As previously reported, the U.S. House of Representatives, by a vote of 221-202, voted under the Congressional Review Act to override the CFPB’s final Section 1071 small business lending rule (1071 Rule), and the U.S. Senate, by a vote of 53-44, voted to do the same. As was expected, on December 19, 2023 President Biden vetoed the legislation.

Based on the margin of each vote, an override of the veto by Congress does not appear likely. As a result, attention will now turn to two lawsuits challenging the rule in federal district courts, one in Kentucky, and one in Texas, and a lawsuit challenging the constitutionality of the CFPB’s funding structure that is now before the Supreme Court. The Kentucky and Texas lawsuits include claims that the 1071 rule is invalid because the CFPB’s funding structure is unconstitutional, based on the ruling of the U.S. Court of Appeals for the Fifth Circuit that held the CFPB’s funding is unconstitutional in Community Financial Services Association of America Ltd. v. CFPB, and because portions of the rule also violate various requirements of the Administrative Procedure Act (APA). The Kentucky lawsuit also includes a claim under the First Amendment. On October 3, 2023, the U.S. Supreme Court heard oral arguments in the CFSA v. CFPB case, and a ruling is not expected until as late as June 2024.

Both the Kentucky and Texas courts issued rulings that preliminarily enjoin the CFPB from implementing and enforcing the 1071 Rule. The preliminary injunction in the Texas case initially was limited to the plaintiffs and their members, while the preliminary injunction in the Kentucky case was not so limited. The preliminary injunction in the Texas case was later extended to apply on a nationwide basis. The court’s order in the Texas case (1) stays all deadlines for compliance with the 1071 Rule for the plaintiffs and their members, parties that intervened in the lawsuit after the initial ruling and their members, and all covered financial institutions until after the Supreme Court’s decision in CFSA v. CFPB, and (2) requires the CFPB, if the Supreme Court rules that its funding is constitutional, to extend the deadlines for compliance with the 1071 Rule to compensate for the period stayed. The court’s order in the Kentucky case does not provide for such an extension of the compliance deadlines.

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