In a major victory for small business lenders, the U.S. District Court for the Southern District of Texas granted motions filed by three groups of trade association intervenors to extend the court’s existing injunction against the Consumer Financial Protection Bureau’s (CFPB or Bureau) enforcement of its final rule under § 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Final Rule) to cover all small business lenders nationwide. A discussion of the preliminary injunction issued by that Texas federal court on July 31 can be found here. The injunction in Texas Bankers Association v. CFPB will dissolve if the U.S. Supreme Court reverses the Fifth Circuit in Community Financial Services Association v CFPB (CFSA case), which found the CFPB’s funding structure unconstitutional.
The court’s ruling follows a period of mounting pressure on the Texas federal court and the CFPB by banks and financial institution trade associations advocating for the nationwide extension of the July 31 injunction, which enjoined the CFPB from implementing and enforcing the Final Rule against the plaintiffs and their members. As discussed here, on August 4, Texas First Bank, Independent Bankers Association of Texas, and Independent Community Bankers of America filed an unopposed emergency motion for leave to intervene and brief in support arguing that they will suffer irreparable harm if the CFPB is not enjoined from enforcing the Final Rule against them. A few days later, two credit union trade associations and Rally Credit Union filed an unopposed motion to intervene in the action for similar reasons (discussed here) and Axle Funding, LLC and the Equipment Leasing and Finance Association filed a similar unopposed motion shortly thereafter. Additionally, as discussed here, a myriad number of trade associations petitioned the CFPB directly urging it to stay enforcement and implementation of the Final Rule for all covered financial institutions to level the playing field between those institutions covered by the Texas Bankers Association v. CFPB injunction and those that were not covered, but the Bureau had not granted such petitions to date.
In its decision, the Texas federal court was largely moved to extend its injunction to cover the intervenors by evidence of compliance costs they already incurred in preparing for the Final Rule’s implementation. “[E]ach set of [i]ntervenors has provided evidence, by way of sworn declarations, not only of the costs [i]ntervenors expect to incur in complying with the [F]inal [R]ule, but also of compliance costs already incurred.” These costs would likely be unrecoverable if the CFSA case is not overturned, and rules promulgated by the CFPB are held invalid. The CFPB countered by arguing the harm to intervenors was outweighed by the “significant benefits” the Final Rule will produce for small business owners. The district court was unpersuaded. “To the extent [d]efendants complain of harm related to delay in effectuating the underlying statute itself, that argument also fails to persuade given the lack of urgency thus far demonstrated — the rule implements statutory changes made 13 years earlier, and creates tiered compliance deadlines beginning October 1, 2024 ….”
The district court’s reasoning for extending the injunction nationwide was to comply with the uniformity commanded by the underlying statute. The court stated the purpose of § 1071 of the Dodd-Frank Act, “is the equal application of lending laws to all credit applicants to avoid disparate outcomes, and it presumes uniform application to all covered financial institutions absent exemption by the Bureau. To judicially exempt the parties to this case, but not others, from the Bureau’s [F]inal [R]ule, both undermines the statute … and leaves non-exempted lenders subject to the discretion of an agency whose very ability to act is a matter of constitutional concern pending resolution on a nationwide scale.”
Our Take:
Notably, and unlike the nationwide injunction entered in September by a Kentucky federal court (discussed here), the Texas federal court’s order enjoins the CFPB from both implementation and enforcement of the Final Rule until after the Supreme Court’s decision in the CFSA case. In the event the Supreme Court overturns that Fifth Circuit decision, the CFPB would be required by the Texas federal court’s nationwide injunction to extend every small business lender’s compliance date to compensate for the period stayed. Thus, small business lenders will not be forced to expend funds in preparation for complying with the Final Rule’s heavy burdens prior to obtaining a final decision from the high court. Nonetheless, small business lenders should take advantage of this extension of time to continue preparations for future compliance with the Final Rule.
