As previously reported, in late December 2023 President Biden vetoed legislation adopted by the U.S. House of Representatives and U.S. Senate under the Congressional Review Act to override the CFPB’s final Section 1071 small business lending rule (1071 Rule). The vote in the House was 221-202 and the vote in the Senate was 53-44. Recently, the U.S. Senate voted on whether to override the President’s veto, and the override effort failed by a vote of 54-45, falling short of the necessary two-thirds vote required in both the House and Senate to override a Presidential veto. Thus, regardless of any action taken by the House, the veto will stand.

Nevertheless, currently the CFPB is enjoined from implementing and enforcing the 1071 Rule based on two lawsuits challenging the rule in federal district courts, one in Kentucky, and one in Texas.

The initial rulings in the Kentucky and Texas lawsuits focus on claims by the plaintiffs 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. 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.

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.

As previously reported, recently Revenue Based Finance Coalition (RBFC), a trade group whose members include non-banks that provide sales-based financing to businesses, filed a lawsuit against the CFPB in a Florida federal district court challenging the 1071 Rule. The core argument made by RBFC is that because sales-based financing does not constitute “credit” within the meaning of the Equal Credit Opportunity Act and Regulation B, the CFPB did not have the authority to regulate sales-based financing as “credit” under the 1071 Rule.

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