Texas Bankers sue CFPB over small business lending data rule

Bloomberg News

The largest state bank trade group in the country is suing the Consumer Financial Protection Bureau to block the rollout of a new data collection requirement. 

The Texas Bankers Association filed suit against the CFPB in the U.S. District Court for the Southern District of Texas on Wednesday. The lawsuit challenges a rule that will require banks to disclose, among other things, information about applicants that are approved or denied small business loans.

The lawsuit notes concerns about the CFPB's ability to safeguard the delicate information it is demanding from banks, citing the recent disclosed breach at the agency, which compromised data on more than 250,000 consumers and dozens of companies.

"The rule will require practically all small business borrowers to be questioned on personal information then reported back to CFPB, which recently exposed data on nearly a quarter million consumers," TBA president and CEO Chris Furlow said in a written statement.

In its lawsuit, the TBA is asking the court to declare the rule unconstitutional, with part of its argument resting on a ruling rendered by the U.S. Court of Appeals for the Fifth Circuit last fall. 

That ruling, which is being challenged in the Supreme Court, deemed the agency's funding structure violated the Constitution's separation of powers principle, because it is provided directly by the Federal Reserve without going through the congressional appropriations process.

The TBA lawsuit also argues that the CFPB violated the Administrative Procedure Act by abusing its discretion over the matter.

A CFPB spokesperson said the agency stands by its rule and the manner in which it was enacted, and it is ready to fight for it in court.

"The CFPB is confident in its small business lending rule — which will increase transparency in small business lending, promote economic development and combat unlawful discrimination — and is prepared to defend it," the spokesperson said.

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A small business loan data reporting requirement was called for under Section 1071 of the Dodd-Frank Act of 2010 and has been in the works for years. The purpose of the disclosures, the law states, is to monitor for discrimination and violations of fair lending laws. The data collection model is similar to the mortgage lending disclosure regime enacted by the Home Mortgage Disclosure Act.

For nearly a decade, the provision sat dormant, until a 2019 lawsuit by the consumer advocacy group California Reinvestment Coalition, compelled the CFPB to take up the issue again. 

The rule has gone through various iterations since first being revisited under the Trump administration, but Furlow has accused the bureau of overstepping its bounds on the final adaptation.

"CFPB has taken three pages of legislation requiring 13 data points and turned it into nearly 900 pages of regulation requiring 81 data points," Furlow said. "CFPB repeatedly exceeds its authorities and ignores required rulemaking law because its unconstitutional funding and leadership structure make it accountable to no one."

The TBA filed suit alongside McAllen, Texas-based Rio Bank, which claims the CFPB's new rule will impose undue hardships, such as obtaining new software, re-training employees and hiring outside managers to handle the new reporting requirements. 

"As a community bank, we are frustrated by CFPB's refusal to realistically assess the consequences for small business customers and the bureaucratic burden this will have on community banks," Ford Sasser III, a Rio Bank CEO and chairman for the trade association, said in a written statement.