The Fifth Circuit Court of Appeals heard arguments in early February challenging the validity of the Consumer Financial Protection Bureau's (CFPB Small Business Lending Rule. The rule is being challenged by various industry groups in Texas, and, following oral arguments, the court placed a partial stay on the rule. Moreover, given the change in leadership at the CFPB under the Trump administration, and the widely reported directive for employees to "stand down" on enforcement, supervision, and rulemaking, it is uncertain whether the Rule will ever take effect and be enforced.
Overview of the Rule
As previously detailed, the rule, promulgated under the Equal Credit Opportunity Act (implemented by Regulation B), requires covered financial institutions to collect and report information on credit applications involving small businesses. This information includes the geographic distribution of small business lending applications, loan approvals and denials, and demographic details about the principal owners of small business applicants. The rule aims to facilitate enforcement of fair lending laws, protecting small business owners.
The rule applies to "covered financial institutions" that "originated at least 100 covered credit transactions for small businesses in each of the two preceding calendar years." This includes entities like banks, credit unions, certain nonbank lenders, commercial finance companies, and nonprofit lenders. The rule carves out an exception for car dealerships.
Litigation History
The CFPB initially issued this rule in 2023, but the rule was challenged in a Texas district court that same year by the Texas Bankers Association, among others, who asserted that the CFPB's funding structure was at odds with the Constitution's Appropriations Clause. The Texas district court then stayed the rule pending resolution of an ongoing separate case in the Supreme Court, CFPB v. CFSA, regarding the constitutionality of the CFPB's funding structure.
In May 2024, the Supreme Court decided CFPB v. CFSA, upholding the CFPB's funding structure as constitutional. In turn, the district court lifted its stay on the Small Business Lending Rule and subsequently ruled in favor of the CFPB on the rule's validity. The CFPB consequently issued an interim final rule to extend compliance deadlines by 290 days to account for the period the rule was stayed, with the new compliance dates phasing in as early as July 18, 2025. Meanwhile, the Texas Bankers Association appealed to the Fifth Circuit and asked the court to stay and toll the compliance dates while it considered the case. The court, however, waited until oral arguments on February 3, 2025, before deciding on whether to grant the stay.
A One-Sided Oral Argument
In what should have been a defense to Texas Bankers Association's allegation that the rule was arbitrary and capricious and exceeded the CFPB's authority to collect certain information about small businesses and their owners, the CFPB countered Texas Banker Association's 20-minute oral argument by stating that "we do not object to either a stay or a toll of the compliance deadlines." The oral arguments coincided with the Trump administration's removal of the then-current CFPB director, Rohit Chopra, and an order for the CFPB to stop investigations and suspend new rules from taking effect. Less than a week later, the Fifth Circuit ordered a partial stay and tolled the compliance deadlines for 90 days. The toll, however, applies only to plaintiffs and intervenors in the case.
Key Takeaway
While the rule received yet another stay, the tolling of the compliance dates applies only to the parties and intervenors of the Fifth Circuit case. This means that the phased-in compliance dates may still apply to other companies. However, given the change in leadership at the CFPB and the widely reported directive from the CFPB's new acting director, Russell Vought, for employees to "stand down," it is uncertain whether the rule will practically take effect and be enforced. The recent nomination of Jonathan McKernan as the next CFPB director signals that the agency will survive, though not without expected reform. We are closely following this case and will provide updates as they come.