Court Upholds CFPB Lending Data Rule, Financial Impacts Loom

• Challengers (plaintiffs): American Bankers Association, Texas Bankers Association, and Rio Bank
• Rule involved: CFPB’s small business data collection rule under Section 1071 of the Dodd-Frank Act
• Implementation timeline: Data collection required by July 2025 for high-volume lenders

On August 26, 2024, US District Judge Randy Crane ruled in favor of the CFPB, dismissing claims from the American Bankers Association, Texas Bankers Association, and other financial entities that the rule was flawed and unlawful. The CFPB’s rule mandates that lenders collect and report data on small business loan applications, specifically focusing on demographic information such as the race, gender, and ethnicity of business owners. This data is intended to support the enforcement of fair lending laws by identifying and addressing discriminatory lending practices.

The lawsuit, which had placed the rule on hold pending the outcome of constitutional challenges to the CFPB’s funding structure, was dismissed after the US Supreme Court upheld the CFPB’s funding mechanism earlier this year. The plaintiffs argued that the rule would increase loan costs for small businesses and that the data collection methods could undermine the statute’s purpose. However, Judge Crane disagreed, stating that while the rule might be contentious as a policy matter, it did not violate statutory authority.

What this means

The ruling has several implications for both the financial sector and consumers. By upholding the rule, the court has affirmed the CFPB’s power to enforce measures designed to curb discriminatory practices in the small business lending market. The rule is expected to bring greater transparency to the lending process, making it easier to identify institutions that may be neglecting or discriminating against women-owned and minority-owned businesses.

The ruling represents a significant compliance challenge for financial institutions, especially those that process a large volume of small business loans. Lenders will need to adapt their data collection processes to meet the new requirements by July 2025, a deadline set by the CFPB after extending the original compliance dates due to ongoing legal battles. The costs associated with these changes could potentially be passed on to small business borrowers, although the actual impact on lending rates remains to be seen.

Industry insiders have expressed concern over the rule’s potential to increase operational burdens on banks and lenders, particularly smaller institutions. They argue that the additional reporting requirements could complicate the lending process and lead to higher costs for borrowers. Despite these concerns, the CFPB has maintained that the rule is crucial for ensuring that all small businesses have fair access to credit, particularly those owned by historically marginalized groups.

As the financial sector grapples with the implications of this ruling, the broader impact on small businesses and consumers will become clearer in the coming months. While the banking industry plans to appeal the decision, the current trajectory suggests that the CFPB’s rule will remain in place, potentially reshaping the landscape of small business lending and other loan types in the United States. Investors and consumers alike will need to monitor these developments closely as they unfold.