Senate votes to override CFPB small business lending rule 

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Yesterday, by a vote of 53-44, the Senate voted to approve S.J. 32, the resolution introduced under the Congressional Review Act (CRA) to override the CFPB’s final Section 1071 small business lending rule (1071 Rule).

The Senators voting for the resolution included three Democratic Senators (Senators Hinckenlooper, Manchin, and Tester) and the two Independent Senators (Senators King and Sinema).  Among the reasons given by Senators for their disapproval of the 1071 Rule were concerns about privacy and the cumbersome nature of the data that institutions would be required to report.  The CRA is the vehicle used by Congress to overturn the CFPB’s arbitration rule and the OCC’s true lender rule.  While the resolution is likely to also pass in the House once a Speaker is elected, President Biden can be expected to veto the resolution and there is unlikely to be sufficient votes to override his veto.  

A more likely source of relief for industry are the two pending lawsuits challenging the 1071 Rule, one in a Texas federal district court and the other in a Kentucky federal district court.  In the Texas lawsuit, which was filed first, the plaintiffs are the Texas Bankers Association, the American Bankers Association, and Rio Bank, McAllen, Texas. The court issued an order that preliminarily enjoins the CFPB from implementing and enforcing the Rule “pending the Supreme Court’s reversal of [Community Financial Services Association of America Ltd. v. CFPB], a trial on the merits of this action, or until further order of this Court.”  However, the court denied the plaintiffs’ request for nationwide injunctive relief and granted injunctive relief only to the plaintiffs and their members.  Because of the limited relief granted by the Texas federal court, other trade associations, financial institutions, and non-bank entities have intervened in the lawsuit in an effort to expand the scope of the preliminary injunction.  

The Kentucky lawsuit was filed by the Kentucky Bankers Association and several Kentucky banks.  The Kentucky federal court also issued an order that preliminarily enjoined the CFPB from implementing the 1071 Rule but unlike the preliminary injunction issued in the Texas lawsuit, the preliminary injunction issued in the Kentucky lawsuit is not limited to members of the plaintiff trade associations and banks.

In addition to raising a constitutional challenge to the 1071 Rule based on the CFPB’s funding mechanism, the plaintiffs in both lawsuits allege that, in promulgating the 1071 Rule, the CFPB violated the Administrative Procedure Act.  The plaintiffs in the Kentucky lawsuit also allege that the 1071 Rule violates the First Amendment.  If the Supreme Court rules that the CFPB’s funding is constitutional, the district courts will need to address the plaintiffs’ non-constitutional claims in the lawsuits.

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