Consumer groups sue CFPB over small business data rule

Consumer advocates led by Rise Economy have sued the Consumer Financial Protection Bureau for the second time for failing to implement the small business data collection rule mandated by Congress 15 years ago.

On Wednesday, Rise Economy, formerly the California Reinvestment Coalition, led a coalition of consumer groups in filing a lawsuit in the U.S. District Court for the District of Columbia alleging the CFPB under the Trump administration violated the Equal Credit Opportunity Act and the Administrative Procedure Act. The APA allows for judicial review of agency actions deemed to be arbitrary and capricious. 

The plaintiffs are asking the court to declare the CFPB violated the APA and ECOA, and to set aside the bureau’s policy invalidating the rule and to require that the agency begin collecting and publishing the required data. 

The CFPB “has never collected the data required by Section 1071, much less made it available to the public,” the 42-page lawsuit states. “And recently, it has taken actions announcing it would continue to refuse to perform its long-overdue obligations.” 

The CFPB’s small-business data collection rule has long been controversial because the data can be used by government and state regulators to determine if lenders are discriminating against protected classes of borrowers in small business lending decisions. One argument made by consumer advocates in support of the rule is that the federal government had virtually no data on small businesses during the COVID pandemic to assess which companies needed aid. 

“The data required by Section 1071 is critical to identifying ‘credit deserts’ where businesses and communities have difficulty accessing credit and to allow financial institutions, community development organizations, and governmental agencies to identify areas of need and potential solutions,” the lawsuit states. “Without this data, CFPB explained, ‘it is not possible to confidently answer basic questions regarding the state of small business lending.’ “

Bankers sued the bureau in 2023 to stop the final rule from going into effect and have sought to hold off compliance for as long as possible, and in April, acting CFPB director Russell Vought said in a memo that the CFPB would not comply with the 1071 rule. In June, Vought issued an interim final rule that extended the compliance deadlines of 1071 by another year to July 2026. 

The 1071 rule was supposed to go into effect in August 2023, but the CFPB was sued by the Texas Bankers Association, the American Bankers Association and Rio Bank, a $945 million-asset private bank in McAllen. The bank trade groups have requested that pricing and small-business loan applicants’ LBGTQ status be vacated from the rule.

A Texas judge halted the small business rule from going into effect — twice. The first stay was lifted last year when Justice Clarence Thomas upheld the CFPB’s funding in a 7-2 opinion. The second stay was granted in February by a three-judge panel of the 5th Circuit Court of Appeals. 

Republican lawmakers, the CFPB’s current leaders and community banks oppose the data collection claiming it is burdensome for small banks to comply. The rule would require any bank or fintech lender that originates 25 or more small-business loans a year to submit data on the race, sex and ethnicity of the principal business owners, as well as which applicants are denied credit. 

The CFPB took more than a decade to write the data collection rule, one of the last remaining mandates of the Dodd-Frank Act. Former CFPB Director Rohit Chopra agreed to a settlement with Rise Economy in 2020 and issued a rule in 2021 that required that data be collected on a wide range of credit products to small businesses including term loans, lines of credit, credit cards and merchant cash advances.

“We are suing to make them adhere to the law and fulfill their responsibilities to the American people,” Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition, said in a press release Wednesday.

The plaintiffs include the National Community Reinvestment Coalition, Main Street Alliance, Democracy Forward and ReShonda Young, a former small business owner who is trying to start a Black-owned bank in Iowa. The CFPB did not immediately respond to a request for comment.