The Decisions of the Consumer Financial Protection Bureau (CFPB) are not Arbitrary and Capricious – Only the Administration’s Actions Against the CFPB Are
The Trump Administration’s Acting CFPB Director Russell Vought has ordered nearly all CFPB work to halt, imperiling the agency’s ability to protect consumers against abuse in the financial marketplace. Also, the CFPB withdrew four lawsuits recently filed against large lenders alleging deceptive and unfair practices. This sudden shutdown of a consumer protection agency is arbitrary, capricious, and leaves consumers exposed.
The incoming Administration’s actions are also in line with the financial industry’s allegations that the CFPB is arbitrary and capricious. But two industry lawsuits which have been defeated at the circuit court level illustrate that the agency is not capricious but carefully executes its mission to protect consumers.
At issue was the CFPB’s rule promulgated in 2023 that implemented the Section 1071 small business data mandated by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. The data required to be collected by Section 1071 includes gender, race, revenue of the small business, census tract location, and such other data that the CFPB deems necessary to carry out the mission of Section 1071. The statutory purpose of Section 1071 is “to facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.”
The general philosophy behind data disclosure requirements like Section 1071 is that collection and public dissemination of data on lending patterns of banks and non-bank lenders will help hold these financial companies accountable to increasing their lending to traditionally underserved populations. When conducting fair lending exams and Community Reinvestment Act (CRA) exams, federal agencies use lending data to ensure compliance with non-discrimination laws and ensure that the lending is not deceptive or unfair. In addition to the demographic data required by Section 1071, the CFPB had used its discretionary authority under the law to require disclosure of interest rates, fees, and other loan terms and conditions to ensure fair and sustainable lending and facilitate federal compliance exams.
In addition to agencies, members of the public and community organizations can conduct their own analyses with the data and meet with lenders to discuss overlooked opportunities for serving neglected businesses. I describe in an upcoming book, Ending Redlining through a Community-Centered Reform of the Community Reinvestment Act (CRA), how democratizing access to data empowers communities and not only increases bank accountability but also collaboration with communities to find mutually profitable and beneficial lending opportunities.
Shortly, after the CFPB issued its regulation implementing Section 1071, the industry filed two lawsuits against the law, asserting violations of the Administrative Procedure Act (APA). The APA requires that agencies hold a rulemaking process during which they propose a regulation and consider comments from the public. They then issue a final regulation taking the comments into account and that is reasonable considering the benefits, costs and purposes of the rule.
The Texas Bankers Association filed the first lawsuit in United States District Court for the Southern District of Texas. In a decision issued in the summer of 2023, Randy Crane, a judge appointed by George W. Bush, ruled against the banker’s association, concluding that the CFPB’s “administrative record is voluminous, and its breakdown of the Bureau’s decision-making is comprehensive; moreover, the agency has reasonably assessed the effects of the Final Rule, including its anticipated costs versus benefits. The Court therefore “do[es] not find the agency’s action outside the realm of reasonableness.”
In particular, the judge sided with the CFPB’s meticulous cost-benefit analysis and found that the banker’s association had exaggerated the costs of the final rule. In particular, the association alleged that the final rule mandated the collection of 81 data points or variables while the Section 1071 provision of Dodd-Frank had only required 13 data points. The judge disagreed, asserting that the CFPB properly used its discretionary authority to require only nine additional data points beyond those specified in Section 1071’s text.
Moreover, the banker’s association alleged that implementing the final regulation would be so costly that several lenders would need to reduce their lending activity to reduce costs. The judge again sided with the agency’s analysis that lending would not be reduced but that interest costs could be increased modestly, citing the CFPB’s conclusion that any additional costs passed onto consumers would only “comprise a small portion of the total cost of the average loan” and would thus not meaningfully impact affordability.
On the heels of this dismissal of an industry lawsuit, a Florida magistrate judge dismissed the second one this February that had been filed by an association representing merchant cash advance companies. Merchant cash advances (MCA) are a form of credit in which the company offering the MCA agrees to receive a portion of a small business’s sales receipts over a future period. The MCA association alleged that the CFPB erred in designating MCAs as a form of credit. The judge disagreed, asserting that MCAs meet the definition of credit (and thus covered by Section 1071) since credit involves allowing the borrower to defer payment and pay over a future period.
The judge also asserted that covering MCAs by Section 1071 was beneficial since traditionally underserved businesses often rely on MCAs given their high approval rates but that these businesses do not consider costs that will now be part of the publicly available Section 1071 data. The judge therefore concluded that the CFPB had properly assessed costs as well as benefits of the final rule.
Industry has vowed to appeal these rulings, and the Trump Administration has stalled the CFPB despite the rulings from two different judges revealing the reasonableness and the importance of the CFPB’s work. Most members of the public are not researchers who regularly use data, so they do not realize the critical role that data plays in protecting vulnerable borrowers, including small businesses. The saga of Section 1071 hopefully will help the public rally around the CFPB and demand that the Administration stop its arbitrary and capricious treatment of this agency.