Banks Lose Court Battle Over CFPB Rule to Collect Small Business Data

A federal judge has rejected a banking industry-backed challenge to a rule adopted by the Consumer Financial Protection Bureau (CFPB) that requires lenders to gather demographic data on small business borrowers, Reuters reports.

The regulation, which was introduced in March 2023, requires banks and other lenders to gather and report data on small business loan applications, including whether the firms are owned by women or racial minorities.

The CFPB aimed to use the data to facilitate its enforcement of fair lending laws to prevent discrimination.

However, Texas District Judge Randy Crane in McAllen blocked the agency from enforcing the rule nationwide, after a federal appeals court declared the bureau's funding structure as unconstitutional in a separate case.

In May, the Supreme Court reversed the 5th U.S. Circuit Court of Appeals' ruling and upheld the CFPB's funding structure. At that point the injunction Crane issued was slated to end.

But industry groups, including the American Bankers Association and Texas Bankers Association, argued the judge should continue to block the rule on other grounds, leading to Monday's ruling.

The banking associations, along with Texas-based Rio Bank, argued that the CFPB violated federal administrative law by adopting a rule with a data collection method that was so flawed the rule could undercut the statute's purpose and increase loan costs for small businesses.

But, Crane said the groups' arguments boiled down to a disagreement with the agency's determinations rather than a dispute over its statutory authority to adopt it at all.

Crane said:  "It may well be that the final rule proves ill-advised as a policy matter, but that possibility does not itself make the final rule unlawful.”

In a statement, the banking associations said they would appeal, noting that the rule would expose small businesses and financial institutions to "significant harm."

In June, the bureau extended the deadlines for lenders to comply with the rule. Those with the highest volume of small business loans are now required to collect data by July 2025.