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(Some) Banks Get a Reprieve
In what could be the weirdest court ruling in a long time, a U.S. District Court judge in McAllen, Texas, signed a preliminary injunction this week against the Consumer Financial Protection Bureau’s enforcement of a contentious small business lending rule, also referred to as 1071. But only for certain banks.
That’s right. If you’re Rio Bank in McAllen, Texas, or a member of the American Bankers Association or the Texas Bankers Association — the plaintiffs in the case — you get an automatic delay in implementing the new rule. If you’re not a member, you won’t.
The timing couldn’t be more difficult for the industry, as banks struggle to comply with yet another expensive and time-consuming rule just as the cost of funds in general has been rising faster than the yield on loans. The 1071 rule is scheduled to go into effect in phases, with the largest small business lenders complying as of Oct. 1, 2024. The CFPB will collect bank demographic data on small business loans to create a massive public database, helping to facilitate the enforcement of fair lending laws and scrutiny of loans for minority- and women-owned small businesses.
One bank CEO responding to Bank Director’s 2023 Risk Survey earlier this year said: “We have concerns over the increasing amount of data that we are being asked to collect and submit to the government. The next big challenge will be HMDA data for small businesses. We have already hired an additional FTE [full-time employee] to prepare for it.”
The Texas Bankers Association estimated the cost of compliance at about $100,000 per bank, according to the judge’s order.
The injunction applies while the Supreme Court hears a challenge to the constitutionality of the CFPB’s funding structure, with a decision expected before the end of June 2024. Any delay of an expensive rule benefits banks. But even if the Supreme Court rules against the CFPB, that doesn’t mean the small business lending rule goes away. After all, 1071 refers to the section of the Dodd-Frank Act of 2010 that required it.
“Although the ruling potentially gives certain banks some breathing room for implementing the regulation,” says John Geiringer, a partner at Barack Ferrazzano Kirschbaum & Nagelberg LLP, “this issue won’t go away entirely unless Congress changes the law itself.”
• Naomi Snyder, editor-in-chief for Bank Director
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