Staying informed and compliant is key to a financial institution’s success in our current, rapidly evolving, compliance landscape. One of the latest issues and arguably the most significant in the space is the CFPB’s section 1071 or the “Small Business Lending Rule”. The final rule, announced on March 30, 2023 by the Consumer Financial Protection Bureau (CFPB), impacts all financial institutions, particularly those focusing on small business lending.
The Small Business Lending Rule has had an unsteady start as both the United States Congress and the Judicial system appear to be presenting significant roadblocks to the CFPB’s enforcement of the rule as it currently exists.
In October of 2023, by a vote of 221 to 202 the US House of Representatives voted to override the Small Business Lending Rule under the Congressional Review Act. The U.S. Senate voted to do the same by a vote of 53 to 44. As a result, President Biden vetoed the legislation on December 19th, 2023. Due to the thin margins provided by the original votes, it was unlikely that the Congress would have been able to overturn the veto with the required two thirds majority in each chamber. As was the case on January 10th of this year when the Senate failed to override the veto by a vote of 54 to 45, making any vote in the House moot.
As the legislative option is no longer available to opponents of the new rule, attention will now likely turn to the two lawsuits currently challenging the rule in federal district courts, one in Texas and one in Kentucky. Additionally, the lawsuit challenging the constitutionality of the CFPB’s funding structure is also before the supreme court. Both the Texas and Kentucky suits claim that the rule is invalid because portions of the rule also violate various requirements of the Administrative Procedure Act (APA). On October 3, 2023, the U.S. Supreme Court heard oral arguments in the Community Financial Services Association of America Ltd. v. CFPB (“CFSA v. CFPB”) case, however, a ruling may not be issued until June of 2024.
Currently, the CFPB is enjoined from implementing and enforcing the 1071 Rule, based on two lawsuits challenging the rule in federal district courts. The Texas injunction was limited to the plaintiffs and their members, however, it was extended to apply on a nationwide basis. This order in the Texas case, first, stays all deadlines for compliance with the 1071 Rule for the plaintiffs and their members, parties that intervened in the lawsuit after the initial ruling and their members, and all covered financial institutions until after the Supreme Court’s decision in CFSA v. CFPB, and secondly, requires that the CFPB, if the Supreme Court finds that the CFPB’s funding is constitutional, to extend the deadlines for compliance with the 1071 Rule to compensate for the period stayed. This obviously, would provide some relief for those financial institutions still trying to put a 1071 reporting process together. The Kentucky case was not limited as to its geographic reach, however, it is worth noting that the Kentucky case does not provide for any extension of the compliance deadlines as listed in the Texas case.
Finally, it is worth noting that the Revenue Based Finance Coalition (“RBFC”), a trade group comprised of non-bank commercial financing organizations filed a lawsuit against the CFPB on December 26th, 2023 in Florida. Federal district court as an additional challenge to the Small Business Lending Rule. This case focuses on the argument that because sales-based financing does not constitute “credit” within the meaning of the Equal Credit Opportunity Act (ECOA) and Regulation B, the CFPB did not have the authority to regulate sales-based financing as “credit” under the Rule. As part of its complaint, RBFC alleges that sales-based financing does not qualify as “credit” within the meaning of Regulation B, additionally, makes claims that the Administrative Procedures Act was violated as the Act provides that, a court “shall…hold unlawful and set aside agency action [that is] arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”
As shown by the summary above, navigating the complexities of this rule requires precision, insight, and a proactive approach. To safeguard your institution’s compliance and success, we recommend partnering with RADD, a firm that specializes in Section 1071 planning services.
Here’s Why You Should Act Now:
Expert Guidance: An experienced audit firm brings in-depth knowledge and expertise in financial regulations. They understand the nuances of the Small Business Lending Rule, ensuring that your institution is well-prepared and compliant.
Risk Mitigation: With the rule facing legislative challenges and ongoing lawsuits, having a robust compliance strategy in place is more critical than ever. RADD will help you identify potential risks, ensuring your institution is prepared for any regulatory outcome.
Timely Compliance: The evolving nature of the Small Business Lending Rule makes timely compliance a priority. Audit firms specializing in Section 1071 planning services are equipped to guide you through the necessary steps, meeting deadlines and avoiding potential penalties.
Tailored Solutions: Every financial institution is unique, and a one-size-fits-all approach won’t suffice. RADD can provide personalized solutions tailored to your institution’s specific needs, ensuring a comprehensive and effective compliance strategy.
Take Action Today:
Don’t wait for uncertainties to impact your institution’s operations. Act now to secure the expertise needed to navigate the Small Business Lending Rule successfully. Hiring an audit firm specializing in Section 1071 planning services is an investment in your institution’s future, providing peace of mind and a competitive edge.
Contact us today to discuss how our team can assist you in developing a robust compliance strategy tailored to your institution’s requirements. Stay ahead of the curve, mitigate risks, and position your financial institution for success in the dynamic regulatory landscape.