During the Ag Lending Conference on September 7th, I reported that an injunction had been entered in Texas preventing the CFPB from enforcing Rule 1071 against the parties to that case. I also mentioned a pending Kentucky case motion requesting the same relief from members of the Kentucky Bankers Association. At that time, I stated that other financial institutions that wanted to be protected from enforcement may want to look into becoming a member of the Kentucky Bankers Association.
On September 14, 2023, a federal court in Kentucky granted the Kentucky Bankers Association’s motion for an injunction preventing the CFPB from enforcing 1071. The injunction appears to apply nationwide, not just to members of the KBA. As the Order reads, “The Consumer Financial Bureau is ENJOINED from enforcing the Small Business Lending Rule until the Supreme Court issues an opinion ruling that the funding structure of the CFPB is constitutional.” Therefore, it appears that it may not be necessary to become a member of the Kentucky Bankers Association to be protected. However, to ensure protection, becoming a member for $1 may be worth the expense.
For more information on the Court’s order, please see the Minnesota Bankers Association’s Compliance Bulletin below:
September 15, 2023
Federal Court Issues Nationwide Injunction Against CFPB in 1071 Case
Yesterday, a federal court in Kentucky granted the Kentucky Bankers Association’s motion for an injunction preventing the CFPB from enforcing its Small Business Lending/1071 rule. The injunction appears to apply nationwide, not just to members of the KBA. The Order reads, “The Consumer Financial Protection Bureau is ENJOINED from enforcing the Small Business Lending Rule until the Supreme Court issues an opinion ruling that the funding structure of the CFPB is constitutional.”
The court first looked at the likelihood that the plaintiffs, Kentucky Bankers Association, seven state-chartered Kentucky banks and one national bank operating in Kentucky, are likely to win on their claim that the CFPB’s structure is unconstitutional. The Fifth Circuit has held that the CFPB’s funding mechanism is unconstitutional because it contravenes the Constitution’s separation of powers, while the Second Circuit has held that the CFPB’s funding structure is constitutional under the Appropriations Clause. The Supreme Court will hear oral arguments on October 3, 2023. The order states that given this split in the circuits, the Supreme Court could rule either way.
Next the court looked at whether injunctive relief is appropriate due to the potential irreparable harm to the plaintiffs if the injunction isn’t issued. The plaintiffs claimed unrecoverable compliance costs as irreparable harm including training programs, seminar fees, staff time, and new software. The court found that these compliance costs are likely unrecoverable, resulting in irreparable harm to plaintiffs.
The court then considered whether there is substantial harm to others, including the general public, if the preliminary injunction were to be granted. Because the 1071 rule does not go into effect until October 1, 2024, and the Supreme Court will have issued its decision on the issue by June 24, 2024 at the latest, the court could not find substantial harm. The CFPB would not be able to enforce the rule even if there weren’t a preliminary injunction since compliance is not required yet. Plus, any benefit that the public would receive from enforcement of the rule wouldn’t be realized until October 2024. Therefore, the court found that a preliminary injunction would not harm the CFPB or the public. The Order reads:
(1) Plaintiffs’ motion for injunctive relief is GRANTED;
(2) The Consumer Financial Protection Bureau is ENJOINED from enforcing the Small Business Lending Rule until the Supreme Court issues an opinion ruling that the
funding structure of the CFPB is constitutional; . . .
This is great news for the banking industry, as the judge in the ABA/Texas Bankers Association case only protected the members of those associations. The CFPB issued a statement yesterday giving no indication that they would hold off on enforcement against banks that are not members of those associations noting that the decision “stays all deadlines for compliance with the small business lending rule for plaintiffs in that case and their members.” We thank the Kentucky Bankers Association and the plaintiff banks for bringing this action to protect the industry.