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A Texas Judge Rules That Lenders Do Not Have to Comply with CFPB Data Gathering Mandate

July 31 (Reuters) – In a recent ruling, a Texas judge has stated that many lenders are not obligated to comply with a mandate from the Consumer Financial Protection Bureau (CFPB) requiring them to gather demographic data on small business borrowers. This ruling comes as the U.S. Supreme Court is currently evaluating the agency’s funding.

The Texas Bankers Association (TBA), American Bankers Association (ABA), and a small Texas bank filed a lawsuit in April, arguing that the CFPB did not have the authority to issue the rule due to a previous court decision that found the regulator’s funding structure to be unlawful.

U.S. District Court Judge Randy Crane in McAllen, Texas, has granted a preliminary injunction, preventing the CFPB from enforcing the rule against members of both associations and Rio Bank, which is based in McAllen. Both the trade groups and the bank have expressed satisfaction with the judge’s ruling, although they remain committed to their larger case against the rule.

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A spokesperson for the CFPB declined to comment on the ruling.

The TBA consists of 400 member banks, while the ABA does not specify the number of its members. However, collectively, these associations hold $19.2 trillion in deposits.

Judge Crane has blocked the rule until the U.S. Supreme Court provides a ruling on the CFPB’s funding structure. The case is scheduled to be heard in the fall.

The rule, which was finalized in March, mandates lenders to gather and report demographic data on small business loan applications, including information on whether the businesses are owned by women or racial minorities.

According to court documents, certain financial institutions are required to comply with the rule starting from October 2024.

Rio Bank and the trade groups have emphasized that lenders are already allocating resources to prepare for compliance. Small banks are expected to spend a minimum of $100,000 to comply with the rule, potentially leading mid-sized lenders to fund fewer small businesses in order to avoid compliance costs.

They have argued that a ruling by the 5th U.S. Circuit Court of Appeals in October weakened the authority of the CFPB and have requested Judge Crane to suspend the rule.

The 5th Circuit Court deemed that the CFPB’s independent funding through the Federal Reserve, rather than budgets passed by Congress, violated the separation of powers principle in the U.S. Constitution.

The CFPB quickly appealed this decision to the U.S. Supreme Court, contending that the Constitution does not impose any limitations on how Congress structures funding for regulatory agencies.

The CFPB was established in 2010 through the Dodd-Frank Act as a response to the 2008 financial crisis. The Act also introduced the requirement for the small business loan rule that is currently under scrutiny.

The case, known as Texas Bankers Association et al v. Consumer Financial Protection Bureau et al., is in the U.S. District Court, Southern District of Texas.

Reporting by Jody Godoy in New York; Editing by Nick Zieminski

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