Judicial action is expected to delay both implementation and reporting
As this article is going to press, the House of Representatives has just voted to send a resolution of disapproval of the rules issued by the CFPB under Section 1071 to the President. While President Biden is expected to veto this resolution, this is still a bipartisan rebuke of the CFPB’s rule making effort by the Congress.
At the same time there is a belief that the Supreme Court may act sooner than expected in the case covering the funding mechanism of the CFPB. Most observers believe the high court’s decision will ratify the CFPB’s structure. This is important because it is this case that is the triggering action for the injunction against Section 1071 to be lifted by the Federal Court in Texas. (See “ELFA Wins Nationwide Relief from Section 1071 for Equipment Finance Industry.”)
It is fair to say that 2023 was the busiest year for action on Section 1071 since the passage of Dodd-Frank 13 years ago.
In the flurry of activity after the injunction was issued, an important factor in the delay may have been overlooked. To refresh the bidding, the effective date for collection of 1071 information by institutions with more than 2,500 covered transactions was originally October 2024, with the reporting of the 2024 transactions scheduled to take place by June 2025. The injunction is estimated to cause all of the compliance deadlines to be delayed by 9-10 months. (This delay may be slightly less if the Supreme Court decides the case earlier than originally anticipated.)
While the most discussed aspect of the delay is the fact that the first effective dates are now after Inauguration Day in 2025, meaning that if there is a new administration there is the potential for a revisiting of the rule, that is a dependent consequence. The certain consequence of the delay is even if the rule goes into effect in 2025 as currently projected, reporting of those transactions will now not occur until 2026, presumably still in June.
During the entire build-up to the rule, the financial services industry broadly pushed the CFPB for more time to get ready for implementation. The injunction has provided that relief through judicial action.
So, while there is potential for the rule to be overturned entirely should there be a new administration, this is speculative even if a Republican wins the White House. (Remember, there was a Republican majority in both chambers of Congress and a Republican President from 2017 to 2019, and Section 1071 survived.) The delay in both implementation and reporting, even if it only amounts to a delay, is still significant given the amount of work that is necessary for financial institutions to prepare for implementation.
Additionally, readers should remember that while the injunction is related to the Supreme Court case involving the funding of the CFPB, the litigation that led to the injunction is much broader and asserts that the CFPB did not follow the necessary procedures during the rulemaking process. While it is optimistic to believe that the underlying litigation would take the whole rule down, there is a reasonable chance that significant portions of the rule could get knocked out should the courts find that the CFPB was out of bounds in portions of the process. This definitely argues for adopting a flexible approach in compliance, e.g., adopting a structure that can easily drop required fields during the application process should those fields be knocked out by a court.
ELFA will remain vigilant throughout this process and will update members as appropriate in this publication and all of the usual communications channels.
For more information, contact Andy Fishburn, ELFA Vice President of Federal Government Relations, at [email protected]. and visit ELFA's web page on Section 1071.
