Legal Challenges and Regulatory Developments

For over a decade, the equipment leasing and finance industry awaited the issuance of rules by the Consumer Financial Protection Bureau (CFPB) for Section 1071 of the Dodd-Frank Act (Section 1071), an amendment to the Equal Credit Opportunity Act of 1974 (ECOA). This wait ended in March 2023, when the CFPB released its Final Rule, which expanded the original legislation from three pages and 13 data reporting points into a complex regulatory framework with 81 data elements. Section 1071 applies to “covered financial institutions,” which are entities that have made at least 100 loans to businesses with less than $5 million in gross revenue in each of the past two years.

The expansion was made under the pretext of the CFPB’s stated goal to create lending transparency in transactions involving minority and women-owned businesses by gathering and analyzing vast, often-irrelevant data to detect lending disparities. While Section 1071 was initially more focused on the primary goal of the ECOA, which aims to reduce inequalities in financial resource access for the aforementioned groups, the Final Rule broadens the scope of the legislation and the authority of the CFPB, placing the burden of data collection squarely on the shoulders of lenders and similarly situated institutions. Compliance will bring costs and distractions that are likely to outweigh the benefits for the industry and the very businesses Congress initially sought to protect.

Early Legal Challenges and the Final Rule

In response to the 2008 financial crisis and to address alleged discriminatory lending practices, Congress passed the Dodd-Frank Act. This legislation introduced a series of reporting requirements for financial institutions and required the CFPB, established by the Dodd-Frank Act, to gather and disclose small business lending data. This effort aimed to identify and address patterns of discrimination. However, the CFPB remained silent for years.

In May 2019, the California Reinvestment Coalition filed suit against the CFPB for not implementing the small business lending requirements mandated by the Dodd-Frank Act. In response, the CFPB issued a Proposed Rule allegedly stemming from the Congressional directives outlined in Section 1071. However, the Proposed Rule introduced nearly 70 additional categories to Section 1071’s data and sub-data points. Following this, the CFPB received over 2,100 comments from industry institutions (including ELFA) and the general public, expressing concerns about the Proposed Rule’s potential effects.

Meanwhile, the CFPB faced criticism regarding the legitimacy of its funding structure, leading to the Fifth Circuit Court of Appeals finding the CFPB’s funding structure violated the U.S. Constitution’s Appropriations Clause. In Community Financial Services Association of America v. CFPB, the Fifth Circuit determined that Congress relinquishing its “power of the purse” to the CFPB violated the Constitution’s structural separation of powers. Consequently, on Oct. 19, 2022, the Fifth Circuit held the funding structure unconstitutional, and the regulations issued by the CFPB were deemed invalid. The CFPB appealed the Community Financial decision to the Supreme Court of the United States, and oral arguments were conducted on Oct. 3, 2023. A decision is anticipated in early 2024.

Despite complaints and questions concerning the legitimacy of its funding structure, the CFPB issued the Final Rule on March 30, 2023. Disregarding most industry concerns, the CFPB significantly broadened the scope of Section 1071 and its legislative boundaries. Now, “covered financial institutions” are required to develop and implement systems for obtaining 81 separate, distinct data points. This expansion occurred without a proper cost/benefit analysis or full consideration of financial institutions’ implementation and compliance costs with the Final Rule.

Judicial Intervention and Injunctions

Upon issuance of the Final Rule, the American Bankers Association (ABA), along with others, filed a lawsuit against the CFPB in the U.S. District Court for the Southern District of Texas, seeking a nationwide preliminary injunction to halt the CFPB’s enforcement of the Final Rule in light of Community Financial. Additionally, the complainants contended that the CFPB violated the Administrative Procedure Act (APA) in issuing the Final Rule. The Court granted a limited injunction to ABA and Texas Bankers Association members, rejecting the requested nationwide injunction.

With the original effective date for the Final Rule approaching and no nationwide injunction in place, various associations, including ELFA, took action by intervening in the ABA litigation. On Oct. 26, 2023, the Southern District granted ELFA and other intervenors’ requests, imposing a nationwide injunction against the implementation and enforcement of the Final Rule. Furthermore, the Court instructed the CFPB to extend the compliance deadlines for all covered financial institutions, should there be a reversal of the Community Financial decision. This extension, tolling compliance until the reversal of Community Financial or further court order, is crucial to maintain equal conditions for all institutions potentially affected by the Final Rule.

ELFA, along with the other intervenors and the original plaintiffs, remains steadfast in its belief that the Final Rule, as well as the CFPB’s actions in promulgating it, violate various provisions of the APA. Should it become necessary, ELFA will aim to succeed on the merits of its claims against the CFPB and the Final Rule, particularly if the Supreme Court reverses the Community Financial decision.

Operational Challenges for Financial Institutions

As issued, the Final Rule mandates that covered lenders collect, maintain and report data concerning credit applications made by small businesses. This data includes the race, sex, ethnicity and sexual orientation of the business owners, the purpose of the loan, and the action taken by the financial institution on each application. To implement these requirements, the use of multiple data collection and reporting systems will be necessary, along with robust data privacy and security measures, and training for staff to ensure compliance with the new regulations, all of which will result in significant costs. Furthermore, at present, vendors capable of providing the necessary infrastructure to collect and report the data are scarce to nonexistent.

Deadlines for compliance with the Final Rule vary based on the number of loans issued. However, each of the deadlines is currently delayed by the order entered in the U.S. District Court for the Southern District of Texas. The prior, now-delayed deadlines were as follows:

• Oct. 1, 2024 – 2,500 or more loans in the past two years;
• April 1, 2025 – Between 500 and 2,500 loans in the past two years and at least 100 loans in 2024; and
• Jan 1, 2026 – At least 100 loans in both 2024 and 2025.

Once institutions reach their respective compliance dates, they are required to submit their loan data to the CFPB by June 1 of the following year.

Final Thoughts

The journey of Section 1071, culminating in the CFPB’s Final Rule, has been a challenging one for the equipment finance industry. While the Final Rule aims to enhance transparency in small business lending, its expansive data collection requirements have triggered concerns about its legality and feasibility.

The upcoming decision from the Supreme Court in Community Financial and, if necessary, ELFA’s ongoing litigation against the CFPB, will be crucial turning points. Meanwhile, the industry will continue to wrestle with the challenges of operationalizing the data collection and reporting requirements, all under the shadow of ongoing legal uncertainties.