In a recent decision, the U.S. District Court for the Southern District of Texas ruled in favor of the Consumer Financial Protection Bureau (CFPB) in a case brought by ELFA and several affiliated financial services trade associations. The case centered on the final rules issued by the CFPB implementing Section 1071. As a reminder, when in force, the rules under Section 1071 will require covered financial institutions to inquire of their credit applicants certain demographic information and report that information annually to the CFPB along with extensive transactional information.

The lawsuit challenged the rule, arguing that the CFPB did not follow the correct processes in developing the rule and exceeded its authority under the statute. The court’s decision to uphold the rule reflects the judiciary’s historical tendency to defer to federal agencies on regulatory matters, interestingly not drawing on recent Supreme Court precedent in the opposite direction.

A central tenet of the case was that the plaintiffs believed that the CFPB’s cost analysis was fatally flawed. In order to show this, plaintiffs had sought to supplement the administrative record with additional evidence showing that the CFPB had underestimated the costs of compliance with the rule. However, the court denied this motion. While adding information to the administrative record after the fact is not the norm, in this case the CFPB’s cost estimates were based on assumptions that were dramatically expanded in the final rule. This expansion, in the minds of the plaintiffs at least, caused the CFPB’s cost estimates to be invalid. 

Since much of our arguments to the court centered around this new cost estimate, once the judge determined that he would not allow the record to be amended, the case was essentially decided. However, it is important to note that there were several issues raised by plaintiffs in their filings that the court did not address in the ruling.

As of press time, ELFA and our co-plaintiffs are in the process of reviewing our options going forward, including the possibility of appealing the case to the U.S. Court of Appeals for the Fifth Circuit.

Additionally, it is widely believed that if former President Trump is elected in November, his appointees to lead the CFPB would pause this rule before it would come into full effect. 

These items combined mean that a level of uncertainty still exists for Section 1071 even if uncertainty may have gone down considering this decision.

What This Means for the Equipment Finance Industry

For the equipment finance industry, the court’s ruling signals a continued trend toward increased regulatory scrutiny and reporting obligations. While the CFPB’s rule is aimed at improving fair lending practices in small business finance, it undoubtedly introduces new compliance challenges for financial institutions. Equipment finance companies, which often operate within complex regulatory environments, will need to invest in more robust reporting systems and ensure that their compliance frameworks are aligned with these heightened requirements.

The ruling also serves as a cautionary tale about the difficulty of contesting federal regulations. The court’s deference to agency expertise was surprising and its reluctance to expand the administrative record suggests that future challenges to similar regulations still face significant hurdles.