The Legal Journey of the Small Business Data Collection Rule 

*This article was published in Bank Director magazine’s fourth quarter 2024 issue.

In March 2023, the Consumer Financial Protection Bureau released the final rule implementing Section 1071 of the Dodd-Frank Act. The rule expands the data lenders for small businesses must collect, including information on race, sex and ethnicity, as well as interest rates and outcomes for applications. Since that time, there have been many issues and developments.

Recent Court Decisions Impact Arguments
A group of banks, credit unions, industry associations and advocacy groups challenged the 1071 rule in two federal district courts: the Southern District of Texas and the Eastern District of Kentucky. The plaintiffs in these lawsuits, Texas Bankers Association v. CFPB and Monticello Banking Co. v. CFPB, argued, among other things, that the CFPB violated the Administrative Procedures Act, also known as the APA, by issuing a rule arbitrarily and without regard to the cost and burden of compliance that significantly expanded the amount of data lenders have to collect and report relative to the original requirements of the Dodd-Frank Act. They argued that the CFPB’s funding structure was unconstitutional.

In May 2024, the Supreme Court of the United States determined in CFPB v. Community Financial Services Association of America that the CFPB’s funding structure is constitutional. The CFPB then issued an interim final rule on June 25, 2024, which extends the 1071 rule compliance dates. Banks and other financial institutions will now have to begin collecting 1071 rule data with effective dates ranging from July 18, 2025, to Oct. 18, 2026, depending on the volume of qualifying credit transactions originated over the past two calendar years, according to the interim final rule.

The constitutionality of the CFPB’s funding structure having been decided, the federal district court cases can now proceed on the APA claims. Previously, these claims may have been difficult to prove under the Chevron deference doctrine, based on the Supreme Court’s 1984 decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, wherein a court was to adopt an agency’s interpretation of ambiguities or silence in a statute, so long as the agency had a “permissible construction of the statute.”

Supreme Court Decision Changes the Landscape
On June 28 however, the Supreme Court overturned the Chevron deference doctrine in the Loper Bright Enterprises v. Raimondo decision. Federal courts, the majority opinion stated, must “exercise their independent judgment in deciding whether an agency has acted within its statutory authority” and do not need to defer to an agency interpretation of the law in relation to statutory silence or ambiguities. This ruling seemingly strengthened the APA claims against the CFPB, with the possibility that the 1071 rule’s current requirements around data collection and reporting requirements, including the total number of data points required to be collected, may be further restricted.

Despite this, a judge in the Southern District of Texas ruled in part against the plaintiffs, upholding the CFPB’s ability to add more data collection requirements. The plaintiffs said they plan to appeal. As of the press date, the Eastern District of Kentucky had not ruled on the case.

The Impact of These Decisions
Despite all the chaos and opposition, it appears that the 1071 rule is here to stay, in some form or fashion, for the foreseeable future. Banks and other financial institutions cannot rely on the possibility that the scope of the 1071 rule may be reduced and should still be taking appropriate steps to institute processes, procedures and mechanisms to collect and report the data currently required by the 1071 rule. This could be an opportunity to determine whether any existing technology partners either have developed or have road mapped systems or functionalities to help the bank with 1071 rule compliance. If that is not currently available, it may merit exploring what the market currently has to offer in terms of 1071 compliance.

The views expressed here are those of the author(s) and do not necessarily represent the views of TruStage™. All information, content and materials provided are for general informational purposes only. TruStage is not a licensed provider of legal services, and nothing contained, expressed, or implied is intended as, nor shall be construed as, legal advice. Readers with questions about any subject matter expressly or implicitly referenced should consult an attorney of their choice in their jurisdiction. TruStage is the marketing name for TruStage Financial Group, Inc. its subsidiaries and affiliates.