Plaintiffs'/Intervenors' Consolidated Motion for Summary Judgment

INTRODUCTION

In 2010, Congress instructed the Consumer Financial Protection Bureau (CFPB or Bureau) to promulgate a rule requiring financial institutions to disclose a small set of data points from women-owned, minority-owned, or small businesses applying for loans. See Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, § 1071 (codified at 15 U.S.C. § 1691c–2). In § 1071, Congress identified 13 pieces of basic information about an application for small business credit and the race, sex, and ethnicity of the business owners that lenders would be required to compile and disclose to the CFPB. The stated goal of this provision, an amendment to the Equal Credit Opportunity Act (ECOA), was to obtain a data set that would “facilitate enforcement of fair lending laws and enable communities, government entities, and creditors to identify business and community development needs and opportunities for credit for women-owned, minority-owned, and small businesses.” Id. § 1691c–2(a).

But when the CFPB published its Final Rule implementing this directive in the Spring of 2023, see 88 Fed. Reg. 35150 (May 31, 2023) (hereinafter, the “Final Rule”), it vastly expanded the amount of data lenders would be required to disclose, requiring 81 data fields from financial institutions. Unlike the statute, the Final Rule requires lenders to venture far outside the application process—and far beyond the scope of the CFPB’s rulemaking authority—in a fruitless attempt to capture the complexity of small business lending. And ultimately, any marginal benefit achieved by those additional data fields cannot justify the enormous costs that the CFPB ignored.

As stressed to the Bureau by commenters, commercial underwriting decisions are made for a host of legitimate reasons—e.g., the strength of the applicant’s product or service, the applicant’s addressable market, the value of collateral securing the loan—that will not be captured by the Final Rule. Thus, the extra data points will not allow the type of “apples to apples” comparisons that would enable a regulator to determine that lenders were denying applications for small business credit on a discriminatory basis, as opposed to a legitimate reason. Key underwriting factors will not (and, realistically, could not) be collected or recorded in the expanded data set. Moreover, there is no reason to believe the demographic data collected from applicants will be representative for accurate statistical analysis. Applicants are not required to comply with requests to provide demographic data. 15 U.S.C. § 1691c-2(c). Based on recent experience with the Paycheck Protection Program, it should be expected that most (nearly 75%) will not. As a result, the additional information will provide minimal, if any, benefit.

Despite the fact that the additional data will not be useful, the requirement to collect the additional fields will impose massive costs in terms of software, forms, and time (not to mention the litigation and reputational risks associated with the “false positives” for fair lending violations the new data will generate). As a result, even if the Court were to defer to the Bureau’s judgment that the additional data points might provide some marginal benefit to the purposes of the statute, that benefit is grossly outweighed by the costs imposed on lenders and, ultimately, small businesses. The CFPB purported to conduct a cost-benefit analysis, but it relied on flawed assumptions and inadequate or cherry-picked data to justify its predetermined conclusions while ignoring or discounting comments from industry, academia, and the Small Business Administration’s Office of Advocacy warning of the negative consequences of the Final Rule.

The only consequence, then, of the vastly expanded obligations under the Final Rule will be the imposition of a staggering compliance burden on lenders. This, in turn, will increase the cost of small business credit and cause some lenders to exit the markets altogether, thereby reducing the availability of credit for the very small businesses the Act aims to protect. Thus, the Final Rule will not serve the laudable purposes of the statute—it will only undermine them. The Final Rule is government run amok.

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