Implementation of Section 1071 Stalls in Texas Following District Court Injunction

According to Reuters, the Consumer Financial Protection Bureau’s efforts to fully finalize the rule to implement Section 1071 of the Dodd-Frank Act are on hold in Texas after the Texas Bankers Association and the American Bankers Association secured a preliminary injunction from Chief U.S. District Judge Randy Crane of the Southern District of Texas.

Following the CFPB’s finalization of the rule to implement Section 1071 at the end of March, the TBA and ABA questioned the legality of the CFPB’s funding structure in a lawsuit, citing an October 2022 ruling from the 5th U.S. Circuit Court of Appeals, Reuters reported.

The U.S. Supreme Court is expected to rule on the CFPB’s funding structure this fall, according to Reuters, with the injunction blocking the implementation of Section 1071 for TBA and ABA member banks until then.  

When the CFPB finalized the rule to implement Section 1071 in March, factors and factoring facilities were noticeably exempt, largely thanks to the efforts of the American Factoring Association, which worked diligently to protect factors from the regulation during the leadup to the final regulation, including the comment period on the proposed rules.

Importantly, the commentary in the CFPB’s final rulemaking contrasted factoring with merchant cash advances and made a clear distinction between the two. While factoring transactions are excluded from the final rule, MCAs are required to comply with the rule. This distinction will give the AFA and the International Factoring Association ammunition as they deal with state-by-state disclosure laws that continue to pop up across the U.S.

It is important to note that there are other activities, such as fuel cards and inventory lending, that do not fall under this exclusion and factors extending credit using these products will still need to disclose under Section 1071.