On February 19, a federal magistrate judge for the United States District Court for the Southern District of Florida issued a report and recommendation rejecting a trade group’s challenge to the CFPB’s small business lending data rule. The ruling found that merchant cash advances lawfully fall within the scope of the rule. The trade group’s lawsuit sought to exclude merchant cash advances from the rule, arguing, among other things, that such transactions do not constitute “credit” under the Equal Credit Opportunity Act (the “ECOA”) and that the rule was arbitrary and capricious, in violation of the Administrative Procedure Act.

Specifically, the trade group’s allegations included the following:

• Dispute over the definition of credit. The trade group alleged that the CFPB exceeded its statutory authority by classifying merchant cash advances as “credit” under ECOA and that these transactions do not meet the traditional definition of credit.
• Regulatory fairness concerns. The trade group argued that the rule is arbitrary and capricious because the CFPB aimed to “level the playing field” rather than adhering strictly to statutory mandates. The trade group claimed that the CFPB selectively targeted merchant cash advance products without proper justification.
• Lack of adequate industry consideration. The trade group alleged that the CFPB failed to properly consider their public comments and industry concerns during the rulemaking process, and that it did not adequately assess the economic impact the rule could have on small business financing.

The court rejected these claims, concluding that merchant cash advances meet the definition of credit under ECOA because they involve deferred debt payments. The court also determined that the CFPB acted within its statutory authority under Section 1071 of the Dodd-Frank Act. Additionally, the court found that the CFPB sufficiently considered industry concerns and balanced the benefits of merchant cash advances against the potential risks to small businesses.

Putting It Into Practice: The magistrate judges findings will need to be adopted by the district court. But it affirms the Bureau’s data collection mandate under the Dodd-Frank Act. However, with the CFPB’s future regulatory activities in flux, it remains to be seen what will eventually happen with the rule. Small business lenders should continue to monitor pending litigation and political developments that could affect their compliance obligations.