By Nate Raymond

(Reuters) – A federal judge on Monday rejected a banking industry-backed challenge to a rule adopted by the U.S. Consumer Financial Protection Bureau that requires lenders to gather demographic data on small business borrowers.

U.S. District Judge Randy Crane in McAllen, Texas, had blocked the agency from enforcing the rule nationwide after a federal appeals court in a separate case declared the bureau’s funding structure unconstitutional.

The U.S. Supreme Court in May reversed the 5th U.S. Circuit Court of Appeals’ ruling and upheld the CFPB’s funding structure, at which point the injunction Crane issued was slated to end.

But industry groups including the American Bankers Association and Texas Bankers Association argued the judge should still block the rule on other grounds, leading to Monday’s ruling.

The regulation requires lenders to gather and report to the agency data on small business loan applications, including whether the firms are owned by women or racial minorities.

The CFPB adopted the rule in March 2023 to implement a provision of the Dodd-Frank Act of 2010 that created a system for collecting and reporting data on loan applications for women-owned, minority-owned and small businesses.

That data would be used to facilitate the CFPB’s enforcement of fair lending laws to prevent discrimination.

The banking groups, along with a small Texas bank, argued the CFPB violated federal administrative law by adopting a rule whose data collection method was so flawed that the rule could undercut the statute’s purpose and increase loan costs for small businesses.

But Crane said the groups’ arguments boiled down to a disagreement with the agency’s determinations rather than a dispute over its statutory authority to adopt it at all.

“It may well be that the final rule proves ill-advised as a policy matter, but that possibility does not itself make the final rule unlawful,” wrote Crane, an appointee of Republican former President George W. Bush.

The ABA did not respond to requests for comment. The CFPB declined to comment.

The bureau in June extended the deadlines for lenders to comply with the rule. Those with the highest volume of small business loans are now required to collect data by July 2025.

Democratic U.S. President Joe Biden in December vetoed a congressional resolution to reverse the CFPB’s rule, saying it would hinder the government’s ability to conduct oversight of predatory lenders.

(Reporting by Nate Raymond in Boston, Editing by Alexia Garamfalvi and Richard Chang)