Litigation leaves CFPB payday rule in limbo

Over the past five years, the payday loan industry has successfully fought federal regulations on short-term, low-value loans by suing the Consumer Financial Protection Bureau.

The years-long litigation over the CFPB’s payday rule may finally come to a head, but the fact that the industry was able to block the rule for so long has infuriated consumer advocates.

“They’re trying to beat the rule if they can, but they’ve slowed it down and erased it,” said Chris Peterson, a University of Utah law professor and former adviser to the former director of the CFPB, Richard Cordray. “It shows that any series of initiatives aimed simply at solving problems can be undone and undermined.”

Gary Tramontina/Bloomberg

The United States Court of Appeals for the Fifth Circuit is expected to rule within the next three to six months on whether the payday rule — first developed under the appointment of Obama Cordray, but finalized in 2020 by Trump appointee Kathy Kraninger – can go into effect.

Two payday trade groups that for follow-up the CFPB in 2018 says the payday rule should be rolled back entirely because former President Donald Trump would have fired Cordray had he had the chance. Cordray, an Obama appointee, finalized the first troubleshooting rule in 2017.

Although Trump was in office at the time, he was forbidden to fire Cordray due to a provision of the Dodd-Frank Act that required a president to find sufficient cause to fire the agency’s director.

Cordray resigned shortly after the payday rule was released after serving 10 months as CFPB director in the Trump administration.

Three years later, the Supreme Court rules on a case concerning the constitutionality of the CFPB. In 2020, the High Court struck down the so-called “for cause” provision in Dodd-Frank, decision that the president has broad power to appoint and dismiss agency heads.

In closing arguments on May 9, payday litigants argue that the payday rule should never have been enacted in the first place because Trump should have been able to fire Cordray. Had Trump been able to do so, they argue, Cordray would not have released the 2017 payday rule.

“The unconstitutional removal restriction actually prevented President Trump from carrying out his desire to remove Director Cordray from office before Cordray signed into law the rule,” said Chris Vergonis, a Jones Day partner representing the Community Financial Services Association. of America and the Consumer Service Alliance of Texas.

Vergonis told the court that Cordray “did not have the power to exercise executive power” and that since he was unduly protected against removal by the president, the remedy “should nullify” the payday rule.

The payday rule is an example of how an agency’s rules have become embroiled in protracted litigation for years, the attorneys said. The rule’s original compliance date was August 2018. After the recovery groups sued, a Texas judge in 2019 suspended the rule’s compliance date. In October, the Fifth Circuit further extended the rules compliance date to 286 days after the appeal was resolved.

Proponents of the payday rule said it was unclear whether the Fifth Circuit would find the payday loan industry’s arguments compelling enough to overturn the final payday rule. They claim it’s overkill given that many Republicans urged Trump to fire Cordray at the time – but he never did.

“Trump never acted, he never came out and said he was going to try to fire Cordray,” Peterson said. “I think there are a lot of problems with that argument because Trump wasn’t shy about firing people, his slogan was ‘You’re fired’ and yet he never took that step.”

After the High Court ruling, the CFPB was forced to review the existing rules to determine whether they were lawful in light of the ruling. Kraninger later ratified all agency actions, including the payday rule. Kraninger published a Press release saying that the agency’s previous actions were still valid and that she wanted to “ensure that consumers and market participants understand that the same rules continue to govern the consumer financial market”.

But payday litigants argued that Kraninger lacked the authority to issue a ratification of the paydays rule. The separate memo Kraninger issued for the payday rule regarding its validity should have been subject to a notice and comment period, as required by the Administrative Procedure Act, litigants argued.

Vergonis told the court that the payday rule required “the making of notice and comment rules undertaken by a director properly exercising executive power.”

“That never happened here,” Vergonis said. Kraninger’s “pen-and-pencil ratification” did not cure this evil.

The original payday rule released in 2017 had two elements: a provision requiring lenders to assess a borrower’s ability to repay a loan, and payment provisions limiting lenders’ ability to access a borrower’s checking account. consumer.

But Kraninger scrapped repayment capacity requirements on the same day in 2020 that it ratified the payday rule. At the time, a Texas judge had already stayed the original compliance date.

Alex Horowitz, senior consumer finance project manager at Pew Charitable Trusts, said the CFPB’s 2020 settlement overriding repayment capacity requirements “was based on flawed analysis and ignored much of the research confirming that loans one-time payments have harmed consumers”.

The current payday rule, if ever enacted, would prevent lenders from making more than two unsuccessful attempts to debit a payment from a consumer’s checking account. These restrictions were intended to protect borrowers from having their funds seized by payday lenders or from repeated overdraft charges.

Since the payday rule also covers debit and prepaid cards that generally charge no fees to consumers, troubleshooters have also argued that the rule should be struck down as “arbitrary and capricious” under the Payday Act. administrative procedure, Vergonis said.

He called the payment provisions “irrationally overbroad” because they extend to debit and prepaid cards which are unlikely to incur substantial fees for consumers.

Horowitz said that over the past five years of litigation, more states have passed payroll reforms and more banks are issuing smaller, longer-term installment loans that have helped lower the cost of labor. credit for low and middle income consumers.

Even as the tow industry continues to fight the tow rule through litigation, advocates are pushing for more consumer protections.

“The CFPB should still reinstate the 2017 rule because federal safeguards are absolutely necessary,” Horowitz said. Successful state reforms in Colorado, Ohio, Virginia and Hawaii also show that “when the rules are well designed, payday lenders follow them and access to credit is widespread.”

The main threat from payday lenders are “bank lease loans” issued by banks on behalf of payday lenders that “often have higher prices than state laws allow,” Horowitz said.

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