CFPB Faces Lawsuit on Payday Lending Rule

Groups representing the small-dollar lending industry challenge rule finalized in 2017, which the bureau is currently reconsidering. The lawsuit also argues the CFPB’s structure is unconstitutional.

4/10/2018 3:00 PM

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CFPB Faces Lawsuit on Payday Lending Rule

Two industry groups representing payday lenders are suing the Consumer Financial Protection Bureau on its authority to implement a rule over the small-dollar lending market.

The Community Financial Services Association of America (CFSA) and the Consumer Service Alliance of Texas are seeking to invalidate the CFPB’s final rule on “Payday, Vehicle and Certain High-Cost Installment Loans,” implemented under former Director Richard Cordray in 2017.

“The lawsuit alleges that the rule violates the Administrative Procedure Act (APA) because it exceeds the Bureau’s statutory authority and is arbitrary, capricious  and unsupported by substantial evidence,” according to the news release from the CFSA.

In January, under the new leadership of Acting Director Mick Mulvaney, the CFPB announced it is reconsidering the rule. Mulvaney is listed as a plaintiff in the complaint, however the groups note the rule they are contesting was implemented under Cordray’s tenure.

The CFPB issued the final rule in October 2017, imposing complex new requirements on payday loans, auto title loans, deposit advance products and longer-term loans with balloon payments. The previous proposed rule reportedly drew over 1 million comments, the majority of which were from opponents of the CFPB’s proposals, including a huge number from consumers who have relied upon and benefited from payday loans, ACA International previously reported.

In its statement on the reconsideration of the final rule, the CFPB notes, “Although most provisions of the Payday Rule do not require compliance until Aug. 19, 2019, the effective date marks codification of the Payday Rule in the Code of Federal Regulations.  Today’s effective date [Jan. 16, 2018] also establishes April 16, 2018, as the deadline to submit an application for preliminary approval to become a registered information system (“RIS”) under the Payday Rule. However, the Bureau may waive this deadline pursuant to 12 C.F.R. 1041.11(c)(3)(iii). Recognizing that this preliminary application deadline might cause some entities to engage in work in preparing an application to become a RIS, the Bureau will entertain waiver requests from any potential applicant,” ACA International previously reported.

According to a news release on the lawsuit from the CFSA, the bureau did not consider the impact of the rule on small businesses.

“Throughout the rulemaking process and during the rule’s public comment period, the Bureau ignored the input of small-dollar loan customers. Serious concerns arose during the comment period over the inaccurate categorization of comment letters, and the questionable and inconsistent process through which the Bureau posted comment letters for public viewing as it rushed to finalize the rule. Questions also arose about whether the CFPB was appropriately reviewing and considering all public comments as required by the APA,” the CFSA reports.

The association’s CEO notes its opposition is to the final rule passed before Cordray resigned from the CFPB.

“We are seeking our day in court to obtain relief for American consumers and small businesses who will be hurt by the regulatory overreach of the CFPB under former Director Richard Cordray’s highly partisan tenure,” said Dennis Shaul, CEO of CFSA, in the news release. “The Bureau’s rulemaking process was seriously flawed from the very beginning. The Bureau failed to demonstrate consumer harm from small-dollar loans, ignored customer input on the rule, and disregarded unbiased research and data that undercut its pre-determined agenda. What’s more, the Bureau’s structure is unconstitutional, therefore rendering its rule an unconstitutional agency action.”

This case isn’t the first challenge to the CFPB’s structure, which was ruled constitutional in the landmark PHH Corporation v. Consumer Financial Protection Bureau (No. 15-1177) decision in January.

The 250-page en banc opinion issued by the full bench of the D.C. Circuit Court in January says the agency’s single-director structure is indeed constitutional and that its director can only be fired by the president for “inefficiency, neglect of duty, or malfeasance in office.” The 7-3 ruling overturns, in part, a 2-1 ruling in 2016 by a three-judge panel of the same court, and notably has an impact on the administration’s policy goals to continue to roll back financial regulations and defang the Bureau, ACA International previously reported.

Read the complaint in Consumer Financial Services Association of America Ltd. v. Consumer Financial Protection Bureau, 1:18-cv-00295 through the CFSA’s website here.

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