Stepping Back? CFPB Reconsiders Protecting Payday Loan Borrowers

“The announcement signals that the CFPB is planning to try to go a different direction with the regulation,” says Christopher Peterson, a law professor at the University of Utah and senior fellow for the Consumer Federation of America. “It’s signaling to people in the industry to not start investing in the money for these changes.”

Generally, the Payday Rule requires short-term lenders to ensure a borrower’s ability to repay the loan by going through an underwriting process before approval. Lenders must determine whether or not a borrower would be able to afford loan payments, and still meet basic living expenses and major financial obligations. The rule also makes it so lenders can’t keep withdrawing payments from borrowers’ bank accounts after two failed consecutive attempts, and requires lenders to notify borrowers before trying to withdraw a payment from their accounts.

The rule came about in part because of research showing payday loans harm consumers.

It took more than five years from start to finish to create and finalize the Payday Rule. The CFPB began looking into payday lenders in January 2012, when it held a public hearing in Birmingham, Ala., on small-dollar lending. The CFPB issued a final rule called Payday, Vehicle Title and Certain High-Cost Installment Loans in October 2017. Lenders don’t need to comply with all parts of the rule until August 2019.

Including the announcement about the Payday Rule, the bureau has made a few other decisions over the past month that indicate it’s taking a new direction with payday lenders.

The CFPB dropped a lawsuit against a group of payday lenders in Upper Lake, Calif., last month. The bureau alleged online installment loan companies Golden Valley Lending, Silver Cloud Financial, Mountain Summit Financial and Majestic Lake Financial engaged in deceptive and unlawful lending practices, charging interest rates upward of 950%, even in states where doing so was illegal, then tried to collect money borrowers did not legally owe. Now, that suit is dead.

On Jan. 22, Word Acceptance Corp., a large, national small-loan lender, released a statement saying the CFPB was finished with its investigation into the company and the agency doesn’t “intend to recommend enforcement action.”

“The leadership at the CFPB is signaling their intention to do everything they can to change the focus of the agency to protecting payday lenders rather than consumers,” says Peterson of the bureau’s recent actions.

Along those lines, Sen. Elizabeth Warren (D-Mass.), — widely credited for her role in creating the CFPB back in 2011 — and Rep. Maxine Waters (D-Calif.) recently sent a letter to the CFPB questioning Mulvaney’s recent actions. Warren and Waters said Mulvaney’s actions have “unwound years of careful CFPB work.”

The letter also alleges Mulvaney’s ties with the payday loan industry may have influenced the bureau’s recent actions. Mulvaney received nearly $60,000 in campaign contributions from the payday loan industry during his tenure, according to data by the Center for Responsive Politics. Those contributions include $4,500 from the World Acceptance Corp. political action committee between 2013 and 2016 when Mulvaney was a lawmaker in South Carolina, according to the National Institute on Money in State Politics.

Right now, the announcement about the Payday Rule is “meaningful politically but not so yet meaningful legally,” says Peterson, also a former adviser at the CFPB. He says undoing the rule could happen in about three different ways:

The CFPB could simply ignore the Payday Rule and pretend like it never happened, but that is extremely unlikely and, even if the bureau tried to, experts tell MagnifyMoney it wouldn’t work.

“They can’t simply state that the rule doesn’t apply or refuse to enforce the rule,” says Bourke. “It would not be legal for the CFPB to simply refuse to enforce the rules at all.”

Bourke says that’s because the bureau has to comply with the Administrative Procedures Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act that created the CFPB in the first place. And under those regulations, they’d have to enforce the rule until they go through a long, legal rule-making process all over again to amend or rescind the rule.

Even if the CFPB decided to enforce the rule, state attorneys general could step in since Dodd-Frank gives state authorities the ability to enforce CFPB regulation, too, Peterson tells MagnifyMoney.

The CFPB could also decide to try and completely get rid of the rule, and that could take years.

“They can [undo] it but it’s a long legal process,” says Bourke. “To actually change this rule they would have to start over and officially start a rule-making.”

There’s no telling how long it would take to collect all of the information and other elements that go into the rule-making process, but remember, the process to create the Payday Rule in the first place took more than five years.

If the agency tries to repeal the rule, it would have to back up its decision with studies and some sort of empirical data that justifies the change, says Peterson. The CFPB has to have proof that a decision to rescind the rule wouldn’t be “arbitrary or capricious,” or else the repeal could be struck down by the SEC as it may violate the Administrative Procedures Act.

“We are along way away from the rule being amended or rescinded,” says Bourke.

Peterson says the most likely legal option for the CFPB to take if it wants to ruin the Payday Rule wouldn’t be to rescind the rule, but to amend it.

“My suspicion is that the leadership of the CFPB will try to introduce sneaky loopholes and exemptions in the legislation that will leave the legislation in tact but make it less effective,” says Peterson.

But that too, would take some level of rule-making and it could easily take a year or more to issue a revised regulation.

“It depends on how quickly the agency can pull together the needed elements and jump through the hoops involved in rule-making,” says Peterson.

He says the bureau could introduce loopholes that make it so the regulation is no longer meaningful or effective for consumers. Any amendments would also be subject to the Administrative Procedures Act, so they cannot be arbitrary or capricious.

He adds the CFPB may try to take the time between now and the deadline to build a record to justify changing their ways. The agency would need to take public comments on new regulation before issuing it, and it must provide justification for revising the legislation, Peterson tells MagnifyMoney.

“In order to get all of that done before the ligation goes into effect though, they would have to move quickly or delay the effective date,” says Peterson.

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