CFPB critics rush to challenge payday loan rule

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The Consumer Financial Protection Bureau is poised to score a big win for payday lenders, following a three-year effort to reduce underwriting requirements for high-cost loans.

Yet the CFPB’s final pay rule, which was expected as early as this week, has already prompted critics of the agency to prepare legal challenges to the plan even before director Kathy Kraninger releases it.

Analysts widely expect consumer groups to sue the CFPB saying it failed to follow the correct procedures in reversing underwriting standards set by former director Richard Cordray. Kraninger is also facing a likely backlash from Democratic House leaders, who may try to repeal the rule under the Congressional Review Act.

“The effect of the rule is essentially, at the federal level, no regulation of payday loans,” said Alan Kaplinsky, partner and co-practice leader at Ballard Spahr. “I think there will be a battle under the Congressional Review Act because there are always a few Republicans in the states that don’t allow payday loans and for them it can be politically important not to give feel like they are supporting payday lenders. . “

Cordray, a person named by Obama, finalized strict standards in 2017 requiring low dollar lenders to assess borrowers’ ability to repay. But that rule never came into effect as the Trump administration later appointed interim director Mick Mulvaney and then Kraninger, who established a deregulation program for the agency.

Canceling underwriting requirements would save the convenience industry between $ 7.3 billion and $ 7.7 billion per year, consumer advocates and lawmakers have estimated, and Kraninger confirmed this in testimony to Congress. Last year.

The breakdown industry has been successful for years in delaying any federal regulation of the industry – in large part with the help of Republicans. In 2018, two payday trade groups sued the CFPB to prevent the 2017 rule from coming into effect, and Mulvaney sided with the lenders.

Expected congressional and legal challenges

Still, it will likely be the Cordray Rule supporters of 2017 who will explore all avenues to prevent the Kraninger overhaul from going into effect. It could mean a brighter spotlight on the Congressional Review Act.

Early in the Trump administration, GOP leaders – who then controlled both houses of Congress – used the law to repeal Cordray-era rules on arbitration clauses and auto loans. But with Democrats controlling the House, they are likely to make a similar effort to challenge Kraninger’s salary rule.

However, even if such a challenge could mean a showdown in the Senate, where Republicans hold a narrow four-vote majority, President Trump is sure to veto it. And Democrats are also limited by the law’s 60-day legislative deadline from the publication of a rule to enact a repeal.

But the office is also expected to be sued by a consortium of consumer groups, including Public Citizen and the National Consumer Law Center. Some groups have taken steps to challenge the agency on the issue long before any final rule. Last year, the Lawyers Committee for Civil Rights under the Act sued the CFPB to force the agency to produce documents on the rationale for the repeal of repayment capacity underwriting standards.

“I think there will be a battle under the Congressional Review Act, but I anticipate there will be another lawsuit challenging the validity of eliminating repayment capacity,” said Kaplinsky said.

State attorneys general could also be involved in legal action. Currently, 16 states and the District of Columbia prohibit high-cost payday loans, according to the Consumer Federation of America.

Consumer advocates are likely to argue that Kraninger’s final rule on pay is “arbitrary, capricious and unsubstantiated by substantial evidence”, and therefore, in violation of the Administrative Procedure Act. This 1946 law gives agencies the latitude to draft regulations, but requires rigorous research and analysis to change existing rules.

Kraninger’s CFPB has sided with the industry in arguing that strict underwriting requirements would reduce access to credit, leaving low-income borrowers with no one to turn to for quick cash.

The point is, the 2017 rule prepared by former director Cordray blatantly ignored the opinions and experiences of real-world small dollar loan borrowers in order to pursue a predetermined rule designed to deprive millions of Americans. of their ability to access in a cost-effective and transparent manner. , and regulated credit, ”said Jamie Fulmer, senior vice president at Advance America, a payday and installment lender based in Spartenburg, SC.

“The initial process was dictated by personal biases against our services, our politics and our political ambitions, working closely behind closed doors with militant organizations determined to eliminate regulated small dollar lending,” Fulmer said.

But consumer groups insist the agency is avoiding research conducted under Cordray.

“It is truly shocking that the CFPB is bending over backwards to side with the most slanderous lenders about the consumers it is supposed to protect,” said Lauren Saunders, associate director of the National Consumer Law Center. “The evidence to support the payday loan debt trap is overwhelming and the CFPB’s flimsy apology to repeal the protections does not hold water.”

In a potential lawsuit, consumer groups may claim the agency hasn’t even tried to challenge much of the bureau’s earlier research.

In last year’s proposal to cancel underwriting requirements, the CFPB challenged or reinterpreted only three of the 153 studies the 2017 rule was based on, said Alex Horowitz, a senior executive at Pew Charitable Trusts.

“They just didn’t argue that the evidence underlying the 2017 rule was flawed,” Horowitz said in an email. “The elimination of consumer protections for payday loans is not justified by the evidence cited by the CFPB. Their justification for the cancellation is presumed rather than proven. Credit would have been widely available under the 2017 rule, and many of the new small loan products developed since then comply with the 2017 rule anyway. “

Kaplinsky pointed out that in addition to a possible trial and an effort to repeal House Democrats, Kraninger’s reign could also be threatened by presidential politics if alleged Democratic candidate Joe Biden wins in November. .

“There will be a challenge, and the litigation will begin, then the election will take place, and it could end that there is a new CFPB director in January who is more liberal, and I guess the new director could try. to do things to stop this rule and get back to the original rule, ”Kaplinsky said.

Memo disclosed

Last May, Thomas Pahl, CFPB’s associate policy director for research, markets and regulation, told a House subcommittee that research under Cordray did not warrant such an aggressive rule.

“We decided to reconsider the rule, in part, because the research that has been done – [there was] nothing wrong with that per se – is not a very solid basis to go to all vehicle title lenders nationwide and all payday lenders nationwide and for this reason we have questions about it, and that’s why we’re putting it out for public comment to see if there are other sources of information on this before the office makes a final decision, ”Pahl said.

But a 14-page memo written by former CFPB economist Jonathan Lanning claims Mulvaney pressured the bureau’s research staff to water down his findings and minimize the harm to consumers if the rule’s stringent underwriting requirements from 2017 were discontinued, according to a New York Times article, which obtained a copy of the memo.

The CFPB did not return a request for comment.

But Fulmer said the leaked report suggests CFPB officials ignored the opinions and assessments of “some staff.” He claims Cordray did not conduct a rigorous cost-benefit analysis in the 2017 rule, but consumer groups counter that Kraninger also did not conduct such an analysis for the rewrite of the rule.

Mulvaney first proposed removing the pay rule in January 2018, shortly after being appointed acting director. A year later, less than a month after his appointment, Kraninger also proposed to repeal the subscription requirements.

Effects of the coronavirus pandemic

In addition to the final rule canceling underwriting standards, the CFPB is also expected to issue a separate proposal to reconsider payment restrictions in the 2017 rule that limited how often a lender can debit a borrower’s bank account.

The 2017 rule limited lenders to two consecutive debit attempts. The industry pushed to extend it to three attempts.

Payday lenders have claimed that the 2017 rule would have eliminated 55% of the income of low dollar lenders who offer loans of 45 days or less. But since the 2017 rule was first proposed, lenders have switched their products to longer-term installment loans.

The coronavirus pandemic has already forced many lenders to close retail storefronts and move businesses online. In addition, to obtain a personal loan, a borrower must be an employee and have a bank account. With so many low and moderate income consumers laid off and experiencing unemployment, it is not yet clear what the impact has been on the industry.

“Estimates suggest that the revenue losses could be even more substantial, leading to a significant reduction in the number of lenders,” Fulmer said. “All of this is in addition to regulations designed not to preserve consumers’ access to regulated credit, but to effectively prohibit it and gut a [state] regulated sector. “

But Cordray said the coronavirus pandemic should lead to stronger consumer protection, not the other way around.

“Opening up consumers to unrestricted high-cost payday loans adds insult to injury during this crisis,” Cordray said in an interview.

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