United States: The Payday Rule And The CFPB's New Lenses

On February 6, 2019, the Bureau of Consumer Financial Protection (Bureau or CFPB) released a proposal to rescind the payday rule’s requirements that lenders conduct a comprehensive assessment of borrowers’ ability to repay before issuing payday, vehicle title and longer-term balloon payment loans. The Bureau simultaneously issued a proposal to delay the August 19, 2019, compliance date for these requirements to November 19, 2020. As these requirements were predicted to wipe out the vast majority of payday lenders, numerous commentators have converged on the repeal proposal. Yet they have failed to recognize vital nuances within and surrounding this proposal, which also provide important insights into the leadership approach of CFPB Director Kathy Kraninger early in her tenure.

The Reconsideration of the Rule

The Bureau’s October 2017 payday rule imposed highly prescriptive requirements on payday loans, vehicle title loans, and longer-term balloon payment loans, including (i) requirements that lenders conduct a comprehensive assessment of borrowers’ ability to repay both these short-term loans and their other financial obligations (the Ability-to-Repay Provisions) and (ii) limitations on lender practices for collecting payments from borrowers (the Payment Provisions). In October 2018, following failed attempts at repeal through the Congressional Review Act, and reiterating his own criticism of the rule, then-Acting Director Mulvaney announced that the Bureau would issue notices in early 2019 to reconsider the Ability-to-Repay Provisions and compliance date. In its press release yesterday, the Bureau stated that it was releasing the proposals to “fulfill that commitment.” Yet the strong language of the proposals and the relatively short comment periods – 90 days for the substantive reconsideration and 30 days for the delay of the compliance date – reflect Director Kraninger’s commitment to reversing course.

The proposal lays out a preliminary determination that the Bureau has insufficient evidence and legal support for the Ability-to-Repay Provisions, but explicitly states that this a policy-based determination rooted in concerns that the rule would reduce access to credit and competition.

The proposal does not rely on new evidence, a common basis for reconsideration of existing rules, but on the Bureau’s own changed view of the data used by it to support adoption of the Ability-to-Repay Provisions in 2017. The Bureau emphasized that, regardless of whether the evidence is sufficient to withstand judicial review under the Administrative Procedure Act (APA), it has made a preliminary conclusion that the evidence is not sufficiently “robust,” “representative” and “reliable” to support these Provisions – given the magnitude of the effects of the rule on the payday industry and consumer access to credit. Moreover, the Bureau states that it “does not believe it is cost-effective for itself and for lenders and borrowers to conduct the necessary research to develop those key findings,” thereby essentially shutting the door on attempts to revive the rule. The proposal thus provides a bold evidentiary basis for rescinding the centerpiece of the payday rule notwithstanding the expected APA challenge that the Bureau’s change in direction is “arbitrary and capricious.”

The Bureau accordingly also cites, as independent grounds for rescinding the Ability-to-Repay Provisions, its reconsideration of the legal standards under the Dodd-Frank Act for “unfairness” and “abusiveness” used in the 2017 rulemaking. The 2017 rulemaking had concluded that covered lenders would be committing “unfair” and “abusive” acts or practices if they did not conduct a comprehensive ability-to-repay analysis because, inter alia, consumers could not reasonably avoid the substantial injury caused or likely to be caused by the failure to underwrite, such failure was not outweighed by countervailing benefits, and the failure to underwrite took unreasonable advantage of consumer vulnerabilities.

On reconsideration, the Bureau states its preliminary belief that the “unfairness” and “abusiveness” standards do not require consumers to have specific understanding of their individualized likelihood and magnitude of injury, only to understand that a significant portion of payday borrowers experience difficulty repaying and could end up in extended loan sequences, default or difficulty paying bills. The Bureau also preliminarily determines that the countervailing benefits to competition and consumers outweigh the harm from forgoing the ability-to-repay analysis. The proposal’s analysis potentially also could provide support for reconsideration of the payday rule’s Payment Provisions, a prospect the current proposal acknowledges the Bureau could consider. More important, while a full discussion of the Bureau’s UDAAP analysis is beyond the scope of this bulletin, the Bureau’s reconsideration of the “unfairness” and “abusiveness” legal standards carries major import far beyond the payday rulemaking.

The Kraninger Approach

The bold analysis laid out in the reconsideration proposal, coupled with its careful launch, provide important insights into Director Kraninger’s leadership approach as she begins her tenure at the CFPB.

While Acting Director Mulvaney’s tenure was punctuated with dramatic public pronouncements and combat with Democratic lawmakers and other CFPB proponents, Director Kraninger is attentive to maintaining a diplomatic tone. She thus stressed from the start that, while grateful to Mulvaney, she would chart an independent course. To demonstrate, she expressed her interest in promoting a “productive relationship” with Congress (including specifically Democratic Representative Maxine Waters as Chair of the House Financial Services Committee), conducted a three-month listening tour of the CFPB’s offices, and avoided speaking on both internal and external controversial Bureau issues. In an astute early move, she also shelved the Mulvaney plan to change the Bureau’s common appellation from the CFPB to the BCFP, which had ignited a furor of opposition from consumer groups in addition to imposing implementation costs on industry.

Beyond diplomacy, Director Kraninger also is focused on strategy, as demonstrated by the launch of the reconsideration of the payday rule. The reconsideration was introduced as a fulfillment of the Bureau’s commitment under Mulvaney to issue the proposal by early 2019. The launch also was timed, not only in the midst of government shutdown and other political furor, but on the heels of announcement of the settlement of a series of enforcement actions against payday lenders, including Enova International, Inc. in late January, the NDG Financial Corp. collection of Canadian and Maltese companies on February 1, and Cash Tyme on February 5, 2019, although these actions had started years previously. Director Kraninger followed up with a statement at the release of the reconsideration proposal that she looked forward to working with fellow state and federal regulators to enforce the law against bad actors.

Notwithstanding her careful focus on diplomacy and strategy, however, Director Kraninger is not hesitant to take on a fight. The release of the payday rule reconsideration proposal predictably triggered strong, immediate opposition from Chairwoman Waters and Senator Sherrod Brown, the top Democrat on the Senate Banking Committee, as well as from other Democrats. Their harsh criticism, in addition to that from consumer groups like the National Consumer Law Center and other commentators, largely overshadowed statements of support such as that from House Financial Services Committee Ranking Member Patrick McHenry. Even industry support has been muted, with the Community Financial Services Association of America arguing that the Bureau should have proposed rescinding the entire payday rule.

With ample warning regarding the opposition, Director Kraninger not only moved ahead with the reconsideration, but chose to issue a proposal bold in declaring a new approach. First, the 2017 payday rulemaking was highly ambitious and consequently faced significant APA vulnerabilities. Yet the reconsideration proposal stresses that it is rooted in a policy-based change to the Bureau’s view of the evidence, regardless of whether the evidence is sufficient to withstand judicial review of the 2017 rule under the APA. In making this pronouncement, the Bureau also states a new commitment to consider the impact of its regulations on competition and consumer access to credit, a mandate under the Dodd-Frank Act that the CFPB heretofore seldom heeded. Second, the reconsideration proposal refers more than once to cost-benefit balancing, including in declining additional fact-finding. This statement confirms that the Bureau will emphasize cost-benefit analysis, particularly in its rulemaking activities, under Office of Management & Budget veteran Kraninger. Third, the reconsideration proposal directly confronts a reinterpretation of the legal elements of “unfairness” and “abusiveness” under the Dodd-Frank Act. This willingness to revisit application of the UDAAP standards in a concrete context, notwithstanding the surrounding controversy, is a powerful potent of change.

The industry has the opportunity to obtain major relief from the CFPB in not only the payday or small-dollar lending sectors, but across the board, through the development of a robust strategy, well-reasoned basis and dialogue with the Bureau.

The attorneys of Stroock’s Financial Services Litigation, Regulation & Enforcement Group are well positioned to answer your questions and provide support on CFPB, financial regulation, investigation, litigation and related issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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