By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.
Last week’s May 16 deadline for overturning the Consumer Financial Protection Bureau’s (CFPB) payday lending rule under Congressional Review Act (CRA) procedures passed– leaving the rule standing… for the time being.
For a history of the rule, see my October post, CFPB Issues Payday Lending Rule: Will it Hold, as the Empire Will Strike Back. Payday lending is a particularly sleazy part of the financial services swamp, preying on the poorest, most financially-stressed Americans,where effective interest rates can top hundred of points per annum.
While a swamp, i tis no backwater, according to this New York Times report I quoted in my October post:
The payday-lending industry is vast. There are now more payday loan stores in the United States than there are McDonald’s restaurants. The operators of those stores make around $46 billion a year in loans, collecting $7 billion in fees. Some 12 million people, many of whom lack other access to credit, take out the short-term loans each year, researchers estimate.
CRA procedures are only one way that the payday lending rule could have been unwound– but would have required on-the-record votes by a majority of Congresscritters. As I wrote in a subsequent December post, House Members Tee Up Bipartisan Bill to Kill CFPB Payday Lending Rule, the industry couldn’t rely on a full court press by the financial services industry to scupper the rule. Opponents of the rule, such as Ballard Spahr partner Alan Kaplinsky writing in the Consumer Finance Monitor agreed, that it unlikely sufficient Senate votes could be found:
Although the Senate’s failure to pass a CRA resolution is disappointing because the CRA would have provided the “cleanest” vehicle for overturning the Payday Rule, we were always doubtful that there would be 51 votes in the Senate to pass a CRA resolution.
As rule proponent TruthOut noted in Consumer Financial Protection Bureau’s Payday Loan Rule Survives GOP Repeal — for Now:
Only four Senators have cosponsored the CRA bill on the bureau’s payday rule — Lindsey Graham (R-S.C.), Pat Toomey (R-Pa.), Joni Ernst (R-Iowa), and Ted Cruz (R-Texas).
Does that mean that paltry Senate support for overturning the rule via CRA procedures mean the rule survives?
Two immediate further threats loom. First, the CFPB reopened its rule-making procedures on the rule in January 2018 and is expected to reconsider the rule in 2019. This is part and parcel of a more general effort to rein in the agency’s consumer protection efforts. As the WSJ reported earlier this month in Mulvaney to Prioritize Business Costs in CFPB Reorganization:
Mick Mulvaney has tightened his control of the Consumer Financial Protection Bureau with a reorganization that will place more emphasis on evaluating the economic cost of the agency’s actions and bring more of its operations under direct supervision of his handpicked staff.
In a memo to CFPB staff sent Wednesday, the Trump-appointed acting director announced he would create an “office of cost benefit analysis” reporting to the director that will help direct the bureau’s supervision and enforcement priorities. Businesses and Republicans have pushed for years for cost reviews of regulations and enforcement, arguing some government actions are too costly to businesses or the economy.
One major and immediate area affected by this reorganisation is student loan oversight.
As for the payday loan rule,as the American Banker reported last week in The real fight over CFPB’s payday rule is just beginning:
While acting Director Mick Mulvaney said last year that modifying the payday rule was a task for Congress, he’s since indicated that he will reopen the rule for further consideration. This is likely to be a lengthy process — one bound by notice-and-comment procedures — and one that is likely to be fiercely debated by industry advocates and consumer groups alike.
Translation: the agency must be careful in how it goes about changing the new rule. Yet even consumer advocates recognize, again as reported by the American Banker:
Consumer advocates note that there are a number of ways the agency could potentially narrow the rule, effectively watering it down. That might include altering provisions that require a lender to assess a borrower’s ability to repay and that limit a lender’s ability to make successive debits from a customer’s account when the transactions don’t process.
A second and more immediate threat to the payday lending rule is a pending lawsuit brought by two industry groups, Consumer Financial Service Association of America, Ltd. and the Consumer Service Alliance of Texas, in United States district court for the western district of Texas. Business interest groups have successfully challenged numerous agency rule-makings for decades and it’s no surprise to regular readers that these have received sympathetic hearings in business-friendly federal courts– a trend that will continue as the Trump administration has successfully targeted judicial appointments as a major priority, as I wrote most recently in January in Trump Sets Records for Seating Federal Judges:
One year in, the Trump administration continues to set records for the discipline and efficiency with which it is seating federal judges– who have lifetime tenure, and will continue to serve long after the Donald is a bad memory.
According to the American Banker:
A pending legal case could also give Mulvaney another opening to make changes to the payday measure. The CFPB must respond next month to the lawsuit by two trade groups that charge the regulation is unlawful. Observers are waiting to see how the agency approaches the case — whether it defends the rule or at least parts of it. That’s especially true after the acting director dropped a lawsuit against a group of payday lenders associated with an American Indian tribe earlier this year.
“We’re concerned and we’re basing that mainly on [Mulvaney’s] historical record as acting director,” said Scott Astrada, director of federal advocacy for the Center for Responsible Lending. “You’re going to see a shift from Capitol Hill to the courts and the agency — that’s going to be the focal point for the future of the rule.”
In a Consumer Finance Monitor post entitled, A third bite at the apple: trade groups file lawsuit challenging CFPB payday loan rule , Kaplinsky wrote in April:
The lawsuit appears to be a third bite at the apple in that it represents a third possible route for overturning the Payday Rule. More specifically, the filing appears to reflect industry concern about the viability of overturning the rule through a resolution under the [CRA] or the reopening of rulemaking by the CFPB.
Interested readers can find the complaint here. In the interest of keeping this post manageable, I’m not going to discuss the legal issues– constituonal and otherwise– it raises. For non-lawyers, Kaplinsky zeroes in on this key question:
Perhaps the most important question with respect to the Texas lawsuit is how the CFPB will respond. The CFPB’s position under the Trump Administration on the constitutional issues is uncertain. While President Trump wanted the CFPB to be held unconstitutional when Richard Cordray was Director so that he could be removed without cause, the President no longer needs such authority. Moreover, the President might no longer want to have such authority because it would potentially enable a Democratic President to remove whoever President Trump eventually appoints as Director.
On the other hand, based on Mr. Mulvaney’s recent recommendation that the CFPA be amended to give the President more control over the Director, some observers believe that the CFPB would agree with the complaint’s allegation that the CFPB is unconstitutional. In addition, Mr. Mulvaney’s decision to reopen the rulemaking indicates that he has grave concerns about the Payday Rule.
Whatever the CFPB decides to do there is a possibility that state attorney generals may seek to step in to defend the lawsuit. Again, Kaplinsky recognises:
It also seems likely that certain consumer advocacy groups or Democratic state attorneys general will seek to intervene as defendants in order to defend the lawsuit. The plaintiffs (and perhaps the CFPB) would likely oppose such intervention and it is premature at this point to speculate as to how the court would rule on intervention.
And finally, let me highlight another Kaplinsky point. The plaintiffs filed this case in Texas, for two reasons. First, the other potential venue– where most administrative law challenges are filed– would be in Washington, DC. But the Court of Appeals for the District of Columbia Circuit has already ruled on constitutional issues raised in this challenge. Second, the Fifth Circuit– which covers Texas– not only hasn’t considered the payday lending nor CFPB constitutional issues, but is known to be generally more business-friendly. If the case proceeds, and results in a contrary appellate decision on the constitutional issues, this would increase the likelihood that the Supreme Court might address this issue. That Court weights heavily conflict between appellate circuits when it considers whether to agree to hear a case. As Kaplinsky observes::
While it is also noteworthy that the lawsuit was filed in federal court in Texas rather than in D.C., the reason for the plaintiffs’ choice of Texas seems obvious—they needed to initiate the lawsuit in a federal circuit that has not already ruled on their constitutional challenge. The D.C. Circuit has already concluded in PHH that the CFPB is constitutional. The plaintiffs undoubtedly hope that the Fifth Circuit will decide the constitutional issue differently, thus creating a conflict with the D.C. Circuit that the U.S. Supreme Court would likely resolve. Also, unlike the D.C. Circuit, the Fifth Circuit is known for being one of the more conservative circuits in the country.
A CRA challenge was only one of three potential means to scupper the CFPB’s payday lending rule. Two more threats remain. The CFPB has promised to revisit the rule. And the rule is also the subject of a pending lawsuit. So, I reiterate Astrada’s conclusion quoted above– that the fight over the future of the rule has shifted away from Congress, back to the CFPB and the courts. I’m not optimistic about the future2prospects for the payday lending rule.