Payday Lending Rule Survives…For Now

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).

Rule Survives?

Does that mean that paltry Senate support for overturning the rule via CRA procedures mean the rule survives?

Unfortunately, no.

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.

Pending Lawsuit

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.

Bottom Line

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.

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  1. diptherio

    In general, I am not an advocate of either vigilante justice or capital punishment. In the case of payday lenders, however, I am tempted to make an exception.

      1. sd

        In a civilized world, the Post Office would offer such services without resorting to usury.

        1. Grumpy Engineer

          Aye. Lending people more money than they can reasonably repay doesn’t help them. It hurts them. I wish more people recognized that.

          1. pretzelattack

            very few can repay loans at these extortionate interest rates. not to mention ripping them off with increasing penalties.

          2. Harry Holida

            Isn’t this the same thing that congress allowed during the most recent depression (2008). Same scam , just a different extension of the banking cartel.

        2. David

          According to a 2013 CPFB white paper, the average income of a payday borrower is $26,167. A quarter of borrowers have incomes over $33,875. The average amount borrowed is $392. The average number of transactions per borrower is 10.7 and the average total fees paid were $574.

          Do you believe that someone making $26k can’t pay off a $392 loan?

          1. Dugless

            BS with statistics. I do not have the time and inclination to read the white paper but you managed to report that “a quarter of borrowers have incomes over $33,875” but did not manage to report the lowest quartile of incomes which I suspect is skewed and quite low. The fact remains that many people get caught in a cycle of usurious loans which they cannot completely pay off and must roll over. If they had access to reasonable credit, it is unlikely they would resort to the payday lenders.

      2. JacobiteInTraining

        Credit, or Usury?

        If the former, they will need to prove they have the income, the means, and the responsibility to pay it back…the same as any other.

        If the latter, then they should not be ‘blessed’ with being forced to undertake such a sin/offense against humans – I am not religious, but there are some gems in the Bible, to be sure.

        If one is so desperate/destitute as to even *glance* at things usurious…then instead of suffering such predatory vampires to exist and prey upon the weak….instead those in such a state should be embraced and cared for by….his friends, his relatives, his church or social network…and failing that – by his government.

        Of course, todays faux-Christians & most of our ‘leaders’ seem to have forgotten their Deuteronomy…15:7-11, specifically:

      3. diptherio

        Credit Union. Mine offers $200 credit line, accessible on demand, with every checking account. 7% APR.

        1. David

          Does your analysis include non sufficient funds (NSF) fees?

          In a 2013 CFPB white paper, the CFPB found that 65% of consumers who used deposit advances had overdraft or NSF activity. The number of fees were related to the amount borrowed, but they found borrowers with over 19 overdraft/NSF charges. If you include that cost into the interest charge, the APR may be approaching payday loan territory.

          You may get your wish, it looks as though the OCC is loosing their restrictions on deposit advances while the CFPB increases controls on the payday lenders.

  2. David

    Mr. Mulvaney’s 210 day interim appointment expires soon (June?). Mr. Trump will need to submit a nomination for director soon. Otherwise, the deputy director may take over. According to the CFPB’s website, Leandra English is still the deputy director.

  3. Off The Street

    Community awareness comes in public and private versions. The public one often has a smiling politician at some staged photo op with hand-picked participants. The private one comes in public spaces, too, although those are not frequented by said pols or their media facilitators.

    Example: While in Los Angeles recently, I happened to drive around different neighborhoods near the airport. You may be able to replicate the routes using some Google street view software. Travel north of the 405 freeway on Figueroa Street and you will see miles of small houses (think 800-1,200 square feet) with bars on the windows. The commercial activities include some payday lenders among other vendors and some street-level capitalism. Not many grocery stores in evidence. To return to the airport, turn west on Century Boulevard where you will see much of the same barred window house character, which you may hesitate to say constitutes a conventional neighborhood.

    Then a miracle happens. As you descend toward the airport, the houses get larger, the bars disappear, and finally a recognizable retail center or two appear all within the span of a mile or so.

    Prediction: Those little barred-window houses are on land that isn’t yet adequately valued. Some pols will get approached by new donors to supplement the payday lenders already disgorging funds. The new donors recognize that unlockable value and will win out in the long game. Grants will be made, taxes abated, you recognize the familiar signs, and sighs.

    Results: Residents will continue to suffer through payday lending, will get dispossessed, and will drive further to whatever job they can find.

    Which are worse, the payday lenders or their enablers in the world of politics? Why can’t they both lose?

    1. sd

      Bars or not, most of those small houses are $500-700 thousand. A quick search on Zillow will show high numbers of pre-foreclosure homes in the immediate area. The nicer areas you cite, the little houses start around $1.5 million.

      1. Off The Street

        Data show many houses in the 300-500K range, which might seem high to buyers from inland cities. Search all along S. Figueroa Street, look at West Athens and other neighborhoods, too. The photos on Zillow, Redfin or similar sites don’t provide the full visual impact of the less desirable houses as those do not look as saleable.

        90061 real estate on Zillow

        West Athens

        Also see Lennox, directly east of Los Angeles Airport.
        ZIPs Near Lennox and Inglewood

        90301 $345,600
        90302 $367,000
        90303 $457,500
        90304 $402,000
        90305 $462,100

        1. sd

          I’m from LA and well aware of how high real estate prices are. Inglewood is where the artists are currently moving to.

  4. JacobiteInTraining

    A couple years ago I had to fulfill a drunken dare i was challenged with by one of my more annoying friends. Sooo…in order to fulfill it…I went to a local payday lender shop and started filling out paperwork. To start with I acted stupid, consulted the lady at the counter as many times as possible with stupid/silly/innocent questions about the forms in order to maximize the time she spent helping me.

    In the interim between filing and being approved, I mentioned that I didn’t actually need the $$ I was just – you know – being sure that I had ‘standing’ for the upcoming Class Action Lawsuit.

    Class Action Lawsuit? Huh?? the lady asked…

    Yeah, says I, the one that will inevitably be filed, and won, bankrupting places like this…once the voters come to their senses, elect new leaders, and the financial vampires start being charged with crimes against the people and start going to jail…I want to be sure I have standing!

    I was ultimately denied, of course, but the expression on the lady (and her managers) faces was priceless.

    I drove around a bit and found another one and did the same thing. I wasted maybe an hour of their time, talking and gabbing and hemming and hawing and insisting to speak to her be sure the process would go as long as possible…I was having a boring Saturday anyway, so the process was cheaper then going to a movie, and much more entertaining.

    “…the APR (Annual Percentage Rate) for a 14-day loan would be 460.16%…”

    Now, where can i go find a print/design of a flatpack guillotine? Next time I go, I might have to leave one of them behind at the desk w/my paperwork…then again, these days if i did that I suppose i would have SWAT team at my door in seconds soooooo…maybe not the best idea. ;)

  5. Jesper

    I’ve seen a few evaluation of economic costs relating to the curbing of legal predatory behaviour….
    In this case my guess is that the industry will claim they’ll have to close a number of payday loan stores if they are no longer to continue operating as now. And this indicates:

    There are now more payday loan stores in the United States than there are McDonald’s restaurants.

    that the result would be significant job-losses.

    The results in similar cases have been:
    -that tele-sales can continue hassling the elderly – curbing telesales would mean a loss of jobs for the young and it was deemed better that the young are working in telesales selling overpriced products to vulnerable elderly than protecting the elderly
    -charities can continue their aggressive begging – curbing their ability to beg would cause a loss of income for the charities and more money for charities was/is prioritised over protecting the vulnerable from the ‘charities’
    -the limit for gambling in the UK on in store machines – curbing the size of the bets would lead to job-losses in the gambling industry. We’ll see if the job-losses (or is it corporate profits…) will outweigh the need to protect the vulnerable
    -the right to negotiate unlimited length of payment terms – how else will the large companies (with secure cashflows) be able to keep the smaller companies small and less profitable while banks can make more money on funding more operating capital for longer.

    The threat of job-losses can keep a fig-leaf of cover for the most absurd of actions. If I were to guess then the threat of job-losses will keep payday-lenders operating as now for the foreseeable future. The people who consider idle hands to be the devil’s workshop will have a difficult choice: idle hands or usury.

  6. FluffytheObeseCat

    One thing I’d like to know about this rule is how much of the usurious store front lending racket is actually impacted by it. Usurers target the poor in many different ways. There are auto “title loan” shops. There are pawnbrokers, which are already regulated, though at the state level or below. There are small store front “finance companies” that sell high cost loans to a very slightly more solvent clientele. The high cost lending business is characterized by at least half a dozen different wealth extraction gambits.

    Even if the rule survives some of these usurers will probably be missed by it, and they will expand into the space vacated by typical payday lenders.

  7. Teejay

    tiny typo: Does that mean that paltry Senate support for overturning the rule via CRA procedures m[e]an the rule survives?

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