Maintaining the CFPB payday rule – Lexology
Almost four years after the Consumer Financial Protection Bureau (“CFPB”) first enacted its rule regulating payday loans, a federal district court in Texas confirmed the rule’s payment provisions against various constitutional and other challenges. The court, which previously suspended the rule’s initial compliance date, also predicted that the provisions would come into effect in 286 days, on June 13, 2022.
The CFPR first enacted the Payday Loan Rule in November 2017. The original rule contained two main elements: the underwriting provisions and the payment provisions that the court upheld. The underwriting provisions would have required payday lenders to ensure a borrower’s repayment capacity before granting a covered loan. The payments provisions prohibit covered lenders from making more than two attempts to withdraw pre-authorized payments from a consumer’s account if two consecutive withdrawal attempts fail due to insufficient funds. Two industry trade groups filed a complaint in 2018, challenging both the underwriting arrangements and the payment arrangements. The court put the rule’s compliance date on hold while litigation was ongoing, and for long periods of time the litigation itself while constitutional challenges to the CFPB structure and other related litigation were pending. The CFPB, then under new leadership, repealed the rule’s underwriting provisions in 2020. What remained of the lawsuit, therefore, was a challenge to the remaining payment provisions.
In its recent ruling, the court dismissed all challenges by trade associations against the payment provisions. Among other things, the court ruled that even though the CFPB was unconstitutionally structured when the rule was published in 2017, the rule was not void. ab initio, and the ratification of the rule by the CFPB director in 2020 remedied all constitutional issues related to the issuance of the rule. The court also dismissed various challenges to the rule under the Administrative Procedure Act (“APA”), including arguments that the rule exceeded the statutory powers of the CFPB or was arbitrary and capricious. Relying on the APA’s deferential standard of review, the tribunal specifically upheld the CFPB’s findings that the practices prohibited by the payment provisions are both unfair and abusive, although its analysis of the abusive standard was pretty superficial.
After confirming the payment arrangements, the court then had to decide when they would come into force. After ruling for the CFPB on all other issues before it, the court ruled in favor of the claimants with respect to the effective date and dismissed the CFPB’s request that the provisions come into effect. effective within 30 days. Instead, the court ruled that the parties “should fully benefit from the temporary suspension” of the effective date that the court had previously ordered, and extended the compliance date by 286 days, the compliance period remaining to run when the Court first decided to stay. ).
The CFPB faces a separate legal action from consumer advocates challenging the 2020 CFPB repeal of the underwriting provisions of the original payday rule. The CFPB has filed a motion to dismiss this case on permanent grounds, which is pending in court.