WASHINGTON — The Consumer Financial Protection Bureau’s likely decision to pare back its final rule on small-dollar lending may help guard it against a congressional rollback and pave the way for bankers to return to the space.
The agency is expected to release a rule targeting payday loans of 45 days or less in the coming weeks, for now dropping plans to additionally rein in installment loans of longer maturity, according to sources familiar with the matter.
The move allows CFPB to narrow the scope of its small-dollar rule, helping it to likely prevail against an expected challenge under the Congressional Review Act, observers said. The agency is already facing such a challenge for its rule banning mandatory arbitration clauses in financial contracts.
“There is a lot more unified industry opposition to the arbitration rule than to the payday and small-dollar loan rule,” said Quyen Truong, a partner at Stroock & Stroock & Lavan, and a former assistant director and deputy general counsel at the CFPB. “If the final rule is narrower than the proposal, focusing on payday loans of 45 days or shorter duration, then that would further reduce the amount of industry opposition.”
That’s not to say that Republicans won’t try to target the rule. In a recent interview, Rep. Steve Stivers, R-Ohio, said he expected a challenge.
“I don’t know how successful that would be, but I think we would probably try and do it,” he said.
The CFPB first proposed a payday lending plan in June of last year. It would require lenders to underwrite the loans by doing an ability-to-repay test if the loan term was less than 45 days of its maturity date was longer and had an annual percentage rate of more than 36% and paid from a consumer's account.
The plan generated more than a million comment letters, including many form letters from payday lending companies and their customers protesting the rule.
Much of the criticism was directed at the proposal’s impact on longer-term installment loans, however. By delaying that part of the final rule, the CFPB gives itself some breathing room—and can more easily enact restrictions on shorter-term loans.
“That would simplify and expedite the process for getting the final rule out, as the detailed requirements and different permutations of the rule proposed for longer-term loans are more difficult for the bureau to justify and for the industry to interpret and implement,” Truong said.
It also would better align with the timing of a potential gubernatorial run by CFPB Director Richard Cordray. The director is said to be announcing his decision as early as this weekend, but has wanted to see the payday lending rule finished first.
For their part, consumer groups have suggested breaking off payday and installment loans makes sense.
“It would be OK if [the CFPB] timed it to do it in parts to address the short-term portion of the market first while they continue the work of reining in the harms of long-term loans,” said Diane Standaert, executive vice president and director of state policy at the Center for Responsible Lending.
To be sure, the payday lending industry is still likely to mount a legal challenge to the final rule.
“A rule that comes out that is materially different than what was proposed would be very suspicious,” said Edward D'Alessio, executive director of the Financial Services Centers of America, a group that includes many payday lenders.
He added that a release of the rule just before Cordray's resigning to run for governor of Ohio could indicate that the bureau is acting hastily and ignoring due process.
“It would clearly be rushing for the process to only take 11 months or so” after the comment period ended, said D’Alessio, noting the sheer volume of letters sent. “That is an extraordinary number of comments on a rule that is extraordinarily complex.”
But Benjamin Olson, a partner at the law firm Buckley Sandler and former deputy assistant director at the CFPB, said the bureau may be able to win a legal challenge under the bifurcated rule because it would meet a “logical outgrowth test.”
“A bifurcation approach under which the bureau adopts only a subset of the provisions in the proposed rule now and defers action on the rest would put the bureau in a good position to defend itself against a logical outgrowth challenge,” Olson said. “The final rule doesn’t have to look exactly like the proposed rule.”
Still, the CFPB could run into trouble if Cordray were to resign before the final rule is released. Acting CFPB Deputy Director David Silberman could still release the rule, but it would be more complicated than if it happened under Cordray, and potentially raise more legal questions.
“The rule conceivably could be issued under an acting director,” Truong said. “I am sure adoption of the rule would cause furor regardless of whether Rich Cordray is in office.”
There are also likely to be critics who say that the rule does not go far enough because the payday industry is already moving to longer-term installment loans. But by leaving out the installment loan portion of the rule, some say banks and credit unions could eventually move into the small-dollar lending field.
“It wouldn’t stop payday installment loans, which have 400% APRs, but it also wouldn’t prevent banks and credit unions from making installment loans that cost six times less if their regulators allow it,” said Nick Bourke, director of the small-dollar loans project at the Pew Charitable Trusts.
“If the CFPB stops short of regulating installment loans, that would suggest that they’ve listened to some of their proposal’s critics and have left bank and credit union regulators space to define what safe, small installment loans should look like going forward.”
Jean Hogarth, vice president at the Center for Financial Services Innovation, said a bifurcated rule reining in short-term loans and not the longer-term installment loans would likely speed up the payday industry's shift to installment loan products.
“That would incentivize the industry to move in that direction,” Hogarth said. “That is not entirely bad for consumers because extending the loan out three to four months makes it easier to pay back as long as the loans are fully amortizing.”
However, she said by doing only the 45-day portion of the rule, the rest of the installment lending market would still face uncertainty.
“You know that the bureau could eventually turn their attention to that part of the market because they have already looked at it,” Hogarth said.
