The Consumer Financial Protection Bureau is expected to go back to the drawing board on its payday lending rulemaking after a federal court rebuffed the agency's attempt to stop the small-dollar rule from going into effect.
On Tuesday, U.S. District Judge Lee Yeakel denied a request by acting CFPB Director Mick Mulvaney to halt the rule's effective date, set for August 2019. Mulvaney had previously sided with two industry trade groups that sued the CFPB in April to invalidate a rule that would be first to federally regulate payday lenders.
Lawyers said the CFPB is likely to propose a narrow rulemaking that would only extend the regulation's compliance date, which would give the agency more time to promulgate an entirely new payday rule. The current payday rule was written under the CFPB's previous director Richard Cordray.
"The easiest thing for them to do would be to get the compliance date extended, since that's what is creating the pressure right now," said Alan Kaplinsky, co-practice leader of Ballard Spahr's consumer financial services group. "It looks like they were counting on the litigation as a way to give them that breathing room and obviously the judge didn't go along with that."
Judge Yeakel, a George W. Bush appointee, did not give a reason in a brief two-page ruling Tuesday on why he rejected Mulvaney's effort to halt the rule's compliance date.
"Everybody agrees that the only way to change the rule is to do it through the regulatory process, and the judge probably thought the CFPB can do it through a rulemaking," Kaplinsky said.
As a practical matter, there is not much doubt that the CFPB will be able to get an extension to the payday lending rule's compliance date, lawyers said. Under Cordray, the bureau extended the effective compliance dates of its remittance rule and prepaid rule.
"They could find policy reasons to cite to support such a proposal," said Richard Horn, a founder of Garris Horn PLLC in Tucson, Ariz., and a former CFPB special counsel and special adviser.
Others questioned why Mulvaney had taken so long to start the process of changing the compliance date.
"Go follow what the law is," said Joe Lynyak, a partner at Dorsey & Whitney. "If Mulvaney intends to rescind the payday rule, the clear path is the Administrative Procedure Act, but he hasn't issued a notice of proposed rulemaking, which is, frankly, not that difficult."
In its spring 2018 rulemaking agenda, the CFPB estimated that it would issue a proposed rulemaking on payday lending in February 2019.
Under Cordray, the agency consistently blew through its rulemaking time frames. The agency recently hired Thomas Pahl as its policy director for research, markets and regulations. Pahl, who worked for nearly four years under Cordray as managing counsel in the CFPB's office of regulations, likely put the payday rulemaking at the top of his agenda.
"If the bureau wants to change the rule before it goes into effect in August 2019, it will need to start on the [notice of proposed rulemaking] as soon as possible," said Lucy Morris, a partner at Hudson Cook's Washington office and a former deputy enforcement director at the CFPB.
Still, experts said changing the payday rule entirely may not be an easy task.
"What Cordray did is hard to fix," said Don Lampe, a partner at Morrison & Foerster. "The agency cannot unilaterally extend the effective date of a regulation without reopening it for notice and comment."
The Dodd-Frank Act authorized the CFPB to write a payday lending rule, but left the agency plenty of latitude on how to structure a regulation.
Payday lenders have balked at the rule's requirements, including a mandate that lenders determine a borrower's ability to repay a loan of 45 days or less. They also object to the rule's "lockout" periods for new loans, limits on rolling over loans and restrictions on electronically debiting borrower accounts to pay their debts.
Kaplinsky said he thinks the payday industry will prevail, but admitted "my anxiety level went up by a quantum leap when I read what the court said."
The judge appeared to side with consumer advocates, who had argued in an amicus brief that a provision of the Administrative Procedure Act that Mulvaney and two trade groups had cited was, in fact, intended to enable the court to grant a stay of a rule only while the parties are actively litigating.
"Here the parties were coming to the court saying they don't want to litigate the validity of the [payday] rule, all they wanted was the compliance date to change and the litigation to be stayed to give the CFPB the breathing room to promulgate a rule," Kaplinsky said.
The lawsuit by two trade groups alleged that the CFPB's payday lending rule is "arbitrary, capricious, and unsupported by substantial evidence, and therefore, was in violation of the Administrative Procedure Act."
Allison Zieve, litigation group director at Public Citizen, said the next step for consumer groups is to continue to monitor the implementation of the payday rule "to ensure that the bureau doesn’t try to take shortcuts to undermine it."
"It is premature to say who might sue if Mulvaney initiates a new rulemaking," she said. "We would have to wait to see what, if anything, he does."
Meanwhile, the two industry trade groups that sued the CFPB also argued that the bureau's structure is unconstitutional and violates the separation of powers principle. The groups filed their lawsuit in Texas, lawyers said, to try to get a favorable ruling and to potentially advance the constitutionality argument to the Supreme Court. The lawsuit is still ongoing.