The Consumer Financial Protection Bureau is moving quickly to release a rule regulating payday lenders by the fall in a final push before the widely expected departure of Director Richard Cordray.
The CFPB's decision to finalize its arbitration rule earlier this month has bolstered the effort to finish the controversial payday rule, because it's not clear Republicans will have the necessary votes to repeal either regulation.
Though the House voted Tuesday to nullify the CFPB's arbitration rule using the Congressional Review Act, Republicans face obstacles in the Senate, where more than two GOP defections could sink the effort. The political calculus by the CFPB appears to favor moving forward with the payday rule while there is a brief window of opportunity.
"At this point, Cordray is thinking, if not now, when?" said Lucy Morris, a partner at Hudson Cook and a former deputy enforcement director at the CFPB. "There's a lot of motivation to get this rule out while Cordray is around."
Kerry Smith, a senior staff attorney at Community Legal Services of Philadelphia, said the CFPB is playing offense.
"I think the arbitration rule was a signal and the CFPB's understands that a strong offense is the best defense," Smith said.
To be sure, Cordray has not said that he plans to leave before his term ends in July 2018. But he is widely expected by Republican lawmakers to run for governor of Ohio, which would have him leaving office by the fall.
As a result, the CFPB wants to move forward on the payday lending rule before Cordray departs, according to experts. If the agency waits until after Cordray leaves, the Trump administration could try to appoint an acting director in his stead who might stop any pending rulemaking. Observers say that the agency could move ahead as early as August but that it is likely to act before the end of September.
The short-term, small-dollar lending industry has raised concerns about the rule, which would be the first federal regulation of payday, auto-title and certain other high-cost installment loans.
"It would be somewhat troubling if the timeline for the issuance of rule is based solely on the political calculations of the director," said Jamie Fulmer, senior vice president of public affairs at Advance America, a large lender based in Spartanburg, S.C.
The CFPB has received 1.3 million comments on its proposal, which was issued in June of last year. In its most recent rulemaking agenda, the agency said that it was carefully considering those comments. A CFPB spokesman declined to comment further.
Under the proposal, the CFPB would give lenders two options: either ensure borrowers have the ability to repay before issuing credit, or comply with limitations after the loan is issued, such as restricting how often it can be rolled over or reissued within a certain time frame.
Payday lenders have repeatedly said that the rule would drive them out of business, though the reality is likely more nuanced.
Some payday lenders already have pulled back from offering short-term loans of less than 45 days. Others have expanded into longer-term loans of a year or more, consumer advocates said.
The CFPB has been working on the rule for more than two years, after releasing a small-business outline in March 2015.
Cordray is personally involved in the rulemaking process, going so far as to set up a conference room near his office that is serving as a "war room" in the final push to finish the payday rule, according to one industry expert.
One reason for his interest is that Ohio has been at the forefront of payday lending reform during the past decade. When Cordray was Ohio's attorney general, state legislators passed the Short-Term Lending Act in 2008, capping annual interest on short-term loans at 28%.
"There is no way that Cordray is going back home to Ohio without" a payday rule, said Isaac Boltansky, a policy analyst at Compass Point Research & Trading.
The CFPB's payday rule has been among the most contentious rulemakings internally, because it marks the first time the agency is invoking its authority to issue regulations prohibiting unfair, deceptive or abusive acts or practices, known as UDAAP.
The final payday rulemaking is likely to face scrutiny in the courts and under the Administrative Procedure Act.
A key problem in crafting payday regulations is that the CFPB is prohibited by law from setting any interest rate cap on small-dollar loans. Some of the proposal's complexity stems from the agency's efforts to curb abusive practices without setting rates.
Consumer advocates have criticized the CFPB's proposal because it would allow a lender to issue up to six short-term loans at rates as high as 400%.
"We urge no exceptions," said Diane Standaert, director of state policy at the Center for Responsible Lending. "Every single unaffordable loan can be harmful to a borrower, even a very small loan."
Fifteen states and the District of Columbia have banned payday loans. Since 2005, no state has legalized the expansion of payday loans and numerous states have restored rate caps to rein in abusive practices, she said.
Fulmer at Advance America complained that the CFPB has been meeting with consumer advocates, who he said want to split the rule in two parts, separating payday loans from auto title and installment loans. He alleges that the CFPB is "captured" by consumer advocates in the same way that some regulators have been accused of being captive to banking interests.
"There have been a number of ex parte meetings with consumer advocacy groups dictating what they want the rule to look like," Fulmer said. "These groups have been very influential in the bureau's work and it is regulatory capture by these advocacy groups."
In the past two to three years, payday lenders have pushed legislation in a dozen states that would allow them to originate high-cost, long-term loans, but those efforts have been rejected, Standaert said.
"They are trying to loosen consumer protections at the state level while blocking the CFPB from doing its works on the federal level," she said.