CFPB's payday rollback plans don't go far enough for some lenders
Payday lenders have already scored a huge victory as the Consumer Financial Protection Bureau moves forward on revising unpopular underwriting requirements imposed by the agency's past leadership. But many in the industry say they still want more.
Those affected by the CFPB's payday lending rule hailed the agency's announcement last week of plans to propose changes next year. But they expressed disappointment that the CFPB will address just the rule's "ability-to-repay" provisions, and not limits on how often a lender can debit a borrower's account.
“We would prefer to have the CFPB redo the whole rule,” said Mary Jackson, CEO of the Online Lenders Alliance. “The payment section of the rule is already outdated, and if the current rule goes into effect it seems duplicative and unnecessary.”
The agency under acting Director Mick Mulvaney has long been committed to easing the payday lending rule, drafted under former Director Richard Cordray, but the effort faces numerous obstacles.
The bureau faces a deadline to revamp the rule by August 2019, when many of the Cordray-era requirements are set to take effect. Consumer groups, meanwhile, appear poised to challenge any rule rewrite in court, arguing that an overhaul of an existing rule violates the Administration Procedure Act.
"They do have a burden in justifying the changes and what is new,” said Jane Luxton, an attorney at Clark Hill. “They can’t just revoke" the ability-to-repay provision "by fiat."
But now, the CFPB is also hearing concerns that its changes to the rule may not go far enough.
Under the existing rule, a covered lender cannot make more than two unsuccessful attempts to debit a payment from a consumer's checking account. Those restrictions were designed to protect borrowers from having their funds garnished by payday lenders or from incurring repeated overdraft fees.
But lenders affected by the rule say that limit is artificially low, and conflicts with industry standards that predate the CFPB regulation.
Justin Hosie, a partner at Hudson Cook, said the payment provisions would place limits only on payday lenders, create an unfair playing field and run counter to established norms for processing paper checks dating back to the 1300s.
“These will be the only payments floating around the payments system that can be presented twice and not three times for payment,” Hosie said. “To have an unusually low limit on some paper [checks] and not others is just bizarre.”
The CFPB said in a statement last week that it planned to revisit only the ability-to-repay provisions and not the payments provisions, "in significant part because the ability-to-repay provisions have much greater consequences for both consumers and industry than the payment provisions."
Some payday lending trade groups would not publicly discuss the payments provisions at all, saying they are pleased that the CFPB is reopening the rule and will change the ability-to-repay provisions that are so onerous to the industry.
But they said that the CFPB no longer needs the payment provisions in the rule because Nacha, the organization that administers the automated clearing house network, already limits the amount of unsuccessful payment attempts any lender can make to 15% of the lender's entire debit entries.
Nacha has said that while some level of returns may be unavoidable, including those for insufficient funds, excessive returns “can be indicative of problematic origination practices.”
Lenders say Nacha's 15% rule put a backstop in place that ensures consumers do not get pinged even for a second ACH payment.
“Most lenders do not go past that first presentment, they just don’t go for the second,” Jackson said.
If a lender does go beyond the 15% overall return rate, it could trigger an investigation by Nacha and the potential loss of access to the ACH system, she said.
Still, it is unclear whether the Nacha rule, which came three years before the final payday rule was issued in 2017, constitutes enough of a restriction that the CFPB would consider unwinding the payment provisions.
“Why is there a special [payment] provision [in the payday rule] when Nacha should be the prevailing rule of the day?" Jackson said. "We want a consistent standard, and the rule is creating an inconsistent standard.”
The CFPB may be leaving the payment provisions alone to reduce its litigation risk from reopening the payday lending rule, some experts said.
Many expect the agency's revision of the rule will prompt legal challenges anyway, with consumer advocates expected to argue that the CFPB's actions are in violation of the APA.
"They have to build a record that will withstand challenge in court because the opponents of the new rule will say it’s arbitrary and capricious and not supported by the record,” said Luxton.
To date, legal challenges pertaining to the rule have come from the industry, trying to overturn the regulation drafted under Cordray, who is the Democratic candidate for governor in Ohio. Two payday lending trade groups sued the CFPB in April to get the payday rule overturned. A Texas judge refused to overturn the rule, however, and has stayed the industry's lawsuit until the CFPB completes its new rulemaking.
But others suggested there may be substantive reasons that the CFPB has chosen to leave the payment provisions untouched.
Todd Zywicki, a law professor at George Mason University and a critic of the Cordray-led CFPB, said the criticism of the payment processing provisions of the rule has been limited.
"They didn’t purge the whole payday rule," said Zywicki. "They’re saying the payment processing rules could do some good for consumers and are relatively reasonable."