CFPB’s payday rule rollback sows confusion
Small-dollar lenders won a huge victory last month when the Consumer Financial Protection Bureau proposed abandoning tough new underwriting requirements before they become effective. But the agency's reversal is stoking confusion in the industry.
The agency's Trump administration-appointed leadership has long sought to roll back the payday lending rule drafted by former CFPB Director Richard Cordray. To do that, the agency's strategy is to focus on repealing the central provision: mandated steps for verifying a borrower's ability to repay a loan.
Yet the bureau's Feb. 6 proposal left intact other components of the Cordray regulation that restrict how lenders debit a consumer's bank account to pay off debt. With so much attention on how the CFPB is unwinding the rule, it is catching some by surprise that those payment restrictions could still take effect as early as August.
“The CFPB knows there are problems with the payment provision yet decided not to deal with it yet,” said Alan Kaplinsky, chair of Ballard Spahr‘s consumer financial services group. “In the meantime, there’s an Aug. 19 compliance date and it’s creating a lot of headaches.”
Lenders have continued to urge the CFPB to repeal the payment provisions as well, but the agency may view a more focused approach — just rolling back the ability-to-repay provision — as easier to defend against legal challenges.
CFPB Director Kathy Kraninger has signaled she is open to reconsidering the payment provisions as well in a future proposal. But with the possible August deadline looming, industry lawyers are clamoring for more guidance. Once the rule goes into effect, banks and other lenders that make repeated unsuccessful attempts to debit a borrower's account could be penalized for "unfair, deceptive or abusive acts or practices."
Specifically, lenders want the CFPB to change how often a lender can debit a borrower's account. Cordray's final rule imposed a limit of two consecutive attempts, but the industry is pushing to extend that to three. Overly restrictive limits on those debits can result in lost revenue and profits for lenders, industry insiders say.
Lenders also want the CFPB to rescind or scale back payment reauthorization requirements and cooling-off periods, remove curbs on debit card transactions because they do not give rise to insufficient-funds fees, and push back the August compliance date.
But consumer advocates say that if the payment provision is weakened as well, it is unclear what would be left of the payday rule.
"The CFPB is already putting a lot of stock in rescinding the ability-to-repay provision. Why would they separately do a rulemaking for the payment piece?" asked Amit Narang, a regulatory policy advocate at Public Citizen’s Congress Watch.
But on top of the industry's concerns about the payment provisions, the various rolling deadlines associated with the payday lending rule have sown confusion.
Originally, the entire rule — including both the ability-to-repay and payment provisions — was set to take effect this August.
But the CFPB — siding with a lawsuit brought by two trade groups seeking to invalidate the Cordray rule — successfully petitioned the judge in the case to stay that deadline to give the bureau time to rework the rule before the compliance deadline.
If the CFPB finalizes its February proposal, the ability-to-repay requirement will be null and void. But some firms may not realize that the original August 2019 deadline for the payment provisions would still be in effect if the judge in the industry lawsuit lifts his stay, as he is expected to do. He could reinstate the original deadline for the payment provisions at an upcoming March status conference.
"The industry has really been wearing rose-colored glasses about the payment provisions. Everybody has put off work on it," said Jeremy T. Rosenblum, a partner at Ballard Spahr. But he added that there may be justification for the CFPB to delay those provisions as well. "The number and severity of problems with the payment provisions provide a strong basis for the bureau to suspend their implementation while obtaining further comments."
The CFPB was forced to take a two-pronged approach to the payday rule — treating the ability-to-repay and payment provisions separately — largely because former acting CFPB Director Mick Mulvaney chose not to repeal the final payday rule outright.
Some have suggested the CFPB has bifurcated the rule in anticipation of lawsuits from consumer groups claiming the unwinding of Cordray's regulation is "arbitrary and capricious" under the Administrative Procedure Act. The bureau has already come under heightened scrutiny for discussing the recent proposal with payday lenders and for relying on research funded by the payday industry to support rescinding the underwriting provision.
On Friday, several consumer advocacy groups refused to meet with Kraninger and cited the CFPB’s proposal as an example of the bureau's abandoning its mission to protect consumers.
“The Bureau has actively worked to protect the interests of corporations rather than the financial well-being of consumers,” said the letter, which was addressed to Kraninger and signed by the National Center for Law and Economic Justice, New Economy Project and New Jersey Citizen Action.
The Trump administration has been stymied by court rulings against it under the Administrative Procedure Act, losing 29 out of 31 court challenges, according to an analysis by the Institute for Policy Integrity in New York.
"The CFPB probably felt that it would be easier to defend in court what they have done if they limited the proposal just to the underwriting provision," Kaplinsky said.
Still, the industry has not given up on trying to persuade the CFPB to rescind all or parts of the payment provisions.
The Online Lenders Alliance, a trade group, wants the CFPB to defer to Nacha, the organization that administers the automated clearinghouse network, which came out with its own standards in 2015 while the CFPB was still working on the rulemaking.
It remains unclear, however, whether implementing the payment provisions will prove difficult.
"Having the payment provision creates some problems," said Rosenblum, but he added that eliminating the underwriting requirements is like "a three-run homer instead of a grand slam" for the industry.
If the payment provisions are "the price for revocation of" ability-to-repay, "it's a price well worth paying," Rosenblum said.