The Consumer Financial Protection Bureau faces significant obstacles in reopening the payday lending rule, including likely legal challenges from consumer groups and ensuring any change complies with the Administrative Procedure Act, which governs how agencies issue regulations.

The decision this week is seen as a way for acting CFPB Director Mick Mulvaney to attempt to eliminate the payday rule's core requirement that lenders determine a borrower's ability to repay a small-dollar loan.

So far, Mulvaney has just delayed the rule indefinitely. But that can't go on forever and if he attempts to make a substantive change, he will have to provide a reasonable basis for doing so under the Administrative Procedure Act, something that could prove difficult given that the rule was finalized in October on the basis of three years of research.

"To make any changes [to the existing rule] is a high hurdle because it cannot be based solely on a change in policy," said Quyen Truong, a partner at Stroock & Stroock & Lavan, and a former assistant CFPB director and deputy general counsel. "It likely will be a lengthy process to jump through all the hoops of the Administrative Procedure Act requirements. The agency also would have to point to some lack in data or analysis in the original rulemaking."

Payday advance storefront
"It is not clear that this necessarily means there will be no payday rule, but there is likely to be a more narrow payday rule," said one expert. Bloomberg News

Practically speaking, the CFPB would have a harder time rescinding the rule than amending it, lawyers said. The agency is expected to issue a new notice of advanced rulemaking, which would be open for public comment for at least 60 days. After the public weighs in, the bureau would issue a new final rule. It also has to conduct an analysis on how it will affect small businesses.

"It is not clear that this necessarily means there will be no payday rule, but there is likely to be a more narrow payday rule," said Ben Olson, a partner at Buckley Sandler and a former deputy CFPB assistant director. "I don't know that current bureau leadership knows how they want to handle this yet other than announcing their intention to do something."

Most banks and credit unions are not directly affected by the payday rule, which went into effect Tuesday though lenders have until August 2019 to comply. The rule was narrowly tailored to regulate only loans with terms of up to 45 days.

The rule requires that lenders to fully underwrite small-dollar loans. It also places some restrictions on lenders' ability to automatically withdraw payments from borrowers' accounts and has recordkeeping and disclosure requirements.

Payday lenders have fought the rule, alleging its requirements are too expensive. Payday loans have high fees and interest rates of 300% or more, and the CFPB says they put consumers who borrow against their next paycheck into a cycle of debt.

The industry also has claimed restrictions on payday loans would hurt low-income borrowers who would have no other way to get quick cash.

Last week, the Competitive Enterprise Institute, a conservative think tank, sent a letter to the Office of Management and Budget, which Mulvaney also runs, requesting that it reject the CFPB's final payday rule for violating the Paperwork Reduction Act.

"We can't point to our complaint as the basis on which the payday rule was reopened, but we hope it did have an impact on OMB and CFPB's thinking," said Sam Kazman, the institute's general counsel.

Meanwhile, Daniel Press, a policy analyst at the institute, released a report Tuesday titled "How the Consumer Financial Protection Bureau's Payday Loan Rule Hurts the Working Poor."

"Small-dollar loans provide a valuable service to people in difficult financial conditions," the report stated. Data in the report could be used to provide a basis for reopening the rule under the Administrative Procedure Act

The CFPB's announcement Tuesday that it planned to reconsider the first federal regulations of high cost payday loans marked a shift from Mulvaney's first days in office, when he said lawmakers, not the agency, should repeal the rule.

Mulvaney told reporters during his first week at the CFPB that the payday rule was "fairly far out the door by the time we got here."

Mulvaney made it clear that he backed a House Republican effort to roll back the payday rule using the Congressional Review Act, which gives Congress 60 days to block a regulation with a majority vote. Lawmakers introduced legislation in December to repeal the rule.

"I would support the Congress to move forward with the" Congressional Review Act, Mulvaney said.

The former South Carolina congressman received $62,950 in campaign contributions from payday lenders during his congressional career, according to data analyzed by the Center for Responsive Politics. He has told reporters that the contributions do not pose a conflict because he is no longer an elected official.

Mulvaney's move has brought condemnation from Democrats. Rep. Maxine Waters of California, the top Democrat of the House Financial Services Committee, said that Mulvaney's actions would strip protections from consumers.

"Republicans are once against giving payday loan sharks a reprieve at the expense of hardworking Americans," Waters said in a press release.

Consumer advocates, meanwhile, said Mulvaney was making a mistake in trying to reopen the rule.

"I don't think there is anybody clamoring to undo the payday lending rule except the payday lenders themselves," said Nick Bourke, director of consumer finance at the Pew Charitable Trusts. "Consumers will be left in the lurch paying a lot of money and experiencing financial distress."

Kate Berry

Kate Berry

Kate Berry covers the Consumer Financial Protection Bureau for American Banker.