Why the CFPB’s payday rule is in the hands of a Texas judge

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Consumer Financial Protection Bureau Director Kathy Kraninger is under pressure to ask a federal judge to lift a stay that has kept the agency's rule to rein in short-term lending from going into effect.

Last year, U.S. District Court Judge Lee Yeakel in Austin delayed the compliance date of the CFPB’s rule until November 2020, handing a major victory to two payday trade groups that sued the CFPB to get the rule thrown out.

The judge's decision put Kraninger in a tough position. The agency was already attempting to rescind a key part of the regulation that would establish tougher underwriting standards for payday loans even while leaving in place another part that places limits on how often a lender can attempt to debit payments from a borrower's checking account. The second part of the rule was set to take effect on Aug. 19 but has been held up by the court ruling.

“Right now the Texas case is significant ... because the Texas court has stayed the entire payday rule,” said Will Corbett, litigation director at the Center for Responsible Lending and a former senior counsel at the CFPB.

So far, however, the CFPB has not asked the judge to lift the stay, a move that has angered consumer groups and Senate Democrats who accuse Kraninger of trying to undermine something promulgated under one of her predecessors, Richard Cordray, who was appointed by former President Barack Obama.

“Every day that the CFPB lets this go, they are letting consumers continue to have withdrawals from payday lenders, so without the bureau taking steps to get the stay lifted, they are leaving consumers unprotected,” Corbett said.

Sen. Sherrod Brown, the lead Democrat on the Banking Committee, has questioned why the CFPB isn't taking action, given that the agency was letting that part of the rule go forward.

“The Bureau’s refusal to request to lift the stay of the compliance date for the payment provisions makes no sense and exposes consumers to continued withdrawal requests, resulting in unnecessary fees,” Brown wrote in an Aug. 14 letter.

Ultimately, the CFPB's action has left the fate of the rule up to Yeakel, who is not scheduled to hear an update from the agency until Dec. 6. It's uncertain which way the judge will decide on the rule.

Yeakel, an Oklahoma City native, is best known for a 2017 decision striking down part of a Texas law that sought to outlaw an abortion procedure. In 2014, he also struck down part of a law that would have required abortion clinics to have the same standards as surgical care centers.

He joined the district court in 2003 after being nominated by President George W. Bush. He had served as chief justice of Austin’s 3rd Court of Appeals, then as associate justice, from 1998 to 2003.

A contentious rule

The CFPB initially finalized the payday lending rule in 2017, but it was almost immediately assailed by payday lenders, which argued it would put them out of business. Republicans accused the agency of picking winners and losers among financial services companies.

When appointees of President Trump gained control of the agency in late 2017, some GOP lawmakers urged them to scrap the rule altogether. But doing so is tricky as it risks running afoul of the Administrative Procedure Act, which dictates how agencies engage in rulemaking and forbids them from reversing themselves in an arbitrary or capricious manner.

In February, Kraninger decided on a dual approach, proposing to eliminate the part of the rule that would have forced payday lenders to ensure a borrower had the ability to repay a loan before extending credit. But Kraninger left in place the rest of the rule.

"I think they bifurcated [the rule] recognizing that the final rule will be challenged in court and that it will be easier to support the repeal of just the [ability-to-repay] provisions as opposed to the repeal of the entire rule," said Alan Kaplinsky, a partner at Ballard Spahr who works for lenders.

Some observers predict Kraninger will finalize the repeal of the ability-to-repay portions of the rule at the same time the agency asks Yeakel to lift the stay on the payment provisions of the rule. They suggest Kraninger is likely to act in October or November.

Pressure from lawmakers

More than 100 House Democrats and consumer advocates have called for Kraninger to either abandon the overhaul of the rule or, alternatively, to ask the court to lift the stay on the payment provisions.

In his letter, Brown also claims that Kraninger’s failure to ask the court to lift the stay constitutes grounds for a challenge under the Administrative Procedure Act.

Industry groups said the CFPB is trying to thread the needle carefully. It is negotiating with the payday groups to get the Texas lawsuit dismissed while also trying not to trigger an expected APA challenge by consumer groups. (The CFPB did not return emails seeking comment.)

Most payday and installment lenders are prepared to comply with the payment provisions, according to trade groups and lawyers representing both types of lenders.

Yet lenders are still lobbying for rollbacks. Any limits on debits can result in millions of lost revenue and profits for lenders. Lenders want the CFPB to raise the debit limit when “pinging” a borrower’s account to three consecutive attempts, from the current two, among a host of other changes.

Meanwhile, consumer advocates are lamenting that so few consumer protections remain of the original rule.

“It’s a very minor tinkering since the real thrust of the law is gone if they finalize the proposal,” said Christopher Peterson, director of financial services and senior fellow at the Consumer Federation of America and a law professor at the University of Utah who was a special adviser to Cordray.

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