For the past five years, the payday lending industry has successfully fought off federal regulations of short-term, small-dollar loans by suing the Consumer Financial Protection Bureau.
The years-long litigation over the CFPB’s payday rule may finally be coming to a head, but the fact that the industry has been able to stall the rule for so long has infuriated consumer advocates.
“They are trying to defeat the rule if they can but if nothing else, they have slowed it down and gummed it up," said Chris Peterson, a law professor at the University of Utah and former advisor to former CFPB Director Richard Cordray. "It shows that any series of initiatives to just fix problems can get undone and undermined."
The U.S. Court of Appeals for the Fifth Circuit is expected to rule In the next three to six months on whether the payday rule — first developed under Obama appointee Cordray but
Two payday trade groups that
Though Trump was in office at the time, he
Cordray resigned shortly after the payday rule was issued after serving 10 months as CFPB director in the Trump administration.
Three years later, the Supreme Court ruled on a case dealing with the CFPB’s constitutionality. In 2020, the high court struck down the so-called “for cause” provision in Dodd-Frank,
In oral arguments May 9, the payday litigants claim that the payday rule should never have been enacted in the first place because Trump should have been able to fire Cordray. If Trump had been able to do so, they argue, Cordray would not have issued the 2017 payday rule.
“The unconstitutional removal restriction actually blocked President Trump from effectuating his desire to remove Director Cordray from office before Cordray promulgated the rule,” argued Chris Vergonis, a partner at Jones Day representing the Community Financial Services Association of America and Consumer Service Alliance of Texas.
Vergonis told the court that Cordray “lacked authority to wield executive power,” and that since he was improperly insulated from being removed by the president, the remedy “should be setting aside" the payday rule.
The payday rule is an example of how an agency’s rules increasingly are being locked in protracted litigation for years, advocates said. The rule’s original compliance date was August 2018. After the payday groups sued, a Texas judge in 2019 stayed the compliance date of the rule. In October, the Fifth Circuit further extended the rules' compliance date until 286 days after the resolution of the appeal.
Supporters of the payday rule said it is unclear whether the Fifth Circuit will find the arguments of the payday loan industry compelling enough to overturn the final payday rule. They claim it’s a stretch given that many Republicans
“Trump never took any action, he never came out and said he was going to try to fire Cordray,” Peterson said. “I think there are a lot of problems with that argument because Trump was not loath to fire people, his catchphrase was ‘You’re fired,’ and yet he never took that action.”
After the high court’s decision, the CFPB was compelled to examine the existing rules to determine whether they passed legal muster in light of the ruling. Kraninger later
But the payday litigants have argued that Kraninger did not have the authority to issue a ratification of the payday rule. The separate memo Kraninger issued for the payday rule regarding its validity should have been subject to a notice-and-comment period as required by the Administrative Procedure Act, the litigants argued.
Vergonis told the court that the payday rule required “notice-and-comment rulemaking undertaken by a director properly exercising executive authority.”
“That never happened here,” Vergonis said. Kraninger’s “wave-of-the-pen ratification did not cure this harm.”
The original payday rule issued in 2017 had two components: a provision requiring lenders to evaluate a borrower’s ability to repay a loan and payment provisions restricting the ability of lenders to access a consumer’s checking account.
But Kraninger scrapped the ability-to-repay requirements on the same day in 2020 that she ratified the payday rule. At the time, a Texas judge had already
Alex Horowitz, principal officer of the consumer finance project at the Pew Charitable Trusts, said the CFPB’s 2020 regulation rescinding ability-to-repay requirements “was based on flawed analysis and ignored the bulk of research confirming single-payment loans have harmed consumers.”
The current payday rule, if it is ever enacted, would restrict lenders from making 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.
Because the payday rule also covers debit and prepaid cards that generally do not charge consumers any fees, the payday groups also have claimed that the rule should be invalidated as “arbitrary and capricious” under the Administrative Procedure Act, Vergonis said.
He called the payment provisions “irrationally overbroad,” because they extend to debit and prepaid cards that are not likely to trigger substantial fees to consumers.
Horowitz said that during the past five years of litigation, more states have enacted payday reforms and more banks are issuing small-dollar and longer-term installment loans that have helped lower the cost of credit for low- and moderate-income consumers.
Even as the payday industry continues to fight the payday rule with litigation, advocates are pushing for further consumer protections.
“The CFPB should still reinstate the 2017 rule because federal safeguards are badly needed,” Horowitz said. Successful state reforms from Colorado, Ohio, Virginia and Hawaii also show that “when rules are designed well, payday lenders follow them and there is widespread access to credit.”
The main threat from payday lenders are “rent-a-bank loans” issued by banks on behalf of payday lenders that “often have higher prices than state laws allow,” Horowitz said.
