Mulvaney can’t just kill CFPB payday rule, but here’s what he can do

Banking rules cannot be rewritten overnight, and so acting Consumer Financial Protection Bureau Director Mick Mulvaney has a tall order remaking the payday loan regulation crafted under his predecessor. But observers say Mulvaney has options for altering the rule to the industry's favor.

One option would be to refocus the rule on disclosure requirements, which would be several steps short of a repeal but more amenable to lenders than the current CFPB regulation.

Another option would be for Mulvaney to suspend the current rule while considering changes but prolong the process as long as possible to delay implementation, kicking the can down the road to give lenders a longer reprieve from a rule they abhor.

"They'll go through the motions of a rulemaking and do nothing. They [will] just extend" the compliance deadline, said Stephen Ornstein, a partner at Alston & Bird.

Mulvaney announced on Jan. 16 that the bureau intended to reconsider the rule, the same day that the first phase of the CFPB rule technically went into effect. The agency noted it also may waive an April 16 registration deadline under the rule. The most substantive requirements do not go into effect until August 2019.

The Dodd-Frank Act authorized the CFPB to write payday lending rules, but left the agency plenty of latitude on how to structure such a regulation. Mulvaney could hit the pause button on compliance to give the agency more time to consider changes, thereby delaying any effect on the industry.

With 21 months left until the core requirements take effect under the existing rule, which was devised under former Director Richard Cordray, Mulvaney could also begin a new rulemaking process that a new Senate-confirmed director could complete before the 2019 deadline. That lengthy lead time gives the CFPB an opportunity to solicit comments on a new, as-yet-unknown payday plan.

"This is a very pro-industry administration and I suspect a permanent director will be reasonable to industry and will go through another notice of rulemaking and open the comment period," Ornstein said.

The payday lending industry has engaged in a 20-year battle with consumer groups, mostly on the state level, to halt regulations on the industry. In the latest twist, some state legislatures are using the CFPB's existing payday rule to justify the creation of a new category of loans that would be even costlier for many borrowers.

Payday lenders have balked at the CFPB rule's key requirement: that payday operators determine a borrower's ability to repay a loan of 45 days or less. They also object to the rule's "lockout" periods for new loans, limits on rolling over loans, and restrictions on electronically debiting borrower accounts to pay the debt.

But the industry is hopeful that Mulvaney, who is also the White House budget director and in the past has criticized CFPB policies and had accepted political campaign donations from small-dollar lenders, will at least water down the rule's effects.

Yet Mulvaney cannot just scuttle the rule without giving any justification, because he likely will face legal challenges, lawyers said. At the very least, the agency would have to ensure that rulemaking changes comply with the Administrative Procedure Act. Although the Trump administration has vowed to undo regulations it inherited from the Obama era, changing a rule that has already gone through a multiyear process of review is not easy.

To illustrate any agency’s difficulty in killing existing rules outright, some observers point to a ruling by the U.S. Court of Appeals for the D.C. Circuit in July that blocked the Environmental Protection Agency from unwinding restrictions on methane emissions from new oil and gas wells. The appeals court decision found that the EPA was "unreasonable," "arbitrary" and "capricious" in trying to block parts of the EPA's methane regulation.

"Mulvaney can't do anything that makes it look like they just decided to change their mind overnight," said Joe Valenti, director of consumer finance at the Center for American Progress. "The CFPB would have to show that conclusions were reached incorrectly."

A major challenge for the CFPB will be to establish a sufficient rationale for changing the payday rule, which was finalized in October by Cordray after four years of research and rulemaking.

The CFPB first began research on payday loans in 2013 and went through a small-business review, which only a small number of agencies are subject to, before proposing a rule in mid-2016 and taking a year to review and respond to comments. The payday industry was preparing to challenge the rule by arguing the CFPB did not take enough time to review millions of comments.

But the agency might have a potential route for changing the structure of the rule to require small-dollar lenders to comply with tougher disclosure requirements. Lenders have long suggested that federal regulations should focus on better disclosures to borrowers, which they think would accomplish the same end as the far more restrictive ability-to-repay requirements.

Industry advocates say a disclosure-focused rule would produce a better outcome from a cost-versus-benefit perspective. Mulvaney recently said he plans to use a cost-benefit analysis for most CFPB actions.

"It would be important to understand the costs and benefits associated with the rule," said Jamie Fulmer, a senior vice president of public affairs at Advance America Cash Advance Centers. "We think disclosure and registration [of payday loans] go a long way toward regulating bad actors in the marketplace."

But others say that limiting the requirements in a revised payday rule to stronger disclosures would not address some of the dangerous aspects for consumers of taking out high-cost, small-dollar credit.

Christopher Peterson, a law professor and senior fellow at the Consumer Federation of America, who was a special adviser at the CFPB, said disclosures are "an inexpensive Band-Aid to conceal the wound underneath."

"Can payday lenders actually walk into the room and say a disclosure does anything?" Peterson said. "It's claptrap and gibberish. Shame on them."

However, requirements that focus on disclosing payday loan terms could still have a sizable impact on loan volumes. In research published in 2016, the CFPB found that, over the six months following implementation of a Texas law requiring more disclosure, loan volume fell by 13% relative to other states.

Fulmer noted that the CFPB has appeared to view disclosures as strong enough for regulating overdraft coverage provided by banks and credit unions.

Fulmer said that when a consumer needs $300 in cash, he or she has various options such as borrowing on a credit card, using overdraft protection that incurs a $25 to $35 fee, or opting for a payday loan.

"It seems inconsistent to suggest that a remedy for one product is disclosure and the other is arbitrary restrictions and lockouts," Fulmer said. "We think the customer ought to have the choice, not have the products dictated to them."