Lenders unhappy about the Consumer Financial Protection Bureau’s watered down payday lending rule could prove a bigger threat to the agency’s plans than consumer groups and state attorneys general.
Democratic state attorneys general and consumer groups have long discussed potential lawsuits if the original 2017 payday lending regulation is weakened, but are likely to have difficulty proving they have standing to sue.
The CFPB may actually be more vulnerable to a challenge from the payday industry, which is displeased with the CFPB’s proposal to keep intact restrictions on access to consumers’ bank accounts. Lenders may have both the incentive and standing to sue.
“They’re gearing up for a consumer challenge. I think they probably don’t believe that there would be an industry challenge,” Alan Kaplinsky, the co-head of Ballard Spahr LLP’s consumer financial services group, said in a Feb. 11 phone interview.
Consumer advocates and Democratic state attorneys general shredded the CFPB’s Feb. 6 proposed rule because it removed ability-to-repay provisions that were the 2017 regulation’s central tool.
The provisions would require payday, auto title and certain installment lenders to determine whether consumers could afford the short-term, high-interest credit, and put in place restrictions on the number of consecutive loans consumers could take out.
Along with the outrage came vague threats of lawsuits. “Not if I have anything to say about it,” Pennsylvania Attorney General Josh Shapiro said in Feb. 6 tweet in response to the proposal.
The CFPB appeared to be gearing up for such a challenge by including legal justifications for removing the ability to repay standards in its 171-page proposal. A senior CFPB official told reporters Feb. 6 that including such a standard was not legally mandated, as the ability to repay standard for mortgages was in the 2010 Dodd-Frank Act.
Those justifications and explanations may ultimately prove useful should the CFPB finalize its proposal but they may not be necessary to fend off a legal challenge from state attorneys general or consumer groups.
The rule’s biggest opponents “will have an uphill battle in establishing standing to bring suit,” Quyen Truong, a partner with Stroock & Stroock & Lavan LLP and a former top CFPB attorney, said in a Feb. 8 phone interview.
The CFPB would likely argue that neither Democratic state attorneys general nor consumer groups are directly harmed by the new regulation, according to Kent Barnett, a professor at the University of Georgia School of Law.
Such proof would be necessary for a challenge to make it past the initial motion to dismiss phase, Barnett added.
For consumer groups, the problem would be finding either payday loan customers or competitors, including some installment lenders with more consumer-friendly terms, that could credibly claim that the removal of the ability to repay provisions harmed them, he added.
“Competitors standing is the strongest form of standing,” Barnett said.
State attorneys general would run into a different problem, according to Rep. Katie Porter (D-Calif.), a freshman lawmaker who was a professor at the University of California Irvine School of Law.
The CFPB’s rule change would not block states from enacting tougher payday loan restrictions or boosting enforcement under existing laws. Thirteen states have already barred payday loans, and Colorado and Ohio recently put significant restrictions on them.
“So I think one of the things we may see as a result is not states suing, but instead states stepping up their own legislative activity to try to emulate what the CFPB said it was going to do,” Porter said in a Feb. 7 interview on Capitol Hill.
Free to Challenge
Those same standing concerns will not apply to the industry, which already sued to block the original 2017 rule.
The Community Financial Services Association, a payday lending industry group, released a Feb. 6 statement blasting the CFPB for keeping restrictions on how payday lenders access consumers’ bank accounts, allowing them to collect before borrowers pay other bills.
The CFSA’s suit against the 2017 rule has been stayed, but could potentially be revived to address concerns about payment provisions. Alternatively, individual lenders could file their own, separate suit.
The CFPB sought to placate payday lenders by saying that it would review the payday rule’s payments provisions, including potentially releasing a request for information and keeping the door open to a new rule easing the payments restrictions.
If the rulemaking process drags on, payday lenders could grow impatient and sue. And the CFPB will likely have to do more than argue that the lenders do not have standing to sue.
“I wouldn’t expect a challenge immediately, but there are a lot of people very upset about it.” Kaplinsky said.
--With assistance from Lydia Beyoud