WASHINGTON — The payday lending industry is planning to use a familiar playbook in its effort to fight the Consumer Financial Protection Bureau’s new rule restricting short-term loans.
The regulation comes just three months after the bureau rolled out restrictions on mandatory arbitration clauses, spurring financial services groups to turn to Congress and the courts in an effort to quash it. While that effort has not yet borne fruit, payday lending advocates are following the same path as they begin their own fight.
“It’s like we are playing golf and the guy ahead of us has the same putt we do,” said Ed D’Alessio, executive director of the Financial Service Centers of America, which represents payday lenders and other finance companies.
Yet there are important differences between the battles over the arbitration rule, which has united most of the financial services industry against it, and the short-term regulation, which mostly affects just payday lenders.
And despite the broad range of support the arbitration rule repeal currently enjoys, it’s not even clear that will succeed.
Congressional Republicans are still trying to nullify the CFPB’s arbitration rule using a legislative procedure called the Congressional Review Act. While the House was able to pass legislation to reject the arbitration rule, it is unclear if the Senate effort will be able to garner enough votes before the window to use the procedure closes in November.
The payday loan industry will likely make similar challenges, but could wait to see if the Senate is able to approve the arbitration effort first. That would be a cleaner and more effective way to roll back the payday rule than a lawsuit.
But even if the arbitration repeal is passed by Congress, that’s far from a guarantee that lawmakers will do the same for payday lending. Many Republicans, particularly those from states that have already enacted limits on small-dollar loans, may be reluctant to vote to overturn the CFPB’s rule. Doing so would carry real consequences, because the CFPB would no longer be able to enact rules regarding short-term loans without an affirmative vote by Congress.
“Half a dozen Republican governors in recent years took actions against payday lenders,” said Michael Calhoun, president of the Center for Responsible Lending. “This is one of those issues … it has broad public support and broad bipartisan support.”
Perhaps because the congressional outlook was uncertain, the Chamber of Commerce filed a lawsuit last month challenging the arbitration rule and the constitutionality of the CFPB’s structure. Joined by several trade groups, the industry argued that the consumer bureau ignored the findings of its own arbitration study, which found that it was more beneficial for consumers to go through the arbitration process.
Similarly, payday lending groups are expected to file their own suit against the CFPB’s small-dollar lending rule, though it is unclear which group or lender will take the lead.
D’Alessio said his group hasn't "decided yet” whether to file a lawsuit. “It is not an undertaking we would take lightly, but somebody from the industry is going to eventually sue.”
Payday lenders face a high hurdle in court, lawyers said.
A lawsuit might claim that the bureau was "arbitrary and capricious" in bringing the rule to regulate payday lenders, essentially claiming it ignored proper procedure in finalizing the rule. But that’s a tough standard to meet, some said.
“It's almost certain there will be another Administrative Procedures Act lawsuit brought by the [payday] trade association," said Andy Arculin, a partner at Venable and a former senior counsel in the CFPB's office of regulations. "It would be a very complicated lawsuit. These are difficult arguments to win on."
There is also the issue of the more than 1 million comment letters filed, many of which were supportive of the payday loan industry. But those letters used similar or identical language. While the industry could claim the CFPB did not have time to read through all the letters, that argument is weak, according to lawyers.
"In the past, what agencies have done when people have filed duplicative letters is they don't count each letter as being a separate comment," said Joseph Lynyak, a partner at the law firm Dorsey & Whitney. "They discount [the letters] based on the fact that they understand the industry's position. The issue is not about how many people file letters but whether the agency is reasonably addressing policy."
Moreover, the CFPB spent nearly five years working on the payday lending rule, in part to make it foolproof against industry challenges. Its director, Richard Cordray, has long considered the payday rule an important accomplishment, one he is personally invested in.
The CFPB is "fully expecting to be sued on it, and they’ve done their due diligence as best they can," Arculin said.
Opponents of the arbitration and payday loan rules are also hoping that a new director appointed by President Trump could help reverse, delay or ease the rules.
In the case of the arbitration rule, which is set to go into effect in March, that would depend on whether Cordray plans to leave before his term expires in July.
There is widespread speculation he will leave to run for Ohio governor, but Cordray has given no sign he definitively plans to do so.
Even if Cordray stays, however, a new director could change direction on the payday lending rule, which isn’t due to go into effect until 21 months after it is published in the Federal Register.
“The new director is going to have well over a year to look at this rule and to decide whether he or she would want to make adjustments or make other changes to it,” D’Alessio said.
Beyond reviewing the rule writing process, the new director could determine that the rule does more harm than good by depriving consumers of access to credit and shuttering small businesses. The rule would require those that offer short-term loans to assess a borrower’s ability to repay, which the industry has said is a vague standard that could lead to more legal liability.
“There is a real question about whether the short-term products subject to the ability to repay requirement will continue to be offered,” said Benjamin Olson, a partner at Buckley Sandler. “If I am a lender that focuses on those products, I have to decide whether I can live with the rule or whether I need to offer different, longer-term products or stop extending credit altogether.”
The CFPB estimates that 94% of consumers will still be able to take out an initial payday loan under the rule, but that it would reduce revenue from repeat borrowing by 67% to 68%. Some Republicans are already objecting to the rule.
“The CFPB never provided a substantive answer as to where these consumers will be able to turn to fulfill their critical financing needs, but the CFPB has also demonstrated that they rarely concern themselves with such practical matters,” said Rep. Steve Stivers, R-Ohio.
However, consumer groups say that the five years the bureau spent studying the issue and developing the rule make unwinding it difficult.
If a new director attempts to ease or repeal the rule, the agency would have to go through the Administrative Procedure Act, including proposing it and posting it to the Federal Register. That would have to wait until a new director is confirmed by the Senate, as even an acting director’s authority might not be sufficient under the law.
“The rule is not protected in the sense there is no way to take action, but it also can’t be wished away with the wave of a wand. There was a multistage process as is required by law to develop this rule,” said Lisa Donner, executive director at the consumer group Americans for Financial Reform. “If anybody wanted to reopen the rule they would need to begin that whole process and they would need to have evidence that justified the opening of that process and making changes in the rule.”