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Nothing comes easy for CFPB in payday lending rule

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The Consumer Financial Protection Bureau has been determined to move forward with a key piece of its payday lending rule. But a challenge by a Tennessee lender to the rule's so-called payment provision could stand in the way.

Advance Financial made a formal request in December 2018 that the CFPB exclude debit cards from the rule's payment restrictions that seek to limit how often a lender can access a consumer’s checking account.

The rationale is that borrowers do not incur fees for insufficient funds when debit card payments are denied, but generally do face such fees when checks and ACH transfers are denied.

The Nashville company claims the CFPB erred when it included debit transactions when barring lenders from making more than two unsuccessful attempts to collect payments from an account. The petition says the CFPB ignored recommendations of a small-business panel to exclude debit transactions, and that that oversight could expose the bureau to legal risk.

"The agency made what we consider a very big mistake so we expect the agency to proceed through rulemaking to correct that mistake," said Andrew Grossman, a partner at BakerHostetler, who wrote the petition for Advance Financial. The company specializes in revolving credit lines with annual percentage rates of up to 360% as an alternative to payday and installment loans.

It is unclear what impact the challenge will have on the overall rule. Even though the petition was filed last year, on Dec. 13, CFPB Director Kathy Kraninger brought up the Nashville lender’s request during testimony to Congress earlier this month. The "petition for rulemaking and supplementary comment" allows firms to share feedback after a rule is finalized.

Kraninger signaled that the agency has until December to respond to the company.

"The bureau has received a petition to reconsider or address issues with the payment's provisions of the 2017 rule in addition to our consideration of the 2017 underwriting requirements," she told members of the Senate Banking Committee on Oct. 17.

"So that is something that at least is on our radar. We have a responsibility to respond to that petition within a year of it being sent to us. So it is on the plate."

In February, Kraninger left intact the payment restrictions but proposed rescinding mandatory underwriting requirements that were championed by the agency in the Obama administration.

"The priority was in fact the reconsideration of the underwriting provisions, but we will have to look at and at least respond to these concerns," she said at the hearing.

The petition implies that the CFPB could face subsequent lawsuits if the rule restricting debit card payments on payday loans becomes effective.

"The present record is more than adequate to conclude that the Final Rule’s approach to debit card payments lacks support and imposes unjustified burdens on both lenders and consumers," the petition said. "That exposes the Bureau to substantial legal risk, given the lack of support for the Final Rule’s arbitrary treatment of debit card payments. Thus, the Bureau should promptly modify the definition of payment transfer to exclude debit card payments."

Many legal experts say the CFPB will eventually make changes because of the threat of litigation.

“There is some indication they will look at the debit card issue, and I have to believe that they will act rationally and change the treatment of debit cards before this rule goes finally into effect,” said Jeremy T. Rosenblum, a partner and co-practice leader at Ballard Spahr, who wrote multiple comments letters about problems with the payment provisions.

“If they don’t make any changes, they have an important aspect of the rule that is completely arbitrary and capricious, which is the standard for invalidation of the rule.”

The payment provision was always viewed as less controversial than the rule's more substantive underwriting provision, which the agency under Kraninger has sought to eliminate. Many believe the agency split the two provisions to mitigate the impact of consumer advocates suing over the removal of the underwriting requirement.

Yet with Advance Financial's petition, both provisions face some legal risk.

"Subjecting debit card payments to the payment provisions was unsupported, unnecessary, and therefore arbitrary and capricious,” Grossman wrote in the petition.

The company claims the CFPB is prohibited from regulating debit cards because it has not met the specific criteria, including showing that debit cards substantially injure a consumer, materially interfere with a consumer’s ability to understand the product or service, or unreasonably take advantage of a consumer.

"Arbitrarily lumping debit card payments in with checks and ACH transfers results in heavier burdens on debit card payments and thereby disincentivizes lenders from using a payment method that has more protections and is less costly to consumers," the petition stated. "That is illogical and contrary to the stated purpose of the payment provisions."

The payday industry has lobbied the CFPB to change the rule, arguing that 18 state attorneys general, and numerous small business representatives, credit unions, community banks, and other industry participants want debit card transactions excluded.

"The industry wants to be able to take debit card payments," said Jamie Fulmer, a senior vice president at Advance America, a Spartenburg, S.C., payday lender owned by Grupo Elektra in Mexico.

It is unclear whether the CFPB would address other changes to the payments part of the rule.

"Kraninger's goal seems to be to vitiate most of the substantive provisions of the previous rule," said Casey Jennings, a lawyer at Seward & Kissel and a former attorney at the CFPB’s Office of Regulations, who worked on the original 2017 regulation.

While Kraninger faces the threat of litigation from lenders, she also is getting pressure from consumer groups and Democratic lawmakers to enforce the consumer protections.

Still, it is unclear how much impact the threat of litigation will have given that the rule's compliance date has been put on hold, indefinitely for now.

A Texas judge stayed the compliance date of the payment provisions in November 2018 after the CFPB sided with two payday trade groups that sued the bureau to invalidate the original payday rule.

The stay is expected to last until mid-2020 or until the Supreme Court rules on a separate case challenging the constitutionality of the CFPB.

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