Consumer Financial Protection Bureau? Recent Recission of Payday Lending Regulations Undermines Agency’s Statutory Purpose & Objectives
By: Tyler Winterich, RBFL Student Editor
The payday lending industry has a significant and controversial economic footprint. In 2018, consolidated payday loan volume across brick and mortar and online lenders was $29.2 billion. While more precise and recent industry data is challenging to identify, as of 2012, 12 million individuals are estimated to use payday loans. The significant nature of this industry and concerns about predatory practices led the Consumer Financial Protection Bureau (CFPB) to issue a payday lending rule in 2017.[1]
In July 2020, the CFPB issued a final rule revoking the 2017 rule’s mandatory underwriting requirements. Effective October 20, 2020, the rule, among other changes, revokes the ability-to-repay provision.[2] This provision required payday lenders to evaluate a borrower’s financial circumstances to ensure that they could meet minimal living expenses and repay the payday loan without re-borrowing. Ability-to-repay requirements are not foreign to the law and exist in other areas, including mortgage lending.
The CFPB’s rescission of these requirements raises the question of whether that decision aligns with the agency’s statutory purpose and objectives. Congress established the CFPB under the 2010 Dodd-Frank Act as part of the government’s response to the 2008 financial crisis.[3] In addition to filling in regulatory gaps, the CFPB serves a necessary purpose, according to supporters, to protect consumers from abusive and deceptive financial transactions which many consumers experienced during the financial crisis. These goals are reflected in the agency’s statutory purpose which includes “ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.”[4] Further, one of the agency’s objectives is to utilize its authority to ensure “consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination.”[5] While the CFPB’s authority has been challenged before, its authority remains intact even after the Supreme Court’s ruling this past June in Seila Law LLC v. CFPB held that the CFPB’s single-director structure is unconstitutional.[6]
Although the CFPB’s authority has been preserved, the recission of the 2017 mandatory underwriting provisions represents an unsettling shift in how the agency wields its authority. In 2017, the CFPB, based on its own research, viewed payday lending as a predatory industry that required additional regulation to protect economically vulnerable consumers.[7] The ability-to-repay requirements attempted to alleviate unequal bargaining power, stop “debt traps,” and demonstrated federal intervention into a mostly state-regulated industry with a history of evading state laws. In 2020, the CFPB aligns with the payday lending industry and views mandatory underwriting requirements as unnecessarily restricting lenders, reducing credit access, and unfairly underestimating consumers.[8] From this perspective, the combination of free market competition and information will ensure borrowers have access to credit at affordable prices.
Which version of the payday lending market will prevail is uncertain, especially because the 2017 rule never went into effect, but deregulated markets likely provide some insights. Payday lenders have demonstrated a willingness to evade remaining laws including state interest rate laws.[9] In addition, the CFPB’s own 2014 report and 2017 rulemaking process as well as multiple third-party organizations have documented significant consumer harm in deregulated payday lending markets, particularly for communities of color.[10] The economic disruptions resulting from COVID-19 likely only increase reliance on predatory credit sources like payday lending. The potential increase in consumer harm as a result of the CFPB’s recission of the 2017 rule seems irreconcilable with the agency’s statutory purpose and objectives.
[1] Payday, Vehicle Title, and Certain High-Cost Installment Loans, 82 Fed. Reg. 54,472 (proposed Nov. 17, 2017) (codified at 12 C.F.R. pt. 1041).
[2] Payday, Vehicle Title, and Certain High-Cost Installment Loans, 85 Fed. Reg. 44,382 (proposed Jul. 22, 2020) (codified at 12 C.F.R. pt. 1041).
[3] Creating the Consumer Bureau, ConsumerFinance.Gov, https://www.consumerfinance.gov/about-us/the-bureau/creatingthebureau/ [perma.cc/M5D8-4386] (last visited Oct. 21, 2020).
[4] 12 U.S.C. §5511(a) (2018).
[5] 12 U.S.C. §5511(b)(2) (2018).
[6] Seila Law LLC v. CFPB, 140 S. Ct. 2183, 2192 (2020).
[7] Payday, Vehicle Title, and Certain High-Cost Installment Loans, 82 Fed. Reg. at 54,875; Press Release, Bureau of Consumer Financial Protection, CFPB Finalizes Rule to Stop Payday Debt Traps (Oct. 5, 2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-finalizes-rule-stop-payday-debt-traps/ [perma.cc/A2XA-NYL3].
[8] Complaint, Cmty. Fin. Serv. Ass’n. of Am., Ltd. Vs. Consumer Financial Prot. Bureau, No. 1:18-cv-00295 (W.D. Tex. Apr. 9, 2018); Press Release, Bureau of Consumer Financial Protection, Consumer Financial Protection Bureau Issues Final Rule on Small Dollar Lending (July 7, 2020), https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-final-rule-small-dollar-lending/ [perma.cc/MD2M-CMY8].
[9] Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps, Hearing Before the United States House Committee on Financial Services, 116th Cong. (2020) (testimony of Graciela Aponte-Diaz, Director of Federal Campaigns for the Center for Responsible Lending).
[10] See e.g., id.; Payday, Vehicle Title, and Certain High-Cost Installment Loans, 82 Fed. Reg. 54,472; Payday Loan Facts and the CFPB’s Impact, Pew Charitable Trusts (Jan. 14, 2016), https://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2016/01/payday-loan-facts-and-the-cfpbs-impact [perma.cc/Z6QT-657T]; The Consumer Financial Prot. Bureau Office of Research, CFPB Data Point: Payday Lending (2014) https://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf [perma.cc/45AA-QMA8].