Two trade groups, the Consumer Financial Service Association of America, Ltd. and the Consumer Service Alliance of Texas, have filed a lawsuit against the CFPB in a Texas federal district court challenging the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule).  The plaintiffs seek an order and judgment holding the Payday Rule unlawful and enjoining and setting aside the Payday Rule.  The case has been assigned to Judge Lee Yeakel, who was nominated by President George W. Bush in 2003.

The lawsuit appears to be a third bite at the apple in that it represents a third possible route for overturning the Payday Rule.  More specifically, the filing appears to reflect industry concern about the viability of overturning the rule through a resolution under the Congressional Review Act (CRA) or the reopening of rulemaking by the CFPB.

The complaint alleges that the Payday Rule is unlawful for the following reasons:

  • The CFPB’s structure is unconstitutional because of the President’s inability to remove the CFPB Director other than for-cause and the funding of the CFPB outside of the normal appropriations process
  • The Consumer Financial Protection Act (CFPA) unconstitutionally delegates legislative power to the CFPB by granting it “legislative authority” to prescribe rules identifying as unlawful unfair, deceptive, or abusive acts or practices and not providing “an intelligible principle” that the CFPB must follow in exercising such authority
  • The Payday Rule exceeds the CFPB’s statutory authority for reasons that include:
    • The Final Rule’s identification of unfair and abusive lending practices conflicts with the CFPA limitations on the CFPB’s authority to declare an act or practice unfair or abusive
    • The Final Rule violates the CFPB prohibition on the CFPB’s establishment of a usury limit because it “determines the legal status of certain covered loans based solely on their interest rates”
    • The CFPB does not have the authority to impose an ability-to-repay requirement on the loans covered by the Payday Rule
  • The Payday Rule is arbitrary and capricious in violation of the Administrative Procedure Act (APA) because the CFPB’s unfairness and abusive determinations “are unsupported by substantial evidence and reflect a clear error in judgment”
  • The CFPB’s cost-benefit analysis of the Payday Rule does not satisfy the requirements of the CFPA for such an analysis
  • The CFPB failed to satisfy various procedural requirements in promulgating the Payday Rule including:
    • The APA notice and comment rulemaking process because “the history of the rulemaking demonstrates that the Bureau will not consider or evaluate empirical studies or evidence that diverges from the Bureau’s pre-determined decision that payday lending and title lending are harmful and must be burdened by draconian regulations”
    • The CFPB has “reduced the elaborate rulemaking process to little more than a sham” because it “has largely allowed outside groups opposed to payday lending to drive this rulemaking, and has not adequately disclosed its reliance on these groups”
    • The CFPB failed to adequately consider the Payday Rule’s impact on small businesses as required by SBREFA
    • The CFPB failed to give adequate consideration to the “over one million comments [it received] from consumers who opposed the proposed rule”

Resolutions under the Congressional Review Act (CRA) to override the Payday Rule have been introduced in the House and Senate.  In January 2018, the CFPB announced that it intends to engage in a rulemaking process to reconsider the Payday Rule pursuant to the APA.  The Payday Rule became “effective”on January 16, 2018.  However, the compliance date for the rule’s substantive requirements and limits (Sections 1041.2 through 1041.10), compliance program/documentation requirements (Section 1041.12), and prohibition against evasion (Section 1041.13) is August 19, 2019.

It is doubtful that there are 51 votes in the Senate to pass a CRA resolution.  Adoption of a new rule through a reopened rulemaking could take too long to accomplish because of the many APA regulatory hoops that the CFPB would have to jump through.  In addition, consumer advocacy groups would likely file a lawsuit against the CFPB challenging any new rule.

Perhaps the most important question with respect to the Texas lawsuit is how the CFPB will respond.  The CFPB’s position under the Trump Administration on the constitutional issues is uncertain.  While President Trump wanted the CFPB to be held unconstitutional when Richard Cordray was Director so that he could be removed without cause, the President no longer needs such authority.  Moreover, the President might no longer want to have such authority because it would potentially enable a Democratic President to remove whoever President Trump eventually appoints as Director.

On the other hand, based on Mr. Mulvaney’s recent recommendation that the CFPA be amended to give the President more control over the Director, some observers believe that the CFPB would agree with the complaint’s allegation that the CFPB is unconstitutional.  In addition, Mr. Mulvaney’s decision to reopen the rulemaking indicates that he has grave concerns about the Payday Rule.

All in all, we believe that the CFPB will likely file an answer to the complaint stating that it agrees with most, if not all, of the complaint’s allegations.  Should that happen, the plaintiffs would be well-positioned to file a motion for judgment on the pleadings.

A motion for judgment on the pleadings is ordinarily granted when the complaint and answer, by themselves, reveal that there are no material issues of fact to be resolved and that a party is entitled to judgment as a matter of law.  However, it is unclear whether the court would be obligated to grant a motion by the plaintiffs for judgment on the pleadings or could exercise independent judgment about the legal issues raised in the lawsuit.

It also seems likely that certain consumer advocacy groups or Democratic state attorneys general will seek to intervene as defendants in order to defend the lawsuit.  The plaintiffs (and perhaps the CFPB) would likely oppose such intervention and it is premature at this point to speculate as to how the court would rule on intervention.

While it is also noteworthy that the lawsuit was filed in federal court in Texas rather than in D.C., the reason for the plaintiffs’ choice of Texas seems obvious—they needed to initiate the lawsuit in a federal circuit that has not already ruled on their constitutional challenge.  The D.C. Circuit has already concluded in PHH that the CFPB is constitutional.  The plaintiffs undoubtedly hope that the Fifth Circuit will decide the constitutional issue differently, thus creating a conflict with the D.C. Circuit that the U.S. Supreme Court would likely resolve.  Also, unlike the D.C. Circuit, the Fifth Circuit is known for being one of the more conservative circuits in the country