On August 28, 2020, the industry trade groups challenging the CFPB’s final Rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans (the Rule) filed their Amended Complaint in accordance with the briefing schedule recently entered by the court. The Amended Complaint focuses on the payment provisions of the Rule but the trade groups have expressly reserved the right to renew their challenges to the underwriting provisions of the Rule in the event the Bureau’s revocation of those provisions is set aside for any reason, including legislative, executive, administrative or judicial action.
In the Amended Complaint, the plaintiffs allege that the Rule violates both the Constitution and the Administrative Procedures Act (the APA). Starting with the Supreme Court’s decision in Seila Law that the Director of the CFPB who adopted the Rule was unconstitutionally insulated from discharge without cause by the President, the Amended Complaint argues that a valid Rule requires a valid notice and comment process from inception and not mere ratification of the final result by a properly serving Director. It further asserts that ratification of the payment provisions is arbitrary and capricious within the meaning of the APA because the payment provisions were based on a UDAAP theory expressly rejected by the CFPB in its revocation of the underwriting provisions of the Rule and the CFPB has failed to explain how a lender can commit a UDAAP violation, consistent with the theory of the revocation of the underwriting provisions, when the consumer is free to eschew a covered loan based on a generalized understanding of the risk of multiple NSF fees.
The Amended Complaint takes issue with the payment provisions based on a number of additional alleged infirmities, including the following:
- The CFPB provided a lengthy period for the industry to comply with the original Rule but failed to provide any compliance period for the ratified Rule. Thus, the current Rule differs from the original Rule it purports to ratify in a key respect.
- The 36% APR trigger for covered installment loans is fundamentally at odds with the provision of the Dodd-Frank Act explicitly prohibiting the CFPB from establishing usury limits.
- The alleged harms the payment provisions are designed to forestall are caused by the banks holding the consumers’ deposit accounts and not by the lenders who initiate payments declined due to insufficient funds.
- The Bureau acted arbitrarily and capriciously in extending the payments provisions to multi-payment installment loans, where consumers have lengthy periods of time between installments to respond to failed payment-transfer attempts (and where, we would note, consumers are already free under the Electronic Funds Transfer Act to decline to authorize loan payments through recurring electronic fund transfers).
- The Bureau also acted arbitrarily and capriciously in extending the payments provisions to debit and prepaid card transactions, where failed payment-transfer attempts typically do not, if ever, result in fees. (We have repeatedly expressed the view that this key aspect of the Rule is indefensible.)
- The CFPB evidence supporting the payment provisions was insufficiently robust and reliable, especially with respect to storefront and installment loans since the CFPB relied upon evidence about online single-payment loans.
- The timing requirements for notices under the Rule arbitrarily prevent consumers from scheduling earlier payments.
- The CFPB did not consider whether enhanced disclosures could have adequately prevented the perceived consumer injuries.
We believe that the Amended Complaint represents a powerful attack on the payment provisions of the Rule. We have only one point we would emphasize to a greater extent: There is no apparent link between the UDAAP problem identified in Section 1041.7 of the Rule—consumers incurring bank NSF fees for dishonored checks and ACH transactions after two consecutive failed payment transfers—and the burdensome notice requirements in Section 1041.9 of the Rule. To our mind, these elaborate notice requirements are arbitrary and capricious for this further reason.
We will continue to follow this case closely and report on further developments.