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

 

A group of Democratic senators (joined by two independent Senators) has sent a letter to Leandra English and Mick Mulvaney urging them to abandon any efforts by the CFPB to reconsider its final payday/auto title/high-rate installment loan rule (Payday Rule).

In January 2018, the CFPB announced that it intends to engage in a rulemaking process to reconsider the Payday Rule pursuant to the Administrative Procedure Act.  Although the Payday Rule became “effective” on January 16, 2018, 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.  The Senators state that they “understand that the CFPB is delaying the rule by granting waivers to companies who would otherwise be taking steps to begin complying with the rule, and that the Bureau may be offering the payday loan industry an opportunity to undermine the rule entirely.”  According to the Senators, such actions are “further efforts to undermine the implementation of this important consumer protection rule.”

The Senators also state that they are “troubled by the CFPB’s enforcement actions related to payday lending.”  Their letter references the CFPB’s decision to end a lengthy investigation into a payday lending company and its dismissal of a federal court lawsuit filed by the CFPB against four online tribal lenders.

We previously observed that the lawsuit represented another attempt by the CFPB to transform alleged violations of state law into CFPA UDAAP violations.  More specifically, the CFPB claimed that because the lenders charged interest at rates that exceeded state usury limits and/or failed to obtain required state licenses, the loans were void or uncollectible in whole or in part as a matter of state law and the defendants’ efforts to collect amounts that consumers did not owe under state law were “unfair,” “deceptive,” and “abusive” under the CFPA as a matter of federal law.

 

The American Banker has reported that last week, Senator Lindsey Graham introduced a joint resolution under the Congressional Review Act (CRA) to override the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule).  The CRA is the vehicle used by Congress to overturn the CFPB’s arbitration rule in a party-line vote.

In December 2017, a bipartisan joint CRA resolution to override the Payday Rule was introduced in the House and, in January 2018, the CFPB announced that it intends to engage in a rulemaking process to reconsider the Payday Rule pursuant to the Administrative Procedure Act (APA).

To be eligible for the special Senate procedure that allows a CRA resolution to be passed with only a simple majority, the Senate must act on the resolution during a period of 60 “session days” which begins on the later of the date when the rule is received by Congress and the date it is published in the Federal Register.  While the deadline for voting on a CRA resolution cannot be definitively determined in advance because of uncertainty as to which days going forward will count as “session days,” it appears the deadline will occur by mid-May.

As we previously commented, to change the Payday Rule pursuant to the APA, the CFPB will have to follow the APA’s time-consuming notice and comment procedures.  In addition, since any changes made by the CFPB are likely to be challenged in litigation, the CFPB will need to successfully defend a revised rule or its withdrawal of the existing rule.

Given the hurdles created by the rulemaking process, the CRA provides a “cleaner” and quicker vehicle for overturning the final rule.  However, there is no assurance that the majorities needed to override the Payday Rule under the CRA can be assembled in both the House and the Senate.  Since the Senate passed the CRA resolution overturning the arbitration rule, the Republican’s majority has narrowed to 51-49, and Senator John McCain has been absent from Congress for health reasons.

According to Politico, CFPB Acting Director Mick Mulvaney will testify before the House Financial Services Committee on April 11, 2018.  Undoubtedly, he will be asked about the CFPB’s plans to revisit the Payday Rule.

 

In a span of three days, the CFPB, under Acting Director Mulvaney, significantly retreated in the payday-lending space and suffered a court defeat in its request for monetary relief with respect to a CashCall installment lending program.  The federal district court’s decision in CashCall followed a bench trial that occurred before Mr. Mulvaney’s first day at the Bureau, making it unlikely that the CFPB will appeal.

First, on January 17, 2018, the CFPB announced that it intends to reconsider the payday/auto-title/high-rate installment loan rule finalized under former Director Cordray.  On the next day, January 18, the CFPB, without explanation, voluntarily dismissed its federal court lawsuit against four online tribal lenders.  Finally, on January 19, the federal judge presiding over CashCall in the Central District of California rejected the CFPB’s demand for $235 million in restitution and a penalty of $51 million, and instead awarded a $10.3 million penalty, the amount available for violations that are neither reckless nor knowing.

Most notably, the district court rejected the CFPB’s claims that CashCall intended to defraud and deceive consumers.  To the contrary, the court found that:

  • CashCall acted in good faith in structuring its tribal lending program and relied on the advice of prominent legal counsel;
  • The CFPB failed to produce any evidence to support its allegation that CashCall deceived consumers;
  • CashCall “made every effort to inform consumers about all material aspects of the loans;”
  • [T]he evidence indicated quite clearly that consumers received the benefit of their bargain;” and
  • The CFPB failed to introduce credible evidence of the net amount of unjust enrichment obtained by CashCall.

It is important to note, however, that the district court reiterated and relied on its prior opinion that CashCall, and not the tribal-affiliated entities, was the true lender.  CashCall’s appeal of the true-lender decision remains pending.

We will continue to monitor the CFPB’s evolving positions under new leadership, especially its proposal to reconsider, and perhaps radically alter, the current payday/auto-title/high-rate installment loan rule.

 

 

On December 1, 2017, three Democrat and three Republican members of the House of Representatives introduced a joint resolution under the Congressional Review Act (H.J. Res. 122) to override the CFPB’s final payday/auto title/high-rate installment loan rule.  The CRA is the vehicle used by Congress to overturn the CFPB’s arbitration rule in a party-line vote.

In a new blog post entitled “7 Reasons to Oppose the Federal Payday Loan Rule,” a policy analyst at the Competitive Enterprise Institute supports use of the CRA to overturn the payday loan rule.  Among the seven reasons discussed in the blog are that the rule leaves low-to-middle income consumers without access to credit, payday loan users overwhelmingly approve of the product, and the rule is built on a flawed theory of consumer harm.

The CFPB’s final payday became “effective” this past Tuesday, 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.  While the CFPB announced yesterday that it intends to engage in a rulemaking process to reconsider the final rule, it normally cannot do so without following the time-consuming notice and comment procedures of the Administrative Procedure Act.  In addition, since any changes made by the CFPB are likely to be challenged in litigation, the CFPB will need to successfully defend a revised rule or its withdrawal of the existing rule.

Given the hurdles created by the rulemaking process, the CRA provides a “cleaner” and quicker vehicle for overturning the final rule.  Republican Congressman Dennis Ross, one of the CRA resolution’s sponsors, is reported to have said that despite the CFPB’s announcement, he intends to continue to seek passage of the resolution by Congress.

Both high-rate loans covered by the final rule and the final rule itself are highly controversial.  Accordingly, there can be no assurance that the majorities needed to override the rule under the CRA can be assembled in both the House and the Senate.  Nevertheless, whether through the CRA, new rulemaking, or litigation, we continue to expect that the final rule adopted under former CFPB Director Richard Cordray will not be implemented in anything approaching its current form.

The CFPB announced today that it intends to engage in a rulemaking process to reconsider, pursuant to the Administrative Procedure Act, its final rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans (the “Payday Rule”).  The announcement fully accords with our expectation that the Payday Rule will never see the light of day in its current form.

If it were to go into effect, the Payday Rule would largely eliminate the availability of payday loans to the public.  In this regard, the Payday Rule reflected former CFPB Director Cordray’s hostility to payday lending and his failure to seriously consider how consumers who rely upon the product would be impacted by its elimination.  It was adopted on a crash basis shortly before Director Cordray’s resignation and largely disregarded over 1,000,000 comments from consumers articulating the critical benefits of payday loans.

To our mind, it was inevitable that Director Cordray’s successor would wish to re-evaluate the costs and benefits of the Payday Rule.  We think it highly likely that, at the end of the day, the new Director (whether Mick Mulvaney in an acting capacity or the as-yet-to-be-appointed permanent successor to former Director Cordray) will repeal the Payday Rule while he or she considers other options that can preserve the product and limit the potential for consumer injury.

Today’s announcement is good news for the millions of consumers who rely upon payday and title loans to meet their financial needs (and, of course, to the payday and title lending industries).

A former CFPB examiner has written U.S. Attorney General Jeff Sessions claiming that CFPB officials falsified examination reports in connection with a CFPB examination of ACE Cash Express that led to the CFPB extracting $10 million of restitution and penalties from ACE.  At the time the CFPB forced ACE to enter into this consent order, even in the absence of any allegations of fraud on the part of the CFPB, we sharply criticized the CFPB for its treatment of ACE.

The July 2014 order between the CFPB and ACE, one of the country’s largest payday lenders, was based on supposed ACE collection problems.  It required ACE to pay $5 million in restitution and another $5 million in civil monetary penalties.

We observed at the time that the CFPB had extracted this relief without providing any context to its actions or explaining how it determined the monetary sanctions.  We found it particularly troubling that, despite the infrequency of collection misconduct observed by ACE’s independent expert, best practices followed by ACE, and the limited criticism of ACE policies, procedures and practices within the four corners of the consent order, former CFPB Director Cordray added insult to injury by accusing ACE of engaging in “predatory” and “appalling” tactics, effectively ascribing occasional misconduct by some collectors to ACE corporate policy.

Now, former CFPB examiner Cassandra Jackson raises serious questions as to the integrity of the exam report giving rise to the consent order.  Ms. Jackson states that she participated in the CFPB examination and was instructed by her superiors “to change, remove, and otherwise falsify documents connected with the examination.”  According to Ms. Jackson, the requests to falsify documents were made by the Examiner in Charge (EIC) of the ACE exam and “others in Management positions.”

Ms. Jackson states that:

  • She was specifically told (1) to cite ACE for a violation despite her verification that ACE was in compliance with the law; (2) to state that ACE had failed to provide exonerating documents; and (3) to remove such documents from case file folders.
  • When she refused, the EIC changed information in her report and signed off on the final report, which was reviewed and accepted by a CFPB Field Manager.
  • The CFPB used the falsified report to garner the consent order with ACE.
  • Her refusal to falsify information resulted in her being told that she was not performing at an acceptable level and was subject to disciplinary action.

Ms. Jackson urges Attorney General Sessions to initiate an investigation of this matter.  Of course, we cannot assess the validity of Ms. Jackson’s claims.  However, we can say that an investigation is in order.

 

A bipartisan group of lawmakers has introduced a joint resolution under the Congressional Review Act to override the CFPB’s final payday/auto title/high-rate installment loan rule.  House members sponsoring the bill consist of three Democrats and three Republicans.  The CRA is the vehicle used by Congress to overturn the CFPB’s arbitration rule.

The CFPB’s final payday loan rule was published in the Federal Register on November 17.  The regulation is effective January 16, 2018. 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.  The deadline to submit an application for preliminary approval to be a registered information system is April 16, 2018.

To be eligible for the special Senate procedure that allows a CRA disapproval resolution to be passed with only a simple majority, the Senate must act on the resolution during a period of 60 “session days” which begins on the later of the date when the rule is received by Congress and the date it is published in the Federal Register.  For purposes of the CRA, a rule is considered to have been “received by Congress” on the later of the date it is received in the Office of the Speaker of the House and the date of its referral to the appropriate Senate committee.  The payday loan rule was received by the Speaker of the House on November 13 and referred to the Senate Banking Committee on November 15.  (Due to uncertainty as to which days going forward will count as “session days,” the deadline for voting on a CRA resolution cannot be definitively determined in advance.)

In addition to the CRA resolution, we expect an industry lawsuit challenging the rule to  be filed within the next few weeks.  According to media reports, the lawsuit is expected to be filed by the Community Financial Services Association of America.  Also, Mick Mulvaney, President Trump’s designee as CFPB Acting Director, is reported to be reviewing the payday loan rule as well as other CFPB actions to determine what his next steps will be.

Richard Moseley Sr., the operator of a group of interrelated payday lenders, was convicted by a federal jury on all criminal counts in an indictment filed by the Department of Justice, including violating the Racketeer Influenced and Corrupt Organizations Act (RICO) and the Truth in Lending Act (TILA).  The criminal case is reported to have resulted from a referral to the DOJ by the CFPB. The conviction is part of an aggressive attack by the DOJ, CFPB, and FTC on high-rate loan programs.

In 2014, the CFPB and FTC sued Mr. Mosley, together with various companies and other individuals.  The companies sued by the CFPB and FTC included entities that were directly involved in making payday loans to consumers and entities that provided loan servicing and processing for such loans.  The CFPB alleged that the defendants had engaged in deceptive and unfair acts or practices in violation of the Consumer Financial Protection Act (CFPA) as well as violations of TILA and the Electronic Fund Transfer Act (EFTA).  According to the CFPB’s complaint, the defendants’ unlawful actions included providing TILA disclosures that did not reflect the loans’ automatic renewal feature and conditioning the loans on the consumer’s repayment through preauthorized electronic funds transfers.

In its complaint, the FTC also alleged that the defendants’ conduct violated the TILA and EFTA.  However, instead of alleging that such conduct violated the CFPA, the FTC alleged that it constituted deceptive or unfair acts or practices in violation of Section 5 of the FTC Act.  A receiver was subsequently appointed for the companies.

In November 2016, the receiver filed a lawsuit against the law firm that assisted in drafting the loan documents used by the companies.  The lawsuit alleges that although the payday lending was initially done through entities incorporated in Nevis and subsequently done through entities incorporated in New Zealand, the law firm committed malpractice and breached its fiduciary obligations to the companies by failing to advise them that because of the U.S. locations of the servicing and processing entities, the lenders’ documents had to comply with the TILA and EFTA.  A motion to dismiss the lawsuit filed by the law firm was denied.

In its indictment of Mr. Moseley, the DOJ claimed that the loans made by the lenders controlled by Mr. Moseley violated the usury laws of various states that effectively prohibit payday lending and also violated the usury laws of other states that permit payday lending by licensed (but not unlicensed) lenders.  The indictment charged that Mr. Moseley was part of a criminal organization under RICO engaged in crimes that included the collection of unlawful debts.

In addition to aggravated identity theft, the indictment charged Mr. Moseley with wire fraud and conspiracy to commit wire fraud by making loans to consumers who had not authorized such loans and thereafter withdrawing payments from the consumers’ accounts without their authorization.  Mr. Moseley was also charged with committing a criminal violation of TILA by “willfully and knowingly” giving false and inaccurate information and failing to provide information required to be disclosed under TILA.  The DOJ’s TILA count is particularly noteworthy because criminal prosecutions for alleged TILA violations are very rare.

This is not the only recent prosecution of payday lenders and their principals. The DOJ has launched at least three other criminal payday lending prosecutions since June 2015, including one against the same individual operator of several payday lenders against whom the FTC obtained a $1.3 billion judgment.   It remains to be seen whether the DOJ will limit prosecutions to cases where it perceives fraud and not just a good-faith disclosure violation or disagreement on the legality of the lending model.  Certainly, the offenses charged by the DOJ were not limited to fraud.

The CFPB’s final payday loan rule was published in today’s Federal Register.  Lenders covered by the rule include nonbank entities as well as banks and credit unions.  In addition to payday loans, the rule covers auto title loans, deposit advance products, and certain high-rate installment and open-end loans.  For a summary of the rule, see our legal alert.

Since the rule’s effective and compliance dates are tied to the Federal Register publication date, those dates have now been set. The regulation is effective January 16, 2018.  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.  The deadline to submit an application for preliminary approval to be a registered information system is April 16, 2018.

We expect the rule’s publication to trigger the filing of an industry lawsuit challenging the rule within a matter of weeks.  In addition, the rule could become the subject of a resolution of disapproval under the Congressional Review Act (CRA), the vehicle used by Congress to overturn the CFPB’s arbitration rule.

Under the CRA, the receipt of a final rule by Congress begins a period of 60 days during which a member of either chamber can introduce a joint resolution of disapproval.  In calculating the 60 days, every calendar day is counted, including weekends and holiday, with the count paused only for periods when either chamber (or both) is gone for more than three days (i.e. pursuant to an adjournment resolution).

For purposes of the CRA, a rule is considered to have been “received by Congress” on the later of the date it is received in the Office of the Speaker of the House and the date of its referral to the appropriate Senate committee.  The payday loan rule was received by the Speaker of the House on November 13 and referred to the Senate Banking Committee on November 15.

To be eligible for the special Senate procedure that allows a CRA disapproval resolution to be passed with only a simple majority, the Senate must act on the resolution during a period of 60 session days which begins on the later of the date when the rule is received by Congress and the date it is published in the Federal Register.

The final payday loan rule’s publication in the Federal Register is also a trigger for the filing of a petition with the Federal Stability Oversight Council (FSOC) to set aside the rule. The Dodd-Frank Act provides that such a petition must be filed “not later than 10 days” after a regulation has been published in the Federal Register.  Efforts to use the FSOC mechanism to overturn the arbitration rule did not materialize.