A Texas federal court has granted the stay of the lawsuit filed by two trade groups challenging the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule) requested in a joint motion filed by the trade groups and the CFPB but has denied the stay of the Payday Rule’s August 19, 2019 compliance date that was also requested in the joint motion.

The court did not provide the basis for its decision in the order ruling on the joint motion.  However, the court also granted the motion filed by four consumer advocacy groups seeking leave to file an amicus memorandum opposing the joint motion.

The joint motion had sought the stay of the compliance date pursuant to Section 10(d) of the Administrative Procedure Act (APA), 5 U.S.C. Section 705.  In their amicus brief, the advocacy groups argued that in addition to the parties’ failure to satisfy the four-part test used to assess requests for Section 705 stays, a stay of the compliance date while also staying the litigation was inconsistent with the purpose of Section 705 to stay agency action in order to maintain the status quo during judicial review.  According to the advocacy groups, the CFPB and trade groups were not seeking to maintain the status quo to protect against litigation uncertainties but rather to address uncertainties created by the CFPB’s decision to engage in rulemaking to reconsider the Payday Rule.  They described the joint motion as an attempt to “effect an end-run around the [APA’s notice-and-comment rulemaking procedures].”  (The trade groups filed a response in which they disputed the arguments made by the advocacy groups.)

In light of the court’s ruling on the joint motion, we hope that the CFPB will move quickly to stay the compliance date pursuant to the APA’s notice-and-comment procedures.

 

Four consumer advocacy groups have filed a motion seeking leave to file an amicus memorandum opposing the joint motion filed by the CFPB and two trade groups that seeks a stay of the compliance date for the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule).  The joint motion, which was filed in the trade groups’ April 2018 lawsuit challenging the Payday Rule, also seeks a stay of the litigation for the duration of the CFPB’s rulemaking to reconsider the Payday Rule.

The four consumer advocacy groups are Public Citizen, Inc., Americans for Financial Reform Education Fund, Center for Responsible Lending, and National Consumer Law Center.  They assert in their motion that because the stay was sought jointly by the parties to the lawsuit, “the Court lacks the benefit of adversarial briefing on the parties’ request.”

The joint motion filed by the CFPB and trade groups seeks a stay of the Payday Rule’s compliance date pursuant to Section 10(d) of the Administrative Procedure Act, 5 U.S.C. section 705, which provides:

When an agency finds that justice so requires, it may postpone the effective date of action taken by it, pending judicial review.  On such conditions as may be required and to the extent necessary to prevent irreparable injury, the reviewing court … may issue all necessary and appropriate process to postpone the effective date of an agency action or to preserve status or rights pending conclusion of the review proceedings.

In the proposed amicus memorandum accompanying their motion, the consumer advocacy groups argue that Section 705 cannot be properly invoked by the CFPB and trade groups to stay the Payday Rule’s compliance date for the following reasons:

  • For the court to stay the compliance date while also staying the litigation is at odds with the purpose of Section 705 “to stay agency action for the purpose of maintaining the status quo during judicial review.”  The CFPB and trade groups are not seeking to maintain the status quo to protect against litigation uncertainties but rather to address uncertainties created by the CFPB’s decision to engage in rulemaking to reconsider the Payday Rule.  Section 705 “cannot properly be used as the basis for a stay where the parties are not litigating and have no intention to do so.”
  • The joint motion is an “attempt to jerry rig non-adversarial litigation to effect an end-run around the [Administrative Procedure Act’s] statutory requirements.”  An agency ordinarily can only delay a rule’s compliance date through the APA’s notice-and-comment rulemaking procedures.
  • The same four-part test used to assess requests for stays pending appeal applies to Section 705 stays.  The joint motion does not satisfy this test because:
    • Little effort was made to show any likelihood of plaintiffs’ success on the merits in their challenge to the Payday Rule
    • No showing was made that the plaintiffs would suffer irreparable injury absent a stay pending review, with no actual information provided “as to whether any individual member of the plaintiff associations intends to spend money on compliance with the Payday Rule before the date when this lawsuit—if it were litigated—could reasonably be expected to end.”
    • No consideration was given to the impact of their request on the CFPB, which would include “bind[ing] the agency and its next director, based on the request of an acting director, who only serves temporarily and at the pleasure of the president.” (emphasis included).
    • No analysis was provided of how a stay would impact the public interest, such as “the impact of a stay on the consumers who the Payday Rule intends to protect.”

The consumer advocacy groups’ motion states that the trade groups have indicated that they oppose the filing of the amicus brief and that the CFPB has indicated that it takes no position on whether the amicus brief should be filed.  We would therefore expect the trade groups to file a response opposing the motion.  Once the court rules on the consumer advocacy groups’ motion, the next step would be for the court to decide the joint motion for a stay either after a hearing or without holding a hearing.

 

The National Credit Union Administration has published a notice in the Federal Register proposing to amend the NCUA’s general lending rule to provide federal credit unions (FCU) with a second option for offering “payday alternative loans” (PALs).  Comments on the proposal are due by August 3, 2018.

In 2010, the NCUA amended its general lending rule to allow FCUs to offer PALs as an alternative to other payday loans.  For PALs currently allowed under the NCUA rule (PALs I), an FCU can charge an interest rate that is 1000 basis points above the general interest rate set by the NCUA for non-PALs loans, provided the FCU is making a closed-end loan that meets certain conditions.  Such conditions include that the loan principal is not less than $200 or more than $1,000, the loan has a minimum term of one month and a maximum term of six months, the FCU does not make more than three PALs in any rolling six-month period to one borrower and not more than one PAL at a time to a borrower, and the FCU requires a minimum length of membership of at least one month.

The proposal is a reaction to NCUA data showing a significant increase in the total dollar amount of outstanding PALs but only a modest increase in the number of FCUs offering PALs.  In the proposal’s supplementary information, the NCUA states that it “wants to ensure that all FCUs that are interested in offering PALs loans are able to do so.”  Accordingly, the NCUA seeks to increase interest among FCUs in making PALs by giving them the ability to offer PALs with more flexible terms and that would potentially be more profitable (PALs II).

PALs II would not replace PALs I but would be an additional option for FCUs.  As proposed, PALs II would incorporate many of the features of PALs I while making four changes:

  • The loan could have a maximum principal amount of $2,000 and there would be no minimum amount
  • The maximum loan term would be 12 months
  • No minimum length of credit union membership would be required
  • There would be no restriction on the number of loans an FCU could make to a borrower in a rolling six-month period, but a borrower could only have one outstanding PAL II loan at a time.

In the proposal, the NCUA states that it is considering creating an additional kind of PALs (PALs III) that would have even more flexibility than PALs II.  It seeks comment on whether there is demand for such a product as well as what features and loan structures could be included in PALs III.  The proposal lists a series of questions regarding a potential PALs III rule on which the NCUA seeks input.

The NCUA’s proposal follows closely on the heels of the bulletin issued by the OCC setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks, federal savings banks, and federal branches and agencies of foreign banks.  In issuing the bulletin, the OCC stated that it “encourages banks to offer responsible short-term, small-dollar installment loans, typically two to 12 months in duration with equal amortizing payments, to help meet the credit needs of consumers.”

 

The CFPB and the two trade groups that filed a lawsuit in April 2018 in a Texas federal district court challenging the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule) have filed a joint motion seeking a stay of the litigation for the duration of the CFPB’s rulemaking to reconsider the Payday Rule. The motion also seeks a stay of the Payday Rule’s compliance date and a waiver of the CFPB’s obligation to file an answer.  The two trade groups are the Consumer Financial Service Association of America, Ltd. and the Consumer Service Alliance of Texas.

In January 2018, the CFPB announced that it intended 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.

In the joint motion, the CFPB and trade groups assert that the rulemaking “may result in repeal or revision of the Payday Rule and thereby moot or otherwise resolve this litigation or require amendments to Plaintiffs’ complaint.”  They also assert that a stay of the Payday Rule’s compliance date during the litigation’s pendency is necessary to prevent  irreparable injury, claiming that none of the expenditures necessary to comply with the Payday Rule would be compensable by money damages should the Payday Rule be invalidated or repealed.  The CFPB and trade groups ask the court to stay the compliance date until 445 days from the date of final judgment in the litigation to ensure sufficient time for compliance should the plaintiffs’ claims be unsuccessful.

The OCC has issued a bulletin (2018-14) setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks, federal savings banks, and federal branches and agencies of foreign banks.

In issuing the bulletin, the OCC stated that it “encourages banks to offer responsible short-term, small-dollar installment loans, typically two to 12 months in duration with equal amortizing payments, to help meet the credit needs of consumers.”  The bulletin is intended “to remind banks of the core lending principles for prudently managing the risks associated with offering short-term, small-dollar installment lending programs.”

By way of background, the bulletin notes that in October 2017, the OCC rescinded its guidance on deposit advance products because continued compliance with such guidance “would have subjected banks to potentially inconsistent regulatory direction and undue burden as they prepared to comply with the [CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule).”]  The guidance had effectively precluded banks subject to OCC supervision from offering deposit advance products.  The OCC references the CFPB’s plans to reconsider the Payday Rule and states that it intends to work with the CFPB and other stakeholders “to ensure that OCC-supervised banks can responsibly engage in consumer lending, including lending products covered by the Payday Rule.”  (The statement issued by CFPB Acting Director Mulvaney applauding the OCC bulletin further reinforces our expectation that the CFPB will work with the OCC to change the Payday Rule.)

When the OCC withdrew its prior restrictive deposit advance product guidance, we commented that the OCC appeared to be inviting banks to consider offering the product.  The bulletin appears to confirm that the OCC intended to invite the financial institutions it supervises to offer similar products to credit-starved consumers, although it suggests that the products should be even-payment amortizing loans with terms of at least two months.  It may or may not be a coincidence that the products the OCC describes would not be subject to the ability-to-repay requirements of the CFPB’s Payday Rule (or potentially to any requirements of the Payday Rule).

The new guidance lists the policies and practices the OCC expects its supervised institutions to follow, including:

  • “Loan amounts and repayment terms that align with eligibility and underwriting criteria and that promote fair treatment and access of applicants.  Product structures should support borrower affordability and successful repayment of principal and interest in a reasonable time frame.”
  • “Analysis that uses internal and external data sources, including deposit activity, to assess a consumer’s creditworthiness and to effectively manage credit risk.  Such analysis could facilitate sound underwriting for credit offered to consumer who have the ability to repay but who do not meet traditional standards.”

While the OCC’s encouragement of bank small-dollar lending is a welcome development, the bulletin contains potentially troubling language.  The OCC’s “reasonable policies and practices specific to short-term, small-dollar installment lending” also include “[l]oan pricing that complies with applicable state laws and reflects overall returns reasonably related to product risks and costs.  The OCC views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entities licensing state(s).”  (emphasis added).  This statement raises at least two concerns:

  • The OCC’s reference to “[l]oan pricing that complies with applicable state laws” is confused (or likely to cause confusion).  Federal law (12 U.S.C. Section 85) governs the interest national banks may charge.  It authorizes banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state.  The OCC should clarify that it did not mean to suggest otherwise.
  • The OCC’s unfavorable view of bank-nonbank partnerships, where the “sole goal [is] evading” state-law rate limits, could be read to call into question a valuable distribution channel for bank loans.  While the context is “specific to short-term, small-dollar installment lending,” this apparent hostility to bank-model relationships should be of concern to all banks that partner with third parties, including fintech companies, to make loans under Section 85.  The statement in question seems at odds with the broad view of federal preemption enunciated by the OCC with respect to the Madden decision. 

 

The 60-day period during which the Senate could pass a resolution under the Congressional Review Act disapproving the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule) with only a simple majority appears to have expired yesterday.  Although the Senate’s failure to pass a CRA resolution is disappointing because the CRA would have provided the “cleanest” vehicle for overturning the Payday Rule, we were always doubtful that there would be 51 votes in the Senate to pass a CRA resolution.

The focus of efforts to undo the Payday Rule will now be the CFPB’s reopened rulemaking and the Texas lawsuit filed by two trade groups challenging the Payday Rule.  In its Spring 2018 rulemaking agenda, the CFPB indicated that it expects to issue a Notice of Proposed Rulemaking to revisit the Payday Rule in February 2019.

In the meanwhile, all eyes will be on the Texas lawsuit to see how the CFPB responds and, in particular, whether it will agree with most, if not all, of the plaintiffs’ allegations.  The CFPB must file its answer by June 11.

 

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.