March 01, 2019

What's Going On? The CFPB Reassesses Its Rule Governing "Payday, Vehicle Title, and Certain High-Cost Installment Loans"

Jason M. Cover

I. What's Covered? . . . More than You Think.

Over a year after announcing its plan to reconsider its final rule on "Payday, Vehicle Title, and Certain High-Cost Installment Loans" (the "Rule"), the Consumer Financial Protection Bureau (the "CFPB") formally published in the Federal Register two notices of proposed rulemaking on February 14, 2019 (collectively, the "NPRMs") that rescind the Rule's so-called "Mandatory Underwriting Provisions" and extend the compliance deadline for those provisions by 15 months to November 19, 2020. While the NPRMs leave unchanged the Rule's byzantine payment restrictions and notice provisions (the "Payment Provisions"), rescission of the Mandatory Underwriting Provisions nevertheless represents a substantive improvement to an administrative rule poised to decimate an otherwise lawful industry. (1)

 

II. What's Out? . . . Mandatory Underwriting Provisions.

Utilizing the CFPB's "unfair, deceptive and abusive acts and practices" rulemaking authority, the Rule's Mandatory Underwriting Provisions had previously (i) deemed it an unfair and abusive practice for a lender to make certain "covered loans" without determining the consumer's ability to repay; (ii) established a burdensome "full payment test" and an unpalatable alternative in the form of a "principal-payoff option" as safe harbors; (iii) required the furnishing of information to certain "registered information systems" that were to be established pursuant to the Rule; and (iv) mandated related recordkeeping requirements. But the Director Kraninger-led CFPB now proposes to remove these provisions root and stem. How does it justify such a radical change?

The CFPB acknowledges in the NPRMs that its previous studies relied upon in formulating the Rule did not provide "a sufficiently robust and reliable basis" of an unfair and abusive practice. These studies and the related analysis "did not confront the total tradeoffs between the benefits and costs" of the underwriting practices deemed to be unfair, as required by Dodd-Frank, because it understated the benefits of these practices by improperly relying upon a large-scale exemption it provided for non-underwritten loans. Accordingly, the CFPB now believes it "prudent as a policy matter to require a more robust and reliable evidentiary basis to support key findings in a rule that would eliminate most covered short-term . . . loans and providers from the marketplace, thus restricting consumer access to these products."

The CFPB also takes issue with its own legal support for determining unfair and abusive practices, noting that a requirement of a "specific understanding" by consumers of their "individualized risk" is not only an excessive burden for lenders but also a suppression of consumer choice. In doing so, it notes that the FTC has routinely adopted rules requiring businesses merely to provide consumers with "general information" about material terms, conditions or risks.

Surprisingly, the CFPB still fails to analyze or identify a consumer harm caused by "covered loans." (Less surprisingly, it does not acknowledge the possibility of a net benefit to consumers that would otherwise not have access to emergency credit.) Instead, it continues to "assume for present purposes that the identified practice causes or is likely to cause substantial injury" without any evidence or factual support.

III. What's In? . . . Payment Provisions.

The Payment Provisions principally limit a lender's ability to attempt to withdraw payments from a consumer's account after two consecutive failed attempts on that same account.(2) Related provisions provide for a warning notice to borrowers upon triggering this prohibition and other notices related to a lender's first payment attempt or "unusual payment withdrawals" (i.e., generally those with different payment amounts, dates or channels). The Payment Provisions are "outside the scope of" the NPRMs, which neither seek to alter the substantive provisions of the Payment Provisions nor their August 19, 2019 compliance deadline.

While these Payment Provisions remain unaltered by the CFPB's most recent actions, it has acknowledged the receipt of "a rulemaking petition to exempt debit payments" and "informal requests related to various aspects of the Payment Provisions or the Rule as a whole, including requests to exempt certain types of lenders or loan products from the Rule's coverage and to delay the compliance date for the Payment Provisions." It remains to be seen what, if any, action the CFPB will take going forward, but it has expressed that it intends "to examine these issues" and commence a separate rulemaking initiative (such as by issuing a request for information or notice of proposed rulemaking) if it "determines that further action is warranted." Given the political and media backlash that followed the issuance of the NPRMs,(3) as well as their more defensible rulemaking authority,(4) it is difficult to imagine the CFPB will make dramatic alterations in the near future. But in-depth analysis of the Payment Provisions quickly reveals substantive flaws––including those that may result in consumer harm or otherwise limit consumer choice––that could be improved with even modest modifications.(5)

III. What's Next? . . . Stay Tuned.

Is this then the "final" Rule? And must lenders be prepared to comply with it by August of 2019? Plot twists, unfortunately, remain.

The District Court for the Western District of Texas has––pursuant to an action brought by several industry trade groups attacking the validity of the Rule––stayed the compliance deadline as of the date of this writing.(6) But the presiding judge did so only after repeated joint requests on the part of both the CFPB and trade groups, and a joint status report filed on March 8 makes clear the parties' interests in the stay are beginning to diverge. It is anyone's guess how the litigants or the Court might wish to proceed thereafter. Moreover, despite potential standing issues, it is widely anticipated that consumer groups, attorneys general and other interested parties will launch their own attacks on the Rule modifications as soon as the rescission of the Mandatory Underwriting Provisions becomes final.

It is impossible to say with any certainty what direction the Rule will take going forward. Prudent financial institutions, however, should stay tuned while preparing to comply with the Payment Provisions by the end of the summer.
 

Footnotes

1. The Rule excludes from coverage (i) purchase-money credit secured by consumer goods (but not refinance transactions); (ii) credit secured by real property; (iii) credit cards; (iv) student loans; (v) non-recourse pawn loans; (vi) overdraft services and overdraft lines of credit; (vii) "alternative loans" (i.e., NCUA's Payday Alternative Loan Program); and (viii) subject to certain conditions, employer wage advance programs, no cost-advances, and accommodation loans.

2. Note that the Rule excludes from the Payment Provisions certain deposit advance products whereby a consumer will not be charged returned item fees and will not be subject to account closure as a result of a negative balance stemming from loan payments.

3. See, e.g., Editorial Board, Trump's Payback for Payday Lenders, N.Y. Times, February 12, 2019, available at https://www.nytimes.com/2019/02/12/opinion/trump-payday-loans.html.

4. Authority for the notice requirements of the Payment Provisions comes from the CFPB's disclosure rulemaking authority and not that with respect to unfair, deceptive and abusive acts and practices.

5. For example, the timing requirements of the Rule's notice provisions effectively create "dead periods" where a consumer cannot make payment even at his or her behest. Similarly, lenders that routinely grant grace periods or deferrals to consumers are faced with the proposition of curtailing such practices or violating the technical terms of the Rule. In either event, the Rule's rigid framework and lack of flexibility may result in consumer harms such as default, additional finance charges, late fees or other costs which cannot have been the intent of the CFPB's rulemaking.

6. See Community Financial Services Association of America, Ltd. V. CFPB, Case No. A-18-CV-0295-LY (W.D. Tex. Nov. 6, 2018).

Jason M. Cover

Ballard Spahr LLP

Jason is a Philadelphia-based attorney practicing in Ballard Spahr's Consumer Financial Services group who counsels a wide-array of providers of consumer financial services, including banks, licensed lenders and fin-tech providers, on regulatory compliance matters and government supervisory and enforcement matters.