On February 6, 2019, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released its much-anticipated proposed amendments to the payday lending rule. The proposed revision is Kathy Kraninger’s first major regulatory initiative since becoming the director of the CFPB.
The Bureau issued two notices of proposed rulemaking that would (i) repeal the mandatory underwriting provisions in the payday lending rule and (ii) delay the compliance date for these provisions until November 19, 2020, which would allow the Bureau to consider comments and issue a final rule before the underwriting provisions take effect. The Bureau’s proposed revisions would not amend or delay the effective date of the payment provisions of the payday lending rule, although the preamble to one of the proposed rules makes clear that the Bureau may separately consider whether any revisions to the payment requirements are appropriate.
The Bureau’s first notice of proposed rulemaking would repeal the payday lending rule’s underwriting provisions, which, under 2017 Final Rule, would have required lenders to assess borrowers’ ability to repay, verify borrowers’ incomes, and furnish certain information regarding payday loans to registered information systems, among other things.
In describing the rationale behind these changes, the Bureau explained that it has preliminarily found that rescinding the underwriting provisions would increase consumer access to credit. The Bureau also questioned the robustness of the evidence underlying the 2017 Final Rule, including a 2013 study by Professor Ronald Mann that surveyed payday loan borrowers regarding how long they expected to take to pay back their loans. In the 2017 Final Rule, the CFPB drew conclusions about the study that Professor Mann himself disputed. In its proposed revision, the Bureau discussed the “clear limitations” of the data underlying the Mann study—including the fact that the study involved a single payday lender in only five states—and found that the study was not sufficiently robust or representative enough to allow the Bureau to draw the conclusions it had previously drawn about payday lenders and borrowers, particularly in light of the dramatic impact the underwriting provisions would have on the market for payday loans and on consumer access to credit.
The Bureau also parted ways with previous leadership’s interpretation of the legal theories underlying “unfairness” and “abusiveness.” In issuing the 2017 Final Rule, the Bureau found that the practice of making certain payday loans to borrowers without assessing the borrowers’ ability to repay was unfair. For an act or practice to be unfair under the Dodd-Frank Act, the act or practice must not be reasonably avoidable by consumers. The previous leadership took the position that, for an act or practice to be reasonably avoidable, borrowers must “have reasons generally to anticipate the likelihood and severity of the injury and the practical means to avoid it,” focusing on the “consumer perception of risk.” The preamble to the proposed rulemaking rejects this reasoning, citing Federal Trade Commission and court interpretations for the proposition that an injury is reasonably avoidable if consumers “have reason to anticipate the impending harm and the means to avoid it.” But the Bureau preliminarily concluded that “consumers need not have a specific understanding of their individualized likelihood and magnitude of harm such that they could accurately predict” the time it would take them to repay a payday loan.
The 2017 Final Rule also found that the practice of making certain payday loans to borrowers without assessing the borrowers’ ability to repay was abusive because it takes unreasonable advantage of the consumer’s lack of understanding and the consumer’s inability to protect their interests. Previous leadership interpreted “understanding” to require an understanding of the borrower’s individual likelihood of being exposed to the risks of the product and the severity of the costs and harms that may occur. In addition, previous leadership found that customers seeking payday loans “are financially vulnerable and have very limited access to other sources of credit” and thus are unable to protect their interests. In issuing the proposed amendments, the Bureau found previous leadership’s interpretations of the abusiveness factors to be too broad. For example, the Bureau preliminary concluded that the lack of understanding element of the abusiveness standard should be treated as similar to the not reasonably avoidable prong of the unfairness standard. Recognizing that “the elements of abusiveness do not have a long history or governing precedents,” the Bureau is seeking comment on how to interpret the abusiveness factors set forth in the Dodd-Frank Act. Comments received may also inform a forthcoming CFPB proposed rule that defines the abusiveness standard.
The Bureau issued an unofficial redline showing its proposed changes to the payday lending rule. Comments on this notice of proposed rulemaking are due 90 days from the date of publication in the Federal Register.
The Bureau’s second notice of proposed rulemaking would delay the compliance date of the underwriting provisions from August 19, 2019, to November 19, 2020, at which point the underwriting provisions may have been repealed or substantially revised by a new final rule.
Comments on this notice of proposed rulemaking are due 30 days from the date of publication in the Federal Register.
The notices of proposed rulemaking do not amend or delay the effective date of the payment provisions of the 2017 Final Rule. The payment provisions prohibit certain lenders from making a new attempt to withdraw funds from an account after two consecutive attempts have failed without obtaining the customer’s consent for further withdrawals. The payment provisions also require lenders to provide written notice before the first attempt to withdraw payments from a customer’s account and, in certain situations, when subsequent attempts may be different (e.g., a different amount or payment channel).
Although the notices of proposed rulemakings would not repeal the payment provisions, the preamble to the first notice of proposed rulemaking makes clear that the Bureau “intends to examine these issues and if the Bureau determines that further action is warranted, the Bureau will commence a separate rulemaking initiative.”
The preamble also notes that the CFPB received a formal petition to exempt debit card payments from the payment provisions. Lenders have argued that there is no harm resulting from continued attempts to collect payment through a debit card, because when a lender attempts to withdraw a payment using a debit card and the borrower’s deposit account lacks the funds for the payment, the bank will deny the payment without imposing an insufficient funds (NSF) fee on the borrower.
Response to the Notices of Proposed Rulemaking
The Bureau’s proposals have been met with swift backlash from prominent Democratic lawmakers. For example, on the same day the proposal was released, Rep. Maxine Waters (D-Calif.) issued a statement urging “Director Kraninger to rescind this proposal and work on implementing a comprehensive federal framework — including strong consumer safeguards, supervision, and robust enforcement — to protect consumers from the cycle of debt.” The next day, Sen. Elizabeth Warren (D. Mass.) followed up with her own statement condemning the proposed revision, which, as reported by Politico, states that “[t]he rule you released today makes a mockery of the CFPB’s statutory mission of protecting consumers.”
The Community Financial Services Association of America, a trade association representing the payday lending industry that has sued to overturn the 2017 Final Rule, issued a statement to Politico that the Bureau’s revision didn’t go far enough, indicating that the association was “disappointed that the CFPB has, thus far, elected to maintain certain provisions of its prior final rule . . . .”