CFPB: Payday Loan Rule May Be 'Arbitrary and Capricious'
This is the latest sign the bureau intends to back down from a strict rule governing an industry that some consider predatory.
Payday lenders “will have had to incur considerable costs to prepare to comply with a rule that may be fundamentally altered through rulemaking,” the CFPB said in documents filed Friday in the U.S. District Court for the Western District of Texas.
The admission comes in court documents in which the agency asks a federal judge to reconsider his ruling that the effective date of the rules not be delayed. The rule is scheduled to go into effect in August 2019.
It is the latest sign that the bureau intends to back down from a strict rule governing an industry that some considers predatory.
The bureau said, in its court filing, that the rulemaking process used to adopt the rule was seriously flawed.
“The rulemaking record did not provide substantial evidence for several findings underpinning critical elements of the rule and that, to that extent, the rule is therefore arbitrary and capricious,” the CFPB said.
The Community Financial Services Association of America filed suit against the agency, charging that the payday lending rules issued by Cordray were not supported by the required research when the agency issued them.
When Cordray left the agency, President Trump selected OMB Director Mick Mulvaney as the acting director. He immediately said the agency would reconsider the strict loan rules.
When he was a Republican House member from South Carolina, Mulvaney was a staunch opponent of Cordray’s rules.
In its Spring version of its regulatory agenda, the CFPB estimated that it will issue new proposed rules in February 2019.
Recently, the agency joined the payday lending group in filing documents in federal court asking that the lawsuit be placed on hold and the rules be placed on hold until the CFPB changed them.
Consumer groups charged that the CFPB and the payday lending association were conducting an end run around the process that is supposed to be used to change rules.
U.S. District Judge Lee Yeakel said the lawsuit would be stayed until he decided otherwise, but he did not delay the effective date of the rule.
However, the CFPB says in its new filing that without a stay of the rule’s compliance date, payday lenders will “suffer irreparable harm from having to comply with the rule.”
It goes on to say that the purported basis for the Cordray payday lending rule is that it is abusive or unfair.
The agency identified as unfair or abusive for a lender to make certain short-term loans without determining the borrowers’ ability to repay the loan.
The rule goes on to specify the steps lender must take to determine borrowers’ ability to pay, including verification of a borrower’s net income and major financial obligations.
The payday lending association has presented a “substantial case on the merits” that the rule was not based on solid research, the CFPB said.
Much of the bureau’s findings rested on a study that surveyed payday loan borrowers about their expectations for repaying their loan.
However, at the time, the agency said that the results of the survey could be interpreted in multiple ways.
The CFPB said if the payday lenders do not get a delay in the effective date of the rules, they will suffer “irreparable injury.”
The agency said when the rule was issued, it estimated that the ability-to-pay requirement would reduce the volume of lenders by about 92% to 93%.
The number of vehicle-title loans made by the lenders would decrease by a similar amount.
“As a result, once the compliance date arrives, many businesses are expected to shut own or otherwise exit the market,” the bureau said in the court filing.