Payday and Auto-Title Loan Trade Groups Lose in Texas Federal Court

Inside Subprime: Aug 10, 2018

By Kerry Reid

On August 7, two trade groups representing the payday and auto-title loan industries lost a motion in the Texas federal court requiring that the court reconsider its earlier ruling on June 12 related to the Consumer Financial Protection Bureau (CFPB) and its installment loan regulation, or “Payday Rule.”

The two groups – the Consumer Financial Service Association of America, Ltd and the Consumer Service Alliance of Texas – originally filed the suit in April of this year. As reported by Alan S. Kaplinsky of Consumer Finance Monitor, the suit by the two groups claimed that the CFPB rule is unlawful on a number of grounds – among them because they claim that CFPB itself is unconstitutional, and that the “Payday Rule” violates the Administrative Procedure Act (APA), which governs the process by which federal agencies develop and issue regulations. (https://www.epa.gov/laws-regulations/summary-administrative-procedure-act)

The Payday Rule, finalized under former CFPB director Richard Cordray in October 2017, requires payday lenders to determine upfront if borrowers are able to repay the short-term, high-interest loans provided by payday operators. It also curtails lenders’ ability to debit borrowers’ bank accounts, which adds on fees to the original debt and can lead to their accounts being closed for insufficient funds.

The court’s June 12 ruling granted a stay on the lawsuit by the two trade groups but denied a stay on the implementation of the Payday Rule by the August 19, 2019, compliance date.

The trade groups and the CFPB filed a joint status report with the court, noting that the CFPB is reconsidering the Payday Rule. Since Cordray’s departure, the CFPB has been operating under acting director Mick Mulvaney, who sided with the two trade groups and requested that the court delay the effective date for the Payday Rule.

Congress had 60 days under the Congressional Review Act to kill the rule from the date it was published in the Federal Register. That deadline expired without Congressional action on May 16. As noted in a report by Sarah O’Brien of CNBC, though Congress didn’t take action to kill the Payday Rule, it did use its authority under the Congressional Review Act to kill a separate CFPB rule that would have banned financial firms from requiring that customers settle disagreements through arbitration.

Since taking over from Cordray, Mulvaney has widely been seen as friendlier to the financial industry than Cordray. Critics note that, among other things, Mulvaney dropped a CFPB lawsuit against online lenders charging as much as 900 percent interest.

Among those applauding the June 12 ruling in Texas is the Center for Responsible Lending (CRL), which has been one of the organizations leading the charge against Mulvaney.

CRL’s litigation counsel Will Corbett issued a statement in June: “Mick Mulvaney and the payday lenders tried an end-run around the law and it was rightly rejected. Today’s ruling is a win for consumers. Under its previous director, the CFPB conducted research, analysis, and public outreach for more than five years in developing a rule to stop payday loans from trapping consumers in debt. In scheming to stop the rule from going into effect, Mulvaney and the payday lenders tried to ignore the legal requirements that federal agencies must follow. CFPB leadership should implement the Payday Rule as written and get back to protecting consumers.”

The situation is complicated by the fact that Mulvaney has announced his intentions to step down. President Donald Trump named Kathy Kraninger, the Office of Budget and Management’s deputy director, as his preferred replacement.

In July, Kraninger faced Democratic opposition in the U.S. Senate. Among other things, her role in the administration’s much-criticized response to Hurricane Maria in Puerto Rico last year and her role in crafting the administration’s “zero tolerance” policy on immigration that has led to the separation of immigrant children from their parents.

However, Kraninger did narrowly win approval by the Senate Finance Committee to head CFPB. Whether she can garner enough support to win the nomination by a vote of the full Senate remains to be seen.

It also remains to be seen how the Texas court’s decision will affect the implementation of the Payday Rule by the current date of next August.

Read the full Texas Subprime Report and check out the following reports on these related areas:

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