The Consumer Financial Protection Bureau is giving its clearest signal yet that a 2020 regulation easing standards for payday lenders is in jeopardy, despite efforts already in motion by the industry to implement the Trump administration rule.
Acting CFPB Director Dave Uejio — appointed by the Biden administration to lead the agency following Kathy Kraninger's resignation — offered his most forceful comments to date on the 2020 rule, which eliminated underwriting requirements for small-dollar lenders.
Uejio stated in a blog post that the bureau's new leadership supports the “ability-to-repay” standards, originally established in a previous 2017 rule that was unwound by Kraninger, signaling that the agency will reinstate them.
But he went even further by suggesting that the CFPB plans to crack down on payday and auto title lenders by using its enforcement authority under the Dodd-Frank Act to punish companies that violate the federal prohibition on “unfair, deceptive or abusive acts or practices.”
“The CFPB is acutely aware of consumer harms in the small dollar lending market, and is particularly concerned with any lender’s business model that is dependent on consumers’ inability to repay their loans,” Uejio said. "Years of research by the CFPB found the vast majority of this industry’s revenue came from consumers who could not afford to repay their loans, with most short-term loans in reborrowing chains of 10 or more."
Uejio made the comments last week, just a day after the CFPB filed a motion accompanying a lawsuit challenging the 2020 payday rule. Though the agency appears intent to overturn the rule, the CFPB's motion argued the plaintiff, the nonprofit National Association for Latino Community Asset Builders, lacks standing to bring the lawsuit because its members are not regulated by the CFPB.
In explaining why the CFPB filed the motion to dismiss, Uejio stressed that the bureau continues to push for the ability-to-repay standard in underwriting.
“The Bureau had a legal obligation to respond to the lawsuit,” Uejio said. “The Bureau’s filing should not be regarded as an indication that the Bureau is satisfied with the status quo in this market. To the contrary, the Bureau believes that the harms identified by the 2017 rule still exist, and will use the authority provided by Congress to address these harms, including through vigorous market monitoring, supervision, enforcement, and, if appropriate, rulemaking.”
Some experts said that until the bureau takes further action, payday and auto lenders can still rely on last year’s rulemaking that rescinded ability-to-repay requirements on small-dollar loans of 45 days or less.
“The industry relies on validly adopted regulations, including the 2020 repeal, and is entitled to arrange its affairs in accordance with those regulations and not to be cowed by the blog entries of an interim director,” said Hilary Miller, a Greenwich, Conn., attorney representing payday lenders and past president of the Payday Loan Bar Association.
The CFPB also may use its enforcement authority to aggressively pursue UDAAP violations in areas other than underwriting such as marketing, debt collection, or dealing with limited-English-proficiency borrowers.
Others suggested Uejio is conveying that the CFPB may not need to reinstate the 2017 payday rule to go after bad actors.
"It’s a signal that the [2017] rule may not be there any more but they don’t need it and they can still investigate and bring enforcement actions," said Allen Denson, a partner at Venable. "I think it’s a pretty big statement."
The CFPB's exam manual for short-term, small-dollar lenders includes a section on so-called sustained use, Denson said, which refers to repeat borrowings of payday loans.
Years of CFPB research supported the bureau's view that repeat re-borrowings of 10 loans or more by a single conumer constituted harm, Uejio said.
“One-in-five payday loans, and one-in-three vehicle title loans, ended in default, even including periods of reborrowing,” Uejio wrote in the three-paragraph blog. “And one-in-five vehicle title loan borrowers ended up having their car or truck seized by the lender. That is real harm to real people.”
Payday lenders lobbied heavily to rescind the 2017 rule by arguing that the rule would have eliminated at least 55% of revenue for lenders that offer small-dollar loans of 45 days or less. Industry trade groups claimed the CFPB under Director Richard Cordray, an Obama appointee, was trying to push a majority of payday lenders out of business and leave cash-strapped consumers without access to credit.
Rescinding the 2020 Trump-era payday rule is further complicated by ongoing litigation in a Texas, where a judge has stayed the 2017 payday rule's payment provisions from going into effect. As a result of that litigation, lenders have not been required to implement certain consumer protections.
The Texas judge is expected to provide an implementation date for the payment provisions. They include a prohibition on lenders’ ability to withdraw funds from a consumer's bank account after two consecutive failed attempts, unless the consumer consents to further withdrawals. Lenders also will be required to provide consumers with written notice before making their first attempt to withdraw payment from a bank account.
Some experts were surprised that Uejio is signaling major policy actions on payday lending before Rohit Chopra, the Biden administration's nominee to lead the bureau, is confirmed.
"It’s kind of a surprise for an acting director to come out with such a strong statement," Denson said. But he also noted that the industry "can’t challenge a blog post and the bureau’s authority to bring cases on UDAAP has always been there."
Still, much has changed in the past decade, in which the CFPB has sought to put in place the first federal regulations of payday loans.
Prudential banking regulators have urged banks to jump into the field. Many payday lenders have moved to offer longer-term installment loans. Moreover, installment lenders are supporting ability-to-repay standards.
"We are on the same page as the CFPB with a pledge to [strengthen] consumer protections," said Mary Jackson, CEO of the Online Lenders Alliance, a trade group. "We have implemented new best practices to include [ability-to-repay] and a host of other items which our members have pledged to follow."
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