Banking and Finance Law Daily CFSA amends its complaint against CFPB on payday loan rules
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Monday, August 31, 2020

CFSA amends its complaint against CFPB on payday loan rules

By Jeff Williams

The Community Financial Services Association files an amended lawsuit after the CFPB ratified rules following the Supreme Court’s Selia Law decision.

Following the Consumer Financial Protection Bureau’s ratification of regulatory actions taken from Jan. 4, 2012, through June 30, 2020, to cure defects delineated by the Supreme Court in Selia Law LLC v CFPB, the Community Financial Services Association of America, Ltd. (CFSA) filed an amended complaint against the CFPB in the federal district court in Austin, Texas on Aug. 28, 2020, seeking to invalidate the Bureau’s final rule on "Payday, Vehicle Title, and Certain High-Cost Installment Loans." The CFSA is asking the court to set aside the 2017 Rule and the ratification of the payments provisions because they are "outside the Bureau’s constitutional and statutory authority, as well as unnecessary, arbitrary, capricious, overreaching, procedurally improper, and substantially harmful to lenders and borrowers alike." Alternatively, the court should order the Bureau to undertake a rulemaking petition it previously rejected by Advanced Financial to exempt debit-card payments from the payment provisions, the CFSA said (Community Financial Services Association of America, Ltd. v. Consumer Financial Protection Bureau, Case No. 1:18-cv-00295).

The Bureau adopted the ratification after the Supreme Court ruled, in a 5-4 decision in Seila Law on June 29, 2020, that the CFPB Director’s removal provision violates the separation of powers and is severable from the other statutory provisions bearing on the Bureau’s authority (see Banking and Finance Law Daily, July 8, 2020).

Amended complaint highlights. The CFSA alleges in the amended complaint that the Bureau’s final rule would "virtually eliminate" payday loans and force millions of consumers to turn to other, more costly options, such as pawn loans, defaulting on other debts, and "unregulated and illegal underground" credit sources. "If allowed to go into effect, the payments provisions of the 2017 Rule will cause substantial harm to consumers by eliminating the convenience of pre-authorized payments and increasing the likelihood that a loan will enter into collections sooner than it otherwise would have (if at all)," the CFSA said. "Some lenders may stop offering installment loans altogether, resulting in higher credits costs and fewer credit options."

The CFSA also argues that the rule was handed down by a "fundamentally flawed agency" that has "substantial power" over the U.S. economy and whose power "was unconstitutionally concentrated in a single, unaccountable and unchecked Director insulated from both the President and the Congress and hence from the people."

The CFSA complaint alleges that the ratification process should have gone through a notice-and-comment rulemaking and that the Bureau also failed to address and explain why it was ratifying components of the rules that had relied on incorrect interpretations of its authority. Further, the CFSA alleges the ratification the Bureau adopted in July is "legally insufficient to cure the constitutional defects in the 2017 Rule or otherwise make effective the 2017 Rule’s payment provisions."

According to the CFSA, "Those provisions require a valid rulemaking process, which only a validly constituted agency can undertake. If the Bureau wishes to impose those provisions, it must conduct a new, valid rulemaking." Allowing the Bureau to "lean on the ratification now would enable the agency to sidestep essential notice-and-comment requirements based on a previous agency action (an attempted rulemaking) that all now agree had no legal force whatsoever, and that cannot lawfully be given retroactive legal force through a ratification," the CFSA said.

In addition to the "flawed ratification" the CFSA alleges, the group argued the rulemaking process that produced the 2017 Rule had other "critical flaws," including that it was "fundamentally at odds" with the statutory authority Congress delineated for the Bureau. "Congress set a clear boundary on the Bureau’s powers by unequivocally declaring that the Bureau lacks the authority to establish a usury limit," the CFSA said. "The payments provisions flagrantly run afoul of this statutory restriction by improperly targeting installment loans with a rate higher than 36 percent." Also, the payment provisions in the rule rely on incorrect constructions of the statutory terms "unfair" and "abusive" that the Bureau did not have evidence to support, the CFSA said.

The payment rules are also arbitrary and capricious, the CFSA alleges, because they "assume lenders are the cause of the purported injury. In fact, the alleged harms—the fees charged by the consumers’ banks for failed payment-transfer attempts and the possibility of account closures—are caused by third parties involved in repayment efforts, and it is arbitrary, capricious, and unreasonable for the Bureau to restrict lender practices because of perceived abuses by non-lenders."

The Bureau also acted improperly by extending the payment rules to multi-payment installment loans and to debit and prepaid card transactions, the CFSA said.

Attorneys: Christian G. Vergonis (Jones Day) for Community Financial Services Association of America, Ltd. and Consumer Service Alliance of Texas. Kevin Edward Friedl for the Consumer Financial Protection Bureau.

Companies: Community Financial Services Association of America, Ltd.; Consumer Service Alliance of Texas

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