Banking and Finance Law Daily Industry groups file complaint to restore payday lending protections for borrowers
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Friday, October 30, 2020

Industry groups file complaint to restore payday lending protections for borrowers

By Nicole D. Prysby, J.D.

The National Association for Latino Community Asset Builders sued the CFPB, alleging that the CFPB acted arbitrarily and capriciously in promulgating a July 2020 rule that revoked protections of the payday lending rule.

On October 29, 2020, the National Association for Latino Community Asset Builders (NALCAB), represented by Public Citizen and the Center for Responsible Lending (CRL), announced that it sued the Consumer Financial Protection Bureau in the U.S. District Court for the District of Columbia, seeking to overturn the CFPB’s July 2020 regulation concerning short-term payday and auto-title lending. The CFPB’s July rule revoked the "ability-to-pay" provisions of its 2017 payday lending regulation. The rescission relieves lenders of any regulatory obligation to consider whether a consumer will be able to make required payments before they extend credit. NALCAB alleged that the CFPB’s actions in the July 2020 rulemaking were arbitrary and capricious, in that the agency applied a new evidentiary standard and new interpretations of the Dodd-Frank Act’s definitions of unfairness and abusiveness to conclude that the bases for the 2017 payday lending rule were insufficient (National Association for Latino Community Asset Builders v. CFPB, Case No. 1:20-cv-03122).

In July 2020, the CFPB issued a final rule (see Banking and Finance Law Daily, Jul. 7, 2020) that rescinded the mandatory underwriting or "ability-to-pay" provisions of its 2017 payday lending regulation codified at 12 CFR Part 1041. The rescission relieves lenders of any regulatory obligation to consider whether a consumer will be able to make required payments before they extend credit. The CFPB proposed eliminating the underwriting requirements in February 2019.

In its press release announcing the lawsuit, CRL points out that annual interest rates for payday and auto-title can be 300 percent or higher, and that lenders’ failure to underwrite traps many borrowers in expensive cycles of unaffordable debt. The CFPB issued the payday lending rule in 2017, after years of research and public input (which included more than 1.4 million comments). The CFPB claimed that the legal and evidentiary bases for the underwriting provisions were "insufficient," but CRL stated that the CFPB’s analysis was based on re-interpretations of Dodd-Frank Act standards that appear designed to undermine the CFPB’s earlier consumer protection measures.

In its complaint, NALCAB alleged that CFPB’s own research shows that about 20 percent of payday loan sequences and 33 percent of title-loan sequences end in default, and that putting consumers through a "debt treadmill" is abusive under the Dodd-Frank Act. NALCAB also alleged that the CFPB, under Acting Director Mick Mulvaney, decided to revoke the payday lending rule without proper analysis and implemented the July 2020 rule without following required administrative procedures. Specifically, that the CFPB asserted that, due to the 2017 rule’s impact, supporting evidence for that rule should have been "robust and reliable" (a new and inconsistent standard that the CFPB claimed was not met by the payday lending rule) and set out new interpretations of the Dodd-Frank Act’s definitions of unfairness and abusiveness. NALCAB requested that the court set aside the CFPB’s rulemaking on the basis that it is arbitrary and capricious, violates the Dodd-Frank Act, and violates the rulemaking requirements in the Administrative Procedure Act.

Companies: Center for Responsible Lending; National Association for Latino Community Asset Builders; Public Citizen

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