On February 6, 2019, the Bureau of Consumer Financial Protection (Bureau or CFPB) released a proposal to repeal the Payday Rule requirement that lenders conduct a comprehensive assessment of borrowers’ repayment capacity before making a payment. issue the breakdown service, vehicle title and longer-term balloon payment. ready. The Bureau simultaneously released a proposal to extend the August 19, 2019 compliance date for these requirements to November 19, 2020. As these requirements were to eliminate the vast majority of payday lenders, many commentators converged on the repeal proposal. . Yet they failed to recognize the vital nuances within and around this proposal, which also provide important insight into the leadership approach of CFPB Director Kathy Kraninger at the start of her tenure.
Revision of the rule
The October 2017 Bureau Payday Rule imposed very prescriptive requirements on payday loans, vehicle title loans, and long-term lump-sum loans, including (i) the requirement that lenders complete a full assessment of borrowers ‘ability to repay both these short-term loans and their other financial obligations (the repayment capacity provisions) and (ii) the limitations of lenders’ practices for collecting payments from borrowers (the provisions on payments). In October 2018, following unsuccessful attempts to repeal through the Congressional Review Act and reiterating his own criticism of the rule, then Acting Director Mulvaney announced that the Bureau would issue notices in early 2019 to reconsider the repayment capacity and compliance provisions. Dated. In its press release yesterday, the Bureau said it was releasing the proposals to “fulfill this commitment”. Still, the strong language of the proposals and the relatively short comment periods – 90 days for the substantive review and 30 days for the delay in the compliance date – reflect Director Kraninger’s commitment to turning the tide.
The proposal makes a preliminary determination that the Bureau does not have sufficient evidence and legal support for the repayment capacity provisions, but explicitly states that this is a policy-based determination rooted in fears that the rule will reduce access to credit and competition.
The proposal does not build on new evidence, a common basis for reviewing existing rules, but on the Office’s own modified view of the data it uses to support the adoption of the repayment capacity provisions in 2017. The Bureau stressed that, regardless of whether there is sufficient evidence to withstand judicial review under the Administrative Procedure Act (APA), he drew a preliminary conclusion that the evidence is not “strong”, “representative” and “reliable” enough to support these provisions – given the extent of the rule’s effects on the convenience industry and the consumer access to credit. Further, the Bureau states that it “does not believe that it is profitable for itself and for lenders and borrowers to conduct the research necessary to develop these key findings”, thus essentially closing the door to attempts to do so. relive the rule. The proposal thus provides a bold evidence base to repeal the centerpiece of the payday rule despite the expected challenge from the APA that the change in Bureau leadership is “arbitrary and capricious”.
Therefore, the Bureau also cites, as an independent ground for rescinding the repayment capacity provisions, its review of the legal standards under the Dodd-Frank Act for “unfairness” and “abuse” used in the 2017 regulations. regulation of 2017 had concluded that covered lenders would commit “unfair” and “abusive” acts or practices if they did not conduct a full repayment capacity analysis because, among others, consumers could not reasonably avoid the substantial harm caused or likely to be caused by the failure to underwrite, that failure was not compensated by compensatory benefits, and the failure to underwrite unreasonably benefited from the vulnerabilities of consumers.
Upon re-examination, the Bureau affirms its preliminary belief that the standards of “unfairness” and “abuse” do not require consumers to have a precise understanding of the individual likelihood and extent of their harm, only to understand that a significant portion of payday borrowers find it difficult to repay and could end up in streaks of extended loans, defaults or difficulty paying bills. The Bureau also determines on a preliminary basis that the compensatory benefits to competition and consumers outweigh the harm caused by forgoing the repayment capacity analysis. Analysis of the proposal could also provide support for the reconsideration of the payday rule payment arrangements, a prospect that the current proposal recognizes that the Bureau may consider. More importantly, while a full discussion of the Office’s UDAAP analysis is beyond the scope of this bulletin, the Office’s re-examination of legal standards of “injustice” and “abuse” has major significance far beyond the scope of this bulletin. beyond developing pay rules.
The bold analysis presented in the reconsideration proposal, coupled with its cautious launch, provides important insight into Director Kraninger’s leadership approach as she begins her tenure at CFPB.
While Acting Director Mulvaney’s tenure has been punctuated with dramatic public statements and fights with Democratic lawmakers and other CFPB supporters, Director Kraninger is careful to maintain a diplomatic tone. So she made it clear from the start that while grateful to Mulvaney, she would forge an independent path. To demonstrate this, she expressed interest in promoting a “productive relationship” with Congress (including in particular Democratic Representative Maxine Waters as chair of the House Financial Services Committee), toured three months in the CFPB offices and avoided talking about the two controversial issues internal and external of the Office. As a clever first step, she also put aside the Mulvaney plan to change the common name of the Bureau from CFPB to BCFP, which had sparked an opposition fury from consumer groups in addition to imposing costs of implementation to industry.
Beyond diplomacy, Director Kraninger is also focusing on strategy, as evidenced by the launch of the pay rule reconsideration. The review was touted as a fulfillment of the Office’s commitment under Mulvaney to release the proposal by early 2019. The launch was also timed, not only amid the government shutdown and other political furor. , but just after the announcement of the settlement of a series of enforcement actions against payday lenders, including Enova International, Inc. in late January, the collection of Canadian and Maltese companies NDG Financial Corp. on February 1 and Cash Tyme on February 5, 2019, although these measures started years before. Director Kraninger continued with a statement when releasing the reconsideration proposal that she was eager to work with other state and federal regulators to enforce the law against bad actors.
Despite her particular attention to diplomacy and strategy, Director Kraninger does not hesitate to fight. The release of the proposed payroll rule review sparked, as might be expected, immediate strong opposition from President Waters and Senator Sherrod Brown, the top Democrat on the Senate Banking Committee, as well as other Democrats. Their harsh criticisms, in addition to those from consumer groups like the National Consumer Law Center and other commentators, have largely overshadowed supporting statements such as that of House Financial Services Committee ranking member Patrick McHenry. Even industry support has been muted, with the Community Financial Services Association of America arguing that the Bureau should have offered to cancel the entire salary rule.
With many warnings regarding the opposition, Director Kraninger not only continued the review, but chose to make a bold proposal by declaring a new approach. First, the development of the 2017 troubleshooting rules was very ambitious and therefore faced significant vulnerabilities in ABS. Yet the reconsideration proposal stresses that it is rooted in a political shift in the Bureau’s opinion on the evidence, regardless of whether the evidence is sufficient to withstand judicial review of the 2017 rule under the APA. In making this statement, the Bureau also affirms a new commitment to consider the impact of its regulations on competition and consumers’ access to credit, a mandate under the Dodd-Frank Act that the CFPB has rarely followed. until now. Second, the review proposal more than once refers to cost-benefit balancing, including refusing to conduct further research. This statement confirms that the Office will place emphasis on cost-benefit analysis, particularly in its rule-making activities, under the leadership of Office of Management and Budget veteran Kraninger. The third, the reconsideration proposal comes up against a reinterpretation of the legal elements of “injustice” and “abuse” under the Dodd-Frank Act. This desire to revisit the application of UDAAP standards in a concrete context, notwithstanding the surrounding controversy, is a powerful engine of change.
The industry has the opportunity to achieve major relief from CFPB not only in the areas of payday lending or small loans, but in all areas, through the development of a solid strategy, well-reasoned basis and a dialogue with the Bureau.