Last June, the CFPB held a field hearing in Kansas City, Missouri to announce the release of the consumer watchdog agency’s highly anticipated proposed rule covering payday and auto title loans, and certain high-cost installment loans.
More than a year has passed since the notice of proposed rulemaking was issued last June, and despite speculation that a final rule is “coming soon,” the chances that the Bureau releases a final rule in 2017 are becoming increasingly slim.
In fact, it could be years before the CFPB issues a final payday rule, if at all.
Here are five reasons why a final payday rule probably isn’t on the horizon.
The CFPB is buried in public comments
The controversial payday rule generated an unprecedented level of feedback. The CFPB received approximately one million public comments, the most the agency has received in its five-year history.
Under the Administrative Procedures Act, federal agencies must respond to any comments that are material to issues raised in a rulemaking proceeding.
The extraordinary level of public comments has single-handedly forced the Bureau to adjust its timeline for issuing a final payday rule. In fact, CFPB staff may still be in the process of analyzing and responding to comments.
The CFPB is refining the rule
The overwhelming response doesn’t just mean CFPB staff has a lot of reading to do. The Bureau must revise to the proposed rule based upon that feedback.
Last October, the Small Business Administration’s Office of Advocacy submitted a comment letter raising concerns about the proposal’s economic impact on small business. The Office of Advocacy encouraged the CFPB to “reconsider its proposal and develop requirements that protect consumers without jeopardizing their access to legitimate credit in states that do not currently regulate payday lending.” They also urged the CFPB to “perform additional research to determine the impact of the changes on small entities and consumers” before implementing new regulations.
The CFPB’s desire to impose stringent regulations on payday and high interest lending is hardly a mystery. In the CFPB’s ideal world, their final rule would be virtually indistinguishable from their proposed rule containing only technical adjustments and minor substantive changes based on comment letters and outreach. The Bureau’s dream scenario is held in check by the Office of Advocacy and other similar comment letters that urge the agency to craft its rule in a way that would achieve its regulatory objectives in a less costly manner.
Perhaps these types of comments have spurred the CFPB to reconsider its proposal and conduct serious additional research (which it is seriously lacking, see #4). And if the Bureau has, in fact, gone back to the drawing board to make substantive revisions to the rule, there’s no telling how much it will delay the final rule.
Congress could nullify a final rule
Let’s assume that the CFPB has reviewed every comment and meticulously revised the rule. Why wouldn’t CFPB Director Richard Cordray issue the final rule the moment it is ready?
A relatively obscure law called the Congressional Review Act establishes a set of procedures through which Congress can pass a joint resolution disapproving a final rule issued by a federal agency. If a resolution is passed by both the House and Senate and signed by the President, the rule will not take effect.
In the 20 years since it was enacted, only one rule had been successfully overturned using the CRA. During the Trump administration, Congress has already nullified 14 Obama-era rules from various federal agencies.
Although the Bureau’s final rule on prepaid cards survived a CRA challenge earlier this year, many observers believe Republican lawmakers will work to strike down a final payday rule.
In addition, if Congress were to nullify final payday regulations, the Bureau would be barred from issuing a similar rule in the future. That added threat undoubtedly gives Cordray and the Bureau one more reason to wait to issue a final payday rule until they are confident it will outlast Congressional objections.
In fact, it would not be shocking if Cordray opted to hold onto the final payday rule rather than exposing it to a potential CRA challenge, even if that meant handing over the CFPB reins to a Trump-appointed Director who could put payday rulemaking on the shelf for his or her entire five-year term.
The rule will probably face legal challenges
Now let’s assume that a final payday rule survives a CRA challenge. The next hurdle for the Bureau would almost certainly be a lawsuit challenging the legality of the rule.
At this time, there are several strong arguments that suggest a court could reasonably invalidate a final payday rule. Perhaps most noteworthy is the CFPB’s premise that payday loans are “unfair” and abusive” because they take unreasonable advantage of consumers despite the Bureau’s lack of convincing evidence that payday loans actually are bad for consumers.
The lack of substantiation is critical from a legal standpoint because the Dodd-Frank Act says a practice is not considered “unfair” if any injury it causes is outweighed by countervailing benefits.
Many observers believe that the sweeping nature of the rules under consideration can only be justified by a rigorous cost-benefit analysis demonstrating substantial consumer injury that outweighs countervailing consumer benefits.
To date, the Bureau has conducted no such analysis and has never acknowledged, or even studied, the benefits of payday loans.
If the CFPB issues a final payday rule based on the current record and without regard to the benefits of payday loans, the rule will likely be challenged in court under the Administrative Procedures Act.
The CFPB could undergo significant changes to its structure or leadership
The shifting political landscape, changes to the CFPB’s leadership, and an overhaul of the agency’s overall structure could have an impact on a payday rule whether it is issued today, next year, or five years from now.
As it stands, Richard Cordray’s five-year term as CFPB Director expires in July 2018. At that time, President Trump will appoint a new director – one who will presumably share President Trump’s anti-regulation sentiment. If the payday rule is not yet finalized before Cordray leaves his post as CFPB Director, the appointee could take steps to delay the effective date, change, or even repeal the rule before it becomes effective.
There have also been long-standing rumors, which have recently intensified, that Cordray may step down during the fourth quarter of 2017 to run for Ohio Governor. Such a scenario only decreases the odds that the Bureau will successfully promulgate its preferred version of a final payday rule.
On top of internal challenges that could arise from a change of Director, there are external forces that could derail the CFPB’s efforts to issue a final payday rule. For example, Congress could pass the Financial Choice Act, which declares that federal authorities “may not exercise any rulemaking, enforcement or other authority with respect to payday loans, vehicle title loans, or other similar loans.” Or the DC Circuit (or eventually the Supreme Court) could issue a ruling in the PHH v. CFPB case declaring the agency’s structure is unconstitutional.
Whether payday regulations are finalized could hinge on the composition of Congress, the vision of a new CFPB Director, or a ruling by the DC Circuit, Supreme Court or some other panel of judges. With so much uncertainty, one thing remains clear – the CFPB’s payday rule faces a number of potential hurdles that could impede its path to the finish line. Failure to clear just one of those obstacles could place the rule in serious jeopardy or even render it obsolete. With that much uncertainty, it’s difficult to feel much confidence that payday regulations will be finalized anytime soon.