Payday loans rule contested in lawsuit against the CFPB
Two groups filed the suit claiming the rule is unconstitutional and will harm consumers.
Two small-dollar loan advocacy groups have filed a lawsuit against the Consumer Financial Protection Bureau (CFPB). The suit is an attempt to dispute the CFPB’s ruling on payday loans reform, which finder first reported on in October 2017.
The Consumer Service Alliance of Texas and the Community Financial Services Association of America (CFSA) both contest the ruling, saying it violates the Administrative Procedure Act (APA). The parties are at odds with the bureau’s authority in implementing the rule, citing it’s unconstitutional.
The ruling was proposed in June 2016 and finalized on October 5, 2017.
How will payday loans and consumers be affected?
Payday loan consumers will be affected the most by the ruling, though other small-dollar loan borrowers will also be affected.
Pew Charitable Trusts state that consumers spend nearly $7.4 billion each year on payday loans. Borrowers who live check to check and lack the credit to access mainstream credit products are the typical payday loan consumers.
While the merits of payday loans are often debated, consumers in a pinch with temporary cash-flow problems may find relief from the short-term loans.
What’s the ruling about?
The CFPB says the rule was issued in an effort to enhance consumer protection and prevent predatory practices. The rule was an initiative of the agency’s initial director, Richard Cordray. The focus of the ruling was aimed toward credit products involving loans with balloon payments. The ruling would affect payday and vehicle title loans, among others.
The first part of the ruling claims that it’s unfair and abusive for lenders to issue balloon payment loans without evaluating a borrower’s ability to repay the loan. The rule exempts some short-term loans as long as they follow certain consumer protection guidelines.
The ruling also regulates a lender’s ability to draft payments from the borrower’s checking account. It stipulates that balloon-payment loans with APRs greater than 36% interest can’t have more than two unsuccessful attempts to withdraw a payment. If a lender insists on doing so, it must submit a written notice to the borrower of its intent to withdraw the payment.
The CFPB says its authority is outlined in section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The act proposes that the bureau identifies and prevents unfair, deceptive or abusive acts or practices and carries out rules to achieve those purposes.
However, within the lawsuit filed by CFSA and the Consumer Service Alliance, it’s alleged that the rule infringes upon the APA and that the bureau doesn’t have the authority to issue such laws.
The core of the APA calls for constitutional safeguards that help regulate agencies and their roles. Essentially, the purpose is to avoid unchecked authority, and this is a prime allegation alluded to in the lawsuit. The suit claims that the CFPB’s director isn’t accountable enough to other government agencies or the American people.
States taking matters into their own hands.
Since Cordray’s departure from the bureau in November, a new director for CFPB has been appointed. Mick Mulvaney, the current director, says the agency is reconsidering the rule.
Many states in support of the ruling want to ensure that consumers are protected. New Jersey recently appointed its own state-level CFPB in an effort to ensure better regulatory practices to keep consumers safe.
Should the consumer decide what’s best or the government?
The ruling of the lawsuit will ultimately decide whether the bureau’s rulings are constitutional or not. Some say the decision is excessive government interference on consumers’ right to choose how they run their financial affairs. Others say policies must be in place to protect consumers.
Some argue that without access to small-dollar loans, many consumers would have a harder time bridging the gap between paychecks. In fact, more than one million consumers, most of whom were borrowers of small-dollar loans, responded to the bureau opposing the ruling.
The response likely highlights the fact that consumers want to be in charge of their own financial affairs and want to decide what’s right for them. The ruling could have a significant impact on the 12 million consumers who take out small-dollar loans each year. The new guidelines are slated to take effect mid-2019.
Learn more about how these loans work in our guide to payday loans.