CFPB: Payday Lending Rule, New Report and MLA Concerns

Financial Services Law

This week in news from the Bureau of Consumer Financial Protection (CFPB or Bureau), a Texas federal court granted a stay of the compliance deadline for the Payday, Vehicle Title and Certain High-Cost Installment Loans Rule, allowing the industry to breathe a sigh of relief.

The Bureau also released a report on the Remittance Rule and received a letter from a bipartisan coalition of 33 state attorneys general expressing concern about enforcement of the Military Lending Act (MLA).

What happened

  • Payday Loan Rule. In 2017, the CFPB issued the proposed Payday Loan Rule, creating new consumer protections for a wide variety of short-term loans. Nearly 1,700 pages in length, the rule declared it “an unfair and abusive practice” for any lender to make covered short-term or longer-term balloon payment loans, including payday and vehicle title loans, before reasonably determining that consumers have the ability to repay the loans according to their terms. Before making a covered loan, a lender must make a reasonable determination that the consumer would be able to make the payments on the loan and be able to meet the consumer’s basic living expenses and other major financial obligations without needing to reborrow.

    The rule also identified it as an unfair and abusive practice when a lender attempts to withdraw payment from consumers’ accounts after two consecutive payment attempts have failed, without the consumer having provided a new and specific authorization to do so.

    Two industry groups challenged the rule, arguing that the CFPB failed to comply with the Administrative Procedures Act when it was promulgated. In the interim, a new president was elected and the leadership at the Bureau changed, with Acting Director Mick Mulvaney indicating that the CFPB plans to reconsider the rule.

    The parties filed a joint request asking U.S. District Court Judge Lee Yeakel to stay both the case and the rule itself, which was scheduled to take effect August 19, 2019. The Texas federal court judge agreed that the litigation should be stayed.

    However, Judge Yeakel initially denied the motion to stay the compliance date and denied the plaintiffs’ motion to reconsider his denial. But after the parties filed their most recent status report—and the Bureau publicly announced its plans to revisit certain portions of the rule—the court changed its mind.

    “Upon reconsideration, and given the information in the October 26 joint status report, the court concludes that to prevent irreparable injury a stay of the rule’s current compliance date of August 19, 2019, is appropriate,” the court wrote. “As the Bureau has publicly announced it plans to revisit portions of the rule, including the compliance date, the court will adjust the conditions and timing for the parties to file periodic joint status reports.”

  • Remittance Rule. The CFPB released an assessment report of the Remittance Rule, which revealed that U.S. consumers transferred more than 325 million remittances worth more than $175 billion in 2017, with money services businesses (MSBs) conducting 95.6 percent of all remittance transfers.

    Even before the rule took effect, the average price of remittances was on the decline, and it has continued to decrease over the past five years, the Bureau found. One possible reason: “new and repurposed technologies and new entrants have had a substantial effect on the remittance transfer market,” the CFPB said. For example, smartphones have increased consumers’ ability to transfer remittances online. “These trends started before the rule came into effect and are expected to continue.”

    Eighty percent of banks and 75 percent of credit unions that offer remittance transfers avoid coverage of the rule’s requirements because they handle less than the 100-transfer threshold, according to the report. For those entities that are forced to pay for compliance, the CFPB said initial costs were between $86 and $92 million; ongoing compliance costs run between $19 and $102 million per year, the Bureau estimated, noting “mixed levels” of compliance in the industry.

    The CFPB found “general compliance at certain institutions as well as both individual violations and wholesale failures to comply at others,” according to the report. “The evidence from many of the Bureau examinations, however, is consistent with consumers generally receiving disclosures, albeit in many instances with inaccuracies and errors.”

    Despite these uneven findings, the CFPB has not filed any enforcement actions against remittance transfer providers for violating the Remittance Rule since it took effect.

  • MLA enforcement. This summer, news reports divulged that Acting Director Mulvaney planned to cease supervisory examinations of the MLA, taking the position that the law does not provide the Bureau with the authority to examine financial institutions for compliance with the statute.

    According to “internal agency documents” obtained by The New York Times, Mulvaney signed off on a two-page change to CFPB policy stating that “proactive oversight is not explicitly laid out in the legislation.”

    Following the lead of all 49 Democratic senators—who sent a letter asking Mulvaney to reconsider his position—a coalition of bipartisan state attorneys general from across the country sent a similar missive.

    “We believe that such a move would significantly harm the servicemembers who live and work in our states and that it would be contrary to the CFPB’s statutory mandate,” the AGs from Alaska, California, Colorado, Connecticut, Delaware, the District of Columbia, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nebraska, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Dakota, Tennessee, Vermont, the U.S. Virgin Islands, Virginia, Washington and Wyoming wrote.

    “Protection of our nation’s servicemembers against financial exploitation is a bedrock tenet of federal consumer financial protection law, and it traditionally has been a bipartisan effort.”

    The statute ensures that servicemembers (many of whom have only recently reached the age of majority and have little experience in managing their own finances) are not saddled with unaffordable debt, the AGs told Mulvaney.

    “Perplexed” by the reports that Mulvaney determined the CFPB needs further statutory authority to conduct examinations for MLA violations, the regulators pointed to 2013 amendments to the statute specifying that it “shall be enforced” by the Bureau “under any … applicable authorities available to” it.

    “[W]e request that the CFPB reconsider its reported decision to discontinue reviewing lenders’ compliance with the MLA as part of its examinations,” the AGs wrote. “Additionally, we would welcome the opportunity to work with your staff on conducting joint investigations related to the MLA, or any other financial exploitation of our states’ servicemembers—a top priority for all of us.”

To read the order in Community Financial Services Association of America v. Consumer Financial Protection Bureau, click here.

To read the assessment report on the Remittance Rule, click here.

To read the letter from the state AGs, click here.

Why it matters

The Texas federal court’s decision to stay the compliance deadline for the Payday Lending Rule is a win for the industry, which will now keep a close eye on the proposed changes the CFPB has promised to release in January 2019. With regard to the Remittance Rule, the Bureau signaled possible changes, explaining that the “report will help inform the Bureau’s future policy decisions concerning remittance transfers, including whether to commence a rulemaking proceeding to make the Remittance Rule more effective in protecting consumers, less burdensome to industry, or both.” Reflecting an unusual alliance of Republican and Democratic regulators, the letter from the state AGs noted that the decision to eliminate the MLA from exams “appears contrary” to several of the principles laid out for the Bureau under Mulvaney’s leadership as well as to President Trump’s statements about caring for servicemembers.