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Financial Services Law Insights and Observations

House committee examines CFPB’s proposal to repeal payday rule

Federal Issues CFPB Payday Lending Payday Rule Agency Rule-Making & Guidance House Oversight Committee

Federal Issues

On May 16, the House Committee on Oversight and Reform’s Subcommittee on Economic and Consumer Policy held a hearing to examine the CFPB’s proposal to repeal parts of its “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (the Rule). (See previous InfoBytes coverage on the proposed repeal here.) Thomas Pahl, Policy Associate Director of the Research, Markets and Regulations Division at the Bureau, testified on the Bureau’s rulemaking and its position on the Rule. Committee Chairman Raja Krishnamoorthi (D-IL) opened the hearing by discussing the Bureau’s five years of research on the payday loan industry, which resulted in the issuance of the Rule in 2017. Krishnamoorthi claimed that Americans overwhelmingly support the requirement that lenders must determine a borrower’s ability to repay before making payday, title, and other high-cost installment loans, and provided an example of a consumer’s experience in this industry.

In his opening remarks, Pahl stressed that a complete picture of the Bureau’s activities concerning payday lenders requires understanding the use of the CFPB’s range of tools provided under the Dodd-Frank Act, such as its (i) consumer financial education initiatives; (ii) supervision of payday lenders to ensure compliance with federal statutes and regulations; and (iii) enforcement actions that target bad actors. Pahl emphasized that enforcement remains a key part of the Bureau’s consumer protection efforts, and highlighted five consent orders as well as two final judgments obtained against payday lenders. According to Pahl, the “payday loan cases are a testament to the agency’s commitment to use its enforcement tool to take decisive action against wrongdoers and send a clear message to the marketplace that should deter unlawful behavior and support a level playing field.” Pahl next discussed the Rule, stating that the Mandatory Underwriting Provisions rest on a determination that it is an unfair and abusive practice to make covered high-interest rate, short-term loans or covered longer-term balloon payment loans without reasonably determining that the consumer has the ability to repay. According to Pahl, the Bureau found that these provisions would lead to a decrease in the number of payday loans of between 51 and 52 percent (short-term vehicle title loans would decrease between 89 and 93 percent) and a decrease in revenue of between 67 and 68 percent, resulting in a contraction in the number of payday and vehicle title lenders. Pahl discussed the Bureau’s February 6 notice of proposed rulemaking (NPRM), which sought comments on repealing the ability-to-repay provision (see InfoBytes coverage here), since the Bureau “has come to have serious doubts as to whether the appropriate legal standards were applied and whether the evidence was sufficiently robust and reliable to support the Bureau's determination that small dollar lenders engage in an unfair or abusive act or practice if they make loans without making a reasonable determination that consumers can repay them.” A second NPRM was issued the same day to delay the Rule’s compliance date, and Pahl commented that the Bureau has begun to evaluate the comments received on both NPRMs.

During the hearing, Krishnamoorthi also questioned Pahl as to whether there is a threshold at which point an interest rate on a payday loan would be considered unfair and abusive or unconscionable. Pahl responded that the Dodd-Frank Act prohibits the Bureau from imposing any usury requirements and that “unconscionability is a matter of state law traditionally.”