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On August 28, two payday loan trade groups (plaintiffs) filed an amended complaint in the U.S. District Court for the Western District of Texas in ongoing litigation challenging the CFPB’s 2017 final rule covering payday loans, vehicle title loans, and certain other installment loans (Rule). As previously covered by InfoBytes, the court granted the parties’ joint motion to lift the stay of litigation, which was on hold pending the U.S. Supreme Court’s decision in Seila Law LLC v. CFPB (covered by a Buckley Special Alert, holding that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau). In light of the Supreme Court’s decision, the Bureau ratified the Rule’s payments provisions and issued a final rule revoking the Rule’s underwriting provisions (covered by InfoBytes here).
The amended complaint requests the court set aside the Rule and the Bureau’s ratification of the rule as unconstitutional and in violation of the Administrative Procedures Act (APA). Specifically, the amended complaint argues, among other things, that the Bureau’s ratification is “legally insufficient to cure the constitutional defects in the 2017 Rule,” asserting the ratification of the payment provisions should have been subject to a formal rulemaking process, including a notice and comment period. Moreover, the amended complaint asserts that the payment provisions are “fundamentally at odds” with the Bureau’s lack of authority to create usury limits because they “improperly target installment loans with a rate higher than 36%.” Finally, the amended complaint argues that the Bureau “arbitrarily and capriciously denied” a petition from a lender seeking to exempt debit-card payments from the payment provisions of the rules.
On August 20, the U.S. District Court for the Western District of Texas granted a joint motion to lift a stay of litigation in a lawsuit filed by two payday loan trade groups (plaintiffs) challenging the CFPB’s 2017 final rule covering payday loans, vehicle title loans, and certain other installment loans (Rule). As previously covered by InfoBytes, in 2018 the plaintiffs filed a lawsuit asking the court to set aside the Rule, claiming the Bureau’s rulemaking failed to comply with the Administrative Procedure Act and that the Bureau’s structure was unconstitutional. The parties filed their joint motion to lift the stay last month following several recent developments, including the U.S. Supreme Court’s decision in Seila Law LLC v. CFPB, which held that the clause that required cause to remove the director of the CFPB was unconstitutional but was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). In light of the Court’s decision, the Bureau ratified the Rule’s payments provisions and issued a final rule revoking the Rule’s underwriting provisions (covered by InfoBytes here). The litigation will focus on the Rule’s payments provisions, with the Bureau noting in the joint motion that it intends to “promptly fil[e] a motion to lift the stay of the compliance date for the payments provisions of the 2017 Rule.” The order outlines the briefing schedule for the parties, with summary judgment briefing due to be completed by December 18.
On August 11, the CFPB released updated FAQs pertaining to compliance with the payment provisions of the “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Payday Lending Rule). Earlier in June, the Bureau issued a final rule revoking certain underwriting provisions of the Payday Lending Rule (previously covered by InfoBytes here), along with FAQs discussing the details of covered loans and “payment transfers” under the rule. The updated FAQs provide guidance on several topics, including (i) exemptions for certain loans originated by a federal credit union; (ii) Regulation Z’s coverage threshold; (iii) conditions for when closed-end and open-end loans may become covered longer-term loans; (iv) exclusions for real estate secured credit; (v) the purchase money exclusion’s applicability to automobile loans; (vi) situations where failed payment transfers count towards the limit under Payday Lending Rule; (vii) how a “business day” is determined; and (viii) situations where a lender must provide an unusual payment withdrawal notice.
On July 29, CFPB Director Kathy Kraninger testified at a hearing held by the Senate Banking Committee on the CFPB’s Semi-Annual Report to Congress, which covers the Bureau’s work from October 1, 2019, through March 31, 2020. (Covered by InfoBytes here.) Kraninger’s testimony identified four key areas of focus for the Bureau: (i) providing financial education resources to prevent consumer harm; (ii) implementing “clear rules of the road” to encourage “competition, increase transparency, and preserve fair markets for financial products and services”; (iii) ensuring a “culture of compliance” through supervision; and (iv) following a consistent, purposeful enforcement regime. Kraninger also highlighted Bureau efforts to address discrimination, consumer confusion regarding forbearance options under the CARES Act, and a legislative proposal that would authorize the Bureau to award whistleblowers who report federal consumer financial law violations.
During the hearing, committee members focused on, among other things, the Bureau’s response to the Covid-19 pandemic and the agency’s recent repeal of certain underwriting provisions of its 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (covered by InfoBytes here). In response to Democratic criticism regarding the repeal of the underwriting provisions, Kraninger reiterated that a Bureau analysis of the provisions in the 2017 final rule revealed it would reduce the availability of small-dollar credit “by at least 70 percent,” and denied claims that the rulemaking process had been impacted by political appointees at the agency. Additionally, Kraninger said she intends to move ahead with putting the payment provisions of the payday rule into effect and is currently “working through” a pending legal challenge to the provisions.
Democratic committee members also questioned Kraninger regarding temporary regulatory relief to mortgage servicers and other financial services companies (covered by InfoBytes here) and the Bureau’s policy statement providing Fair Credit Reporting Act and Regulation V compliance flexibility for consumer reporting agencies and furnishers during the pandemic (covered by InfoBytes here). With regard to the U.S. Supreme Court’s June ruling in Seila Law v. CFPB (covered by a Buckley Special Alert), Committee Chairman Mike Crapo (R-ID) noted he is still advocating for “a bipartisan board of directors to oversee the CFPB” and for subjecting the Bureau to the annual appropriations process.
The next day, Kraninger appeared before the House Financial Services Committee’s hearing to discuss the semi-annual report. Similar to the Senate hearing, committee members questioned Kraninger on the payday rule, the revision to the HMDA rule, the Bureau’s pandemic-related initiatives for consumers, and on ways the Bureau is protecting struggling consumers during the pandemic, particularly with respect to the agency’s supervisory and enforcement work.
On July 7, the CFPB issued the final rule revoking certain underwriting provisions of the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Payday Lending Rule). As previously covered by InfoBytes, the Bureau issued the proposed rule in February 2019 and the final rule implements the proposal without revision. Specifically, the final rule revokes, among other things (i) the provision that makes it an unfair and abusive practice for a lender 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 the loans according to their terms; (ii) the prescribed mandatory underwriting requirements for making the ability-to-repay determination; (iii) the “principal step-down exemption” provision for certain covered short-term loans; and (iv) related definitions, reporting, and recordkeeping requirements. Additional details regarding the final rule can be found in the Bureau’s unofficial redline and executive summary.
While compliance with the payment provisions of the Payday Lending Rule is currently stayed by court order (see previous InfoBytes coverage here), the Bureau states that it “will seek to have them go into effect with a reasonable period for entities to come into compliance.” Additionally, the CFPB ratified the payment provisions of the Payday Lending Rule in light of the U.S. Supreme Court decision in Seila Law (covered by a Special Alert here) and issued a statement on the supervision and enforcement of certain aspects of the payment provisions with respect to certain large loans. According to the statement, the Bureau does not intend to take supervisory or enforcement action with regard to covered loans that exceed the Regulation Z coverage threshold (currently set at $58,300). The statement notes that the Bureau is monitoring and assessing the “effects of the [p]ayment [p]rovisions, including their scope, and [it] may determine whether further action is needed in light of what it learns.”
Moreover, the Bureau released FAQs pertaining to compliance with the payment provisions of the Payday Lending Rule. The FAQs discuss the details of the covered loans and “payment transfers”—defined as a “a debit or withdrawal of funds from a consumer’s account that the lender initiates for the purpose of collecting any amount due or purported to be due in connection with a covered loan”—under the rule.
On July 7, the CFPB, “out of an abundance of caution,” ratified several previous actions, including the large majority of the Bureau’s existing regulations, following the U.S. Supreme Court’s opinion in Seila v. Consumer Financial Protection Bureau. As previously covered by a Buckley Special Alert, the Court held that, while the clause in the Consumer Financial Protection Act that requires cause to remove the director of the CFPB violates the constitutional separation of powers, the removal provision could—and should—be severed from the statute establishing the CFPB, rather than invalidating the entire statute. According to the Bureau’s announcement, the action ratifies most regulatory actions taken by the Bureau from January 4, 2012 through June 30, 2020, and “provides the financial marketplace with certainty that the rules are valid in light of the Supreme Court decision in Seila Law.” The Bureau noted, however, that the ratification does not include two actions: (i) the July 2017 “Arbitration Agreements” rule, which was disapproved following the approval by President Trump of a joint resolution under the Congressional Review Act that provides “the ‘rule shall have no force or effect’”; and (ii) the November 2017 “Payday, Vehicle Title, and Certain High-Cost Installment Loans” rule (Payday Rule), for which the Bureau previously revoked the rule’s mandatory underwriting provisions. Both of these actions are not within the scope of the ratification, the Bureau stated, noting, however, that it has separately ratified the Payday Lending Rule’s payment provisions.
The Bureau is also considering whether to ratify other legally significant actions, such as certain pending enforcement actions, and stated it will make separate ratifications, if appropriate. However, the Bureau stressed it “does not believe that it is necessary for this ratification to include various previous Bureau actions that have no legal consequences for the public, or enforcement actions that have finally been resolved.” Additionally, because the ratification is not a “rule” or “rule making” as defined by the Administrative Procedure Act (APA), since it is “not an ‘agency statement of general or particular applicability and future effect’” and is “not ‘formulating, amending, or repealing a rule,’” the Bureau contended it is not subject to the APA’s notice-and-comment procedures.
On February 6, CFPB Director Kathy Kraninger testified at a House Financial Services Committee hearing on the CFPB’s Semi-Annual Report to Congress. (Covered by InfoBytes here.) The hearing covered the semi-annual report to Congress on the Bureau’s work from April 1, 2019, through September 30, 2019. In her opening remarks, Committee Chairwoman Maxine Waters argued, among other things, that the Bureau’s recent policy statement on the “abusiveness” standard in supervision and enforcement matters “undercuts” Dodd-Frank’s prohibition on unfair, deceptive, or abusive acts or practices. Waters also challenged Kraninger on her support for the joint notice of proposed rulemaking issued by the OCC and FDIC to strengthen and modernize Community Reinvestment Act regulations (covered by a Buckley Special Alert), arguing that the proposal would lead to disinvestment in communities, while emphasizing that Kraninger’s actions have not demonstrated the Bureau’s responsibility to meaningfully protect consumers. However, in her opening statement and written testimony, Kraninger highlighted several actions recently taken by the Bureau to protect consumers, and emphasized the Bureau’s commitment to preventing harm by “building a culture of compliance throughout the financial system while supporting free and competitive markets that provide for informed consumer choice.”
Additional highlights of Kraninger’s testimony include:
- Memoranda of Understanding (MOU) with the Department of Education (Department). Kraninger discussed the recently announced information sharing agreement (covered by InfoBytes here) between the Bureau and the Department, intended to protect student borrowers by clarifying the roles and responsibilities for each agency and permitting the sharing of student loan complaint data analysis, recommendations, and data analytic tools. Kraninger stated that the MOU will give the Department the same near real-time access to the Bureau’s complaint database enjoyed by other government partners, and also told the Committee that the Bureau and Department are currently discussing a second supervisory MOU.
- Payday, Vehicle Title, and Certain High-Cost Installment Loans. Kraninger told the Committee that a rewrite of the payday lending rule—which will eliminate requirements for lenders to assess a borrower’s ability to repay loans—is expected in April. (Covered by InfoBytes here.) Kraninger noted that the Bureau is currently reviewing an “extensive number of comments” and plans to address a petition on the rule’s payments provision. “[F]inancial institutions have argued that there were some products pulled into that that were, you know, unintended,” she stated. “[W]orking through all of that and. . .moving forward in a way that is transparent in. . .April is what I am planning to do.”
- Ability-to-Repay and Qualified Mortgages (QM). Kraninger discussed the Bureau’s advanced notice of proposed rulemaking that would modify the QM Rule by moving away from the 43 percent debt to income ratio requirement and adopt an alternative such as a pricing threshold to ensure responsible, affordable mortgage credit is available to consumers. (Covered by InfoBytes here.) She stated that the Bureau would welcome legislation from Congress in this area.
- Supervision and Enforcement. Kraninger repeatedly emphasized that supervision is an important tool for the Bureau, and stated in her written testimony that during the reporting period discussed, “the Bureau’s Fair Lending Supervision program initiated 16 supervisory events at financial services institutions under the Bureau’s jurisdiction to determine compliance with federal laws intended to ensure the fair, equitable, and nondiscriminatory access to credit for both individuals and communities, including the Equal Credit Opportunity Act  and HMDA.” In addition to discussing recent enforcement actions, Kraninger also highlighted three innovation policies: the Trial Disclosure Program Policy, No-Action Letter Policy, and the Compliance Assistance Sandbox Policy. (Covered by InfoBytes here.)
- Military Lending Act (MLA). Kraninger reiterated her position that she does not believe Dodd-Frank gives the Bureau the authority to supervise financial institutions for military lending compliance, and repeated her request for Congress to grant the Bureau clear authority to do so. (Covered by InfoBytes here.) Congressman Barr (R-KY) noted that while he introduced H.R. 442 last month in response to Kraninger’s request, the majority has denied the mark up.
- UDAAP. Kraninger fielded a number of questions on the Bureau’s recent abusiveness policy statement. (Covered by InfoBytes here.) Several Democrats told Kraninger the new policy will put unnecessary constraints on the Bureau’s enforcement powers, while some Republicans said the policy fails to define what constitutes an abusive act or practice. Kraninger informed the Committee that the policy statement is intended to “clarify abusiveness and separate it from deceptive and unfairness because Congress explicitly gave us those three authorities.” Kraninger reiterated that the Bureau will seek monetary relief only when the entity has failed to make a good faith effort to comply, and that “[r]estitution for consumers will be the priority in these cases.” She further emphasized that “in no way should that policy be read to say that we would not bring abusiveness claims.” Congresswoman Maloney (D-NY) argued, however, that a 2016 fine issued against a national bank for allegedly unfair and abusive conduct tied to the bank’s incentive compensation sales practices “would have been substantially lower if the [B]ureau hadn’t charged [the bank] with abus[ive] conduct also.” Kraninger replied that the Bureau could have gotten “the same amount of restitution and other penalties associated with unfairness alone.”
- Constitutionality Challenge. Kraninger reiterated that while she agrees with Seila Law on the Bureau’s single-director leadership structure, she differs on how the matter should be resolved. “Congress obviously provided a clear mission for this agency but there are some questions around. . .this and I want the uncertainty to be resolved,” Kraninger testified. “Congress will have the opportunity to make any changes or respond to that and I think that’s appropriate,” she continued. “I would very much like to see a resolution on this question because it has hampered the CFPB’s ability to carry out its mission, virtually since its inception.” (Continuing InfoBytes coverage on Seila Law LLC v. CFPB here.)
On February 3, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from April 1, 2019, through September 30, 2019. The report, which is required by the Dodd-Frank Act, addresses, among other things, problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken by the Bureau. In her opening letter, Director Kathy Kraninger reported that she has focused, “whenever appropriate and possible” on two areas: (i) encouraging saving, by establishing a program called “Start Small, Save Up”; and (ii) unleashing innovation by reducing regulatory constraints and revising innovation policies and promoting cooperation between state and federal regulators, as demonstrated with the launch of the American Consumer Financial Innovation Network last year.
Among other things, the report highlights credit scores, credit reporting, and the consumer credit card market as areas in which consumers face significant problems. The report notes that credit reports and credit scores greatly affect credit available to consumers. With respect to the availability of general purpose credit cards the report cites Bureau findings that in 2018, consumers with high credit scores had an 83 percent approval rate, whereas consumers with subprime credit scores had only a 17 percent approval rate. In addition to these areas of focus, the report notes the issuance of one significant final rule—Payday, Vehicle Title, and Certain High-Cost Installment Loans; Delay of Compliance Date; Correction Amendments—last year. (Covered by InfoBytes here.) Several less significant rules were also finalized, including (i) Technical Specifications for Submissions to the Prepaid Account Agreements Database; (ii) Availability of Funds and Collection of Checks (Regulation CC); and (iii) Home Mortgage Disclosure (Regulation C)–2019 Final Rule.
On November 20, the Office of Information and Regulatory Affairs released the CFPB’s fall 2019 rulemaking agenda. According to a Bureau announcement, the information released represents regulatory matters it “reasonably anticipates having under consideration during the period from October 1, 2019, to September 30, 2020.”
Key rulemaking initiatives include:
- Property Assessed Clean Energy (PACE) Financing: As previously covered by InfoBytes, the Bureau published an Advanced Notice of Proposed Rulemaking (ANPR) in March 2019 seeking feedback on the unique features of PACE financing and the general implications of regulating PACE financing under TILA. The Bureau notes it is currently reviewing comments as it considers next steps.
- Small Business Rulemaking: On November 6, the Bureau held a symposium on small business lending to gather information for upcoming rulemaking (previously covered by InfoBytes here). The Bureau emphasized it will focus on rulemaking that would not impede small business access to credit by imposing unnecessary costs on financial institutions. According to the Bureau, materials will be released prior to convening a panel under the Small Business Regulatory Enforcement Fairness Act to consult with businesses that may be affected by future rulemaking.
- HMDA/Regulation C: The Bureau plans to finalize the permanent thresholds for reporting data on open-end lines of credit and closed-end mortgage loans in March 2020, and expects to issue a Notice of Proposed Rulemaking (NPRM) to govern the collection of HMDA data points and the disclosure of this data in July 2020. Both initiatives follow an NPRM and an ANPR issued by the Bureau in May (previously covered by InfoBytes here).
- Payday, Vehicle Title, and Certain High-Cost Installment Loans: As previously covered by InfoBytes, the Bureau published two NPRMs related to certain payday lending requirements under the final rule titled “Payday, Vehicle Title, and Certain High-Cost Installment Loans.” Specifically, the Bureau proposed to rescind the portion of the rule that would make it an unfair and abusive practice for a lender 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, and to delay the rule’s compliance date for mandatory underwriting provisions. The Bureau notes it is currently reviewing comments and expects to issue a final rule in April 2020.
- Debt Collection: Following an NPRM issued in May concerning debt collection communications, disclosures, and related practices (previously covered by InfoBytes here), the Bureau states it is currently “engaged in testing of consumer disclosures related to time-barred debt disclosure issues that were not addressed in the May 2019 proposal.” Once testing has concluded, the Bureau will assess the need for publishing a supplemental NPRM related to time-barred debt disclosures.
- Remittance Transfers: The Bureau expects in December to issue a proposed rule to address the July 2020 expiration of the Remittance Rule’s temporary exception for certain insured depository institutions from the rule’s disclosure requirements related to the estimation of fees and exchange rates. (Previously covered by InfoBytes here.)
- GSE Patch: The Bureau plans to address in December the so-called GSE patch, which confers Qualified Mortgage status for loans purchased or guaranteed by Fannie Mae and Freddie Mac while those entities operate under FHFA conservatorship. The patch is set to expire in January 2021, or when Fannie and Freddie exit their conservatorships, whichever comes first. (See Buckley Special Alert here.)
The Bureau further notes in its announcement the addition of entries to its long-term regulatory agenda “to address issues of concern in connection with loan originator compensation and to facilitate the use of electronic channels of communication in the origination and servicing of credit card accounts.”
On October 17, CFPB Director Kathy Kraninger testified at a hearing held by the Senate Banking Committee on the CFPB’s Semi-Annual Report to Congress. (Previous InfoBytes coverage here.) Pursuant to the Dodd-Frank Act, the hearing covered the semi-annual report to Congress on the Bureau’s work from October 1, 2018 to March 31, 2019. While Committee Chairman Mike Crapo (R-Idaho) praised recent key initiatives undertaken by Kraninger pertaining to areas such as innovation, small dollar lending underwriting provisions, and proposed amendments to the Ability to Repay/Qualified Mortgage Rule, he stressed the importance of reconsidering the fundamental structure of the Bureau. Conversely, Senator Sherrod Brown (D-Ohio) argued that Kraninger’s leadership has led to zero enforcement actions taken against companies for discriminatory lending practices, and that her initiatives have, among other things, failed to protect consumers. In her opening testimony, Kraninger reiterated her commitment to (i) providing clear guidance; (ii) fostering a “‘culture of compliance’” through the use of supervision to prevent violations; (iii) executing “vigorous enforcement”; and (iv) empowering consumers. Notable highlights include:
- Constitutionality challenges. The Bureau recently filed letters in pending litigation arguing that the for-cause restriction on the president’s authority to remove the Bureau’s single Director violates the Constitution’s separation of powers, and on October 18, the U.S. Supreme Court granted cert in Seila Law LLC v. CFPB, to answer the question of whether an independent agency led by a single director violates Article II of the Constitution. (InfoBytes coverage here.) Senator Brown challenged, however, Kraninger’s “credibility as a public official,” arguing that she changed her original position about not speaking on constitutionality issues.
- Supervision of student loan servicers. Kraninger addressed several Senators’ concerns about the Department of Education reportedly blocking the Bureau from obtaining information about the Public Service Loan Forgiveness Program for supervisory examinations, as well as and the need for a stronger response from the Bureau to obtain the requested information. Kraninger stressed that the CFPB will move forward with a statutorily required Memorandum of Understanding between the two agencies, and emphasized that the Bureau continues to examine private education loans and is collaborating with the Department of Education to ensure consumer protection laws are followed.
- Proposed revisions to Payday Rule. Several Democratic Senators questioned the Bureau’s notice of proposed rulemaking to rescind the Payday Rule’s ability-to-repay provisions. (Previously covered by InfoBytes here.) Specifically, one Senator argued that the Bureau has failed to “present any new research in defense of the change.” Kraninger replied that while she defends the Bureau’s proposal, “a final decision has not been made in this issue.” Kraninger also addressed questions as to why—if the Bureau does not believe there is a reason to delay the effective date of the Payday Rule’s payment provisions—the Bureau has not yet filed a motion to lift a stay and allow payment provision to be implemented. Kraninger indicated that the CFPB had not done so because the payday loan trade groups were also challenging the Bureau’s constitutionality (InfoBytes here).
- Clarity on abusive practices under UDAAP. Kraninger noted the Bureau intends to, “in the not too distant future,” provide an update as to whether more guidance is necessary in order to define what constitutes an abusive act or practice.
A day earlier, Kraninger also presented testimony at the House Financial Services Committee’s hearing to discuss the semi-annual report, in which committee members focused on, among other things, constitutionality questions and concerns regarding recent Bureau settlements. Similar to the Senate hearing, Democratic committee members questioned Kraninger’s change in position concerning the Bureau’s constitutionality, and argued that for her “to second-guess Congress’ judgment on [the] constitutionality of the CFPB and to argue against the CFPB structure in court is disrespectful to Congress.” With regard to recent Bureau enforcement actions, many of the committee members’ questions revolved around consumer restitution, as well as a recently released majority staff report, which detailed the results of the majority’s investigation into the CFPB’s handling of consumer monetary relief in enforcement actions since Richard Cordray stepped down as director in November 2017. (See previous InfoBytes coverage here.)