July 08, 2020

CFPB issues Final Rule Revoking the Mandatory Underwriting Provisions of the Payday Rule

5 min

The CFPB revokes the previous Payday Rule from 2017 and issues a significantly different Final Rule. Key changes include removal of the Mandatory Underwriting Provisions and implementation of the Payment Provisions. Notable is that Director Kraninger specifically declined to ratify the 2017 Rule’s underwriting provision.

Notwithstanding the COVID-19 pandemic, the CFPB’s rulemaking has not slowed down. The CFPB issued its final rule (the “Revocation Final Rule”) revoking the Mandatory Underwriting Provisions of the 2017 rule governing Payday, Vehicle Title, and Certain High-Cost Installment Loans (the “2017 Payday Lending Rule”). As we have discussed, the CFPB bifurcated the 2017 Payday Lending Rule into two components: (i) the “Mandatory Underwriting Provisions” (which had applied ability-to-repay requirements and other rules to lending covered by the Rule); and (ii) “Payment Provisions” (which established certain requirements and limitations with respect to attempts to withdraw payments from borrowers’ accounts.

The Bureau’s Revocation Final Rule eliminates the Mandatory Underwriting Provisions consistent with the CFPB’s proposal last year. In a move not to be overlooked, CFPB Director Kathleen Kraninger declined to ratify the Mandatory Underwriting Provisions post Seila Law v. CFPB. As made relatively clear by the Supreme Court last week, Director Kraninger likely has to ratify decisions made prior to the Court determining that the CFPB director serves at the pleasure of the president or can be removed at will. In addition to the Final Rule, the Bureau issued an Executive Summary and an unofficial, informal redline of the Revocation Final Rule.

The preamble to the Revocation Final Rule sets out the justification for the revocation and the CFPB’s interpretation of the Consumer Financial Protection Act’s prohibition against unfair, deceptive, or abusive acts or practices (UDAAP). In particular, the preamble analyzes the elements of the “unfair” and “abusive” prongs of UDAAP and concludes that the Bureau previously erred when it determined that certain small-dollar lending products that did not comport with the requirements of the Mandatory Underwriting Provisions were unfair or abusive under UDAAP.

Regarding the “unfair” prong of UDAAP, the Bureau concluded that it should no longer identify as “unfair” the practices of making certain covered loans “without reasonably determining that the consumers will have the ability to repay the loans according to their terms,” stating that:

  1. The CFPB should have applied a different interpretation of the “reasonable avoidability” element of the “unfairness” prong of UDAAP;
  2. Even under the 2017 Final Rule’s interpretation of reasonable avoidability, the evidence underlying the finding that consumer harm was not reasonably avoidable is insufficiently robust and reliable; and
  3. Countervailing benefits to consumers and to competition in the aggregate outweigh the substantial injury that is not reasonably avoidable as identified in the 2017 Payday Lending Rule.

Regarding the “abusive” prong of UDAAP, the CFPB determined that there are insufficient factual and legal bases for the 2017 Final Rule to identify the lack of an ability to repay analysis as “abusive.” The CFPB identified “three discrete and independent grounds that justify revoking the identification of an abusive practice” under the lack of understanding prong of “abusive,” stating that:

  1. There is no taking unreasonable advantage of consumers with regard to the consumers’ understanding of small-dollar, short-term loans;
  2. The 2017 Final Rule should have applied a different interpretation of the lack of understanding element of the “abusive” prong of UDAAP; and
  3. The evidence was insufficiently robust and reliable in support of a factual determination that consumers lack understanding.

The CFPB pointed to two grounds supporting revocation under the inability to protect theory of “abusive,” stating that:

  1. There is no unreasonable advantage-taking of consumers; and
  2. There are insufficient legal or factual grounds to support the identification of consumer vulnerabilities, specifically a lack of understanding and an inability to protect consumer interests.

As noted above, the CFPB has not revoked the Payment Provisions of the 2017 Payday Lending Rule. The Payment Provision defines any more than two consecutive unsuccessful attempts to withdraw a payment from a consumer's account due to a lack of sufficient funds as an unfair and abusive practice prohibited under the Dodd-Frank Act. The Payment Provisions also mandate certain re-authorization and disclosure obligations for lenders and account servicers that seek to make withdrawal attempts after the first two attempts have failed, as well as policies, procedures, and records that track the Rule's prescriptions.

While consumer advocates have already hinted at challenging the Revocation Final Rule, there are some hurdles that will have to be passed. For example, any challenge will have to address standing, the Bureau’s compliance with the Administrative Procedure Act, and the director’s decision not to ratify the Mandatory Underwriting Provisions. The Revocation Final Rule is also subject to the Congressional Review Act and the accompanying congressional review period. And, as the CFPB notes, the compliance date of the entire 2017 Payday Lending Rule is currently stayed by court order in conjunction with a pending legal challenge to the Rule. The effect of the non-rescinded Payment Provisions will also depend on the status and outcome of that challenge.

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