The CFPB has signaled that it is back to business as usual when it comes to certain high-cost consumer loans and "sustained use." As you may recall, in 2017 the Consumer Financial Protection Bureau, then led by Director Richard Cordray, issued its rule on small dollar loans that included, among other things, an "ability to repay" provisions that would have required covered lenders to determine whether borrowers had the financial ability to repay a loan before providing one and which placed limits on consumer reborrowing in the absence of strict underwriting controls. The rule was premised on the notion that failure to consider a borrower's ability to repay these loans constituted an unfair, deceptive, or abusive practice (UDAAP), in violation of the Consumer Financial Protection Act.
However, before the rule could take effect, Director Kathy Kraninger delayed compliance with the ability to repay provisions and then rescinded them altogether by issuing a new final rule in 2020 that nullified the provisions. Meanwhile, in 2018, the Community Financial Services Association of America and the Consumer Service Alliance of Texas challenged the entirety of the 2017 rule—and later, the 2020 rule—in the United States District Court for the Western District of Texas. That litigation is ongoing.
Yesterday, Acting Director Dave Ueijo explained that the Bureau continues to monitor what it considers to be the harms to consumers presented by the small dollar lending market, notwithstanding the 2020 rule's partial rescission of the 2017 rule and the Texas litigation. Acting Director Ueijo also wrote that the Bureau recently filed a brief in the Texas case that addressed the court's jurisdiction to hear the case but did not comment on the merits of its 2020 rule. Although the Bureau's brief did not address the merits of its rule, Acting Director Ueijo maintained that the consumer harms mentioned in its 2017 rule, including consumers' inability to repay their loans, persist and require the Bureau's sustained attention. To that end, Acting Director Ueijo reaffirmed the Bureau's focus on "small dollar lenders' business models" that "rely on consumers' inability to repay," pledging that the Bureau "will use the authority provided by Congress to address these harms, including through vigorous market monitoring, supervision, enforcement, and, if appropriate, rulemaking."
The statement that the Bureau will use "vigorous market monitoring, supervision, and enforcement" to address the alleged harm of consumer reborrowing is telling. It is a declaration that—in the absence of a rule—the Bureau will use its vast enforcement authority and malleable UDAAP standards that the Bureau used as its authority to promulgate the 2017 rule in order to effect the change it desires. When coupled with the Bureau's announcement that it will return to an expansive read: aggressive—application of its abusiveness authority, this development should be concerning for payday, title, and installment lenders for a number of reasons. Lenders will need to predict how the Bureau, including its Enforcement Staff, will assess what it means to "rely on consumers' inability to repay" and adapt their models so that they do not cross this threshold. The consequences of a CFPB enforcement action regarding a sustained use theory can be substantial.