On September 14, 2018, the Community Financial Services Association of America, Ltd. and the Consumer Service Alliance of Texas (Industry Groups) moved for a preliminary injunction to prevent many of the provisions of the Consumer Financial Protection Bureau’s (CFPB’s) payday lending rule (12 C.F.R. Part 1041) from becoming effective on August 19, 2019. The payday lending rule, which we reported on here, here, and here, tightly regulates loans with repayment terms of less than 45 days, and has been the subject of much contention. The Industry Groups argue that the rule will effectively “deny[] access to the crucial financial flexibility that many payday borrowers rely on.”
The Industry Groups initially filed suit in the Western District of Texas on April 9, 2018, seeking a declaratory judgment striking down the payday lending rule as unconstitutional. After the suit was filed, the CFPB appeared willing to revisit the rule, and the parties jointly moved the court to, among other things, stay the litigation while the CFPB reconsidered the final rule and delay the compliance date for the payday lending rule until 445 days after final judgment in the litigation. The court, however, declined to do either. Shortly after the court’s ruling, the Industry Groups filed the motion for a preliminary injunction.
The Industry Groups argue that a preliminary injunction is warranted because they are likely to succeed on their claims—that the payday lending rule is void as a rule passed by an unconstitutionally-structured agency and arbitrary and capricious under the Administrative Procedures Act—and that harm to the industry is imminent due to the steep costs that payday lenders would have to undertake to ensure compliance with the rule before August 19, 2019. First, the Industry Groups argue that the CFPB is unconstitutionally structured because the CFPB’s single director can only be removed by the President for cause. As support, the Industry Groups cite Collins v. Federal Housing Finance Agency (896 F.3d 640 (5th Cir. 2018)), which we reported on here. The Industry Groups argue that, because the CFPB is unconstitutionally structured, any rule that it passes is void ab initio.
In Collins, the Fifth Circuit concluded that the Federal Housing Finance Agency’s (FHFA’s) single-director structure was unconstitutional. The court found that the single director structure lacked the bi-partisan balance of multi-member agencies that are also insulated from the President’s removal power; that the President had no power to influence the director by controlling appropriations to the FHFA; and that the President could not exercise control through the FHFA’s oversight board which, although it is partly staffed by presidential appointees, serves a purely advisory function. However, the Collins court also compared the CFPB favorably to the FHFA on the final point, noting that, unlike the FHFA, the CFPB’s advisory board actually has the power to veto the CFPB’s decisions.
The Industry Groups argue that, under Collins, the CFPB suffers the same constitutional deficits as the FHFA, but also likened the CFPB’s advisory board to the FHFA’s advisory board—arguing that the CFPB’s oversight board is also purely advisory in nature because it can only exercise its veto power “in one exceedingly rare circumstance”: where the board determines by supermajority that a rule puts “the safety and soundness of the United States banking system or the stability of the financial system of the United States at risk.” This, the Industry Groups argue, is an inadequate check because it “leaves the Bureau completely free to break the law or abuse its power as long as it does so . . . in a regulation that does not threaten financial ruin.”
The Industry Groups also argue that the payday lending rule is arbitrary and capricious because it fails to properly balance the costs and benefits of the rule, instead acting “to serve [the CFPB’s] desired end of obliterating the payday-lending industry rather than protecting consumer interests.” Specifically, the Industry Groups claim that the CFPB did not properly find that payday loans are unfair and abusive because it “simply assumed that consumers are ‘injured’ whenever they incur substantial costs as a result of obtaining a [payday] loan – regardless of whether the loan makes them better off than they otherwise would be.” (Emphasis in original.) The Industry Groups also argue that, even accepting the CFPB’s definition of injury, the injury is “reasonably avoidable” because consumers are well informed about the loans’ terms, and can therefore avoid incurring the “injury” if they so choose. Finally, the Industry Groups challenged the CFPB’s findings that lenders take unreasonable advantage of consumers because the practical effect of the payday lending rule is to eliminate payday loans as an option to consumers—thereby potentially forcing consumers into even less desirable choices.
The Industry Groups claim that payday lenders will suffer irreparable harm if the court does not rule on their motion for a preliminary injunction by November 1, 2018, because payday lenders will otherwise need to begin spending substantial resources to comply with the rule before August 19, 2019. It is unclear whether the Industry Groups’ motion will be successful, but there is a chance that a ruling from the court could come down in the near future. LenderLaw Watch will continue to monitor developments with the payday lending rule, and report the latest news.