CFPB

Payday Lending Rules Seem Likely To Escape The CRA

Last week, at the end of an otherwise dramatic day on Capitol Hill, the Senate managed to pull off something of a twist ending: the repeal of the CFPB’s arbitration rule via a Senate vote that invoked the Congressional Review Act (CRA) to prevent the rule from ever going into effect – and to prevent any consideration of a similar rule change for the next five years.

The vote came down to a 50-50 tie that was broken by Vice President Mike Pence.

The overturn of the rule was both surprising and not, all rolled into one.

Not a surprise because ever since its final passage by the CFPB in July, Republicans immediately and clearly signaled their intention to attempt to repeal it. By August, the House had passed its CRA resolution – and that matter passed officially to the Senate, where it seemed like it might pass.

But then Equifax was breached – and they made the spectacularly poor decision to insert an arbitration agreement into the contract for free credit monitoring they offered consumers.

Sharp-eyed consumer groups noticed the arbitration clause and melted down. Although that clause would not protect Equifax from a class-action suit resulting from the breach itself, it would exclude any consumer who had signed up for Equifax’s free credit monitoring services.

That mandatory arbitration clause lit the fuse of a new arbitration debate that otherwise might not have happened.

However, in the end, though it was close, the Senate Republicans pulled out the votes, albeit with some controversy. Democrats accused Republicans of sneaking through the arbitration repeal while they weren’t paying attention. Republicans mostly rolled their eyes in response, and suggested that since “kill the arbitration clause” had been their consistent message for the last several weeks, the opposition should be less surprised.

And so, it seemed the arbitration clause was done for the next few years. But when the dust had settled – and the think pieces had all been written about how this was the greatest/worst legislative decision/miscarriage of justice in history – the time for tea leaf reading began.

And pundits began to wonder: Are the newly minted payday lending regulations likely to go the way of the arbitration clause and be repealed by the CRA?

But it seems that is looking less likely, as Republicans seem to be much more quietly reacting to the final, controversial payday lending rule.

A Noncommittal Response

Republicans in Congress worked fairly quickly to be free of the CFPB arbitration rule. Within two weeks of its passage, the House had already invoked the CRA to repeal it, and it was well on its way to the Senate. The conventional wisdom is that the repeal vote would have come sooner, were it not for Equifax’s actions making the move a bit impolitic.

It has now been nearly a month since the CFPB’s payday lending regulations have dropped. So far, there has been almost no movement in either the House or Senate; this is not an insignificant detail, given that the CRA is a very time-linked tool: Once the rule is published in the Federal Register, Congress has only 60 days to invoke the CRA to prevent it from going into effect.

Earlier this year, prepaid card regulations handed down by the CFPB managed to survive a CRA challenge that was approved by the House of Representatives when the Senate was unable to put together enough votes in time to meet the deadline. As such, the Senate never voted on the rule.

This time around, the action has been less fast.

Now, some of that can be explained by the fact that payday lending regulations have not yet been published to the Federal Register, though the CFPB confirms it has been submitted for publication and its appearance is imminent. And Jeff Emerson, a spokesman for the House Financial Services Committee, said that committee Chairman Jeb Hensarling wants a CRA resolution to move forward.

However, Emerson also noted “nothing has been planned yet” when it comes to the payday rule.

Mike Crapo, chairman of the Senate Banking Committee, managed to be a shade less committal when he spoke to reporters last week, saying he would not “give odds” on whether a CRA resolution is likely to pass in the Senate.

“I know that there’s a lot of consideration and discussion of it, but I’m just waiting to see what that discussion generates,” Crapo said.

When specifically asked if the Senate’s razor-thin margin for passage was affecting Republicans’ calculus on blocking the payday rule, Crapo noted: “We’ve always known that all of these are going to be close.”

What’s Different

While the arbitration clause had the distinction of being nearly universally reviled by the entire financial services industry as a means to impoverish them at the hands of litigation-happy class-action attorneys, the industry’s response to the payday lending regulations has been a bit more divided. Big banks and credit unions had been fiercely critical of early instantiations of the rule, which did not differentiate between bank-based short-term lending and non-bank-based short-term lending – but seem to have moderated their position, stopping short of official criticism when the final draft rule created a special cut-out for small banks and credit unions. 

The Consumer Bankers Association and the payday lending industry have been rather avid in their opposition to the new rule, but it’s not the unified opposition observed with arbitration.

Plus, payday lending, unlike arbitration, is not an obscure issue. Though the majority of Americans have not and will not ever use a short-term, non-bank loan, most Americans do know what payday loans are and have an very negative opinion of them – with the exception of those who actually receive them. The data actually indicates that most short-term loan customers report being quite satisfied with the product. However, the average American who has never had one tends to think they are exploitative and are more favorably disposed to short-term, low-dollar lending managed by banks, according to Pew’s data.

Taking a stand against payday lending regulations – unlike arbitration – is associated with political risk, particularly for senators whose individual vote records tend to be more carefully scrutinized than House members. Democrats will almost certainly unanimously block a CRA resolution, and Republicans only have a two-vote margin to pass anything. Given the controversial nature of the issue, senators seem to be increasingly deciding to let the CFPB decision stand.

“It’s much better to let Democrats and the CFPB take the blame for the disaster this rule is going to be than to go to the mat right before an election year defending payday lenders,” one senatorial aide told PYMNTS on the condition of anonymity.

The payday lending rules are far from safe: Richard Cordray’s tenure as the CFPB’s director will be over as of July, and that’s if he doesn’t leave early to run for governor of Ohio. Donald Trump’s replacement for the head of the CFPB will likely have a very different outlook on this issue – and it remains to be seen what, if anything, he or she may do to modify the rule.

And, when legislation fails, there is always litigation.

“Even if a CRA resolution is not successful in overturning the rule, the industry will at some point also be pursuing litigation to overturn the rule and will also continue to pursue any other relief possible to prevent it from going into effect,” noted  Edward D’Alessio, the executive director of Financial Service Centers of America.

Keep watching this space.

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