A lawsuit filed against the Consumer Financial Protection Bureau (CFPB) alleges that the bureau’s rule regulating the payday lending industry violates multiple federal statutes and fundamentally misses the point of why consumers seek short-term, small-dollar loans in the first place. It also asserts previously broached arguments premised on the purported unconstitutionality of the bureau’s structure – a concept which was shot down in a majority ruling by the D. C. Circuit Court of Appeals in January.
The Community Financial Services Association of America, Ltd., and the Consumer Service Alliance of Texas, trade associations representing non-bank lenders specializing in small-dollar loans, filed a complaint through their attorneys calling the rule a “draconian” attempt to “virtually eliminate” an industry that provides a “critical form of consumer credit.”
The plaintiffs’ complaint, filed in the District Court of Western Texas, Austin Division, alleges that the rule’s provision on preventing short-term, small-dollar loan borrowers from taking on loans they are not able to afford does not account for the fact that such loans are designed for people who do qualify for other types of credit.
“The centerpiece of the final rule is an ability-to-repay requirement restricting payday loans to borrowers who have sufficient net income to satisfy all other financial obligations and repay the loan within its initial term — a limitation fundamentally inconsistent with the fact that consumers, many of whose income and expenses vary from one month to the next, use payday loans precisely because their net income in a particular month may be insufficient to satisfy their financial obligations,” the complaint states.
The complaint asserts that the CFPB’s rulemaking process relied on faulty reasoning that runs contrary to available evidence about the impact of the payday lending industry.
“The final rule rests on unfounded presumptions of harm and misperceptions about consumer behavior, and was motivated by a deeply paternalistic view that consumers cannot be trusted with the freedom to make their own financial decisions,” the complaint states. “In fact, the bureau ignored and attempted to discount the available research showing that short-term, small-dollar loans result in improved financial conditions, not harm, because in many cases they are better than the alternative options available to consumers. By effectively eliminating a critical form of credit for millions of borrowers who are in dire need of it, the Final Rule severely injures the very consumers the bureau is charged with protecting.”
Characterizing the “fundamentally flawed rule” as the product of a “fundamentally flawed agency,” the complaint reiterates some of the principal criticisms levied by many of the bureau’s opponents. The plaintiffs argue that the CFPB is unconstitutionally structured because it is run by a single director whom is “unaccountable and unchecked director insulated from both the president and the Congress and hence from the people.” Therefore, the plaintiffs further allege, the bureau’s policies are “those of the director alone, without any mechanism of political accountability.”
In addition to the fact that the president may only remove the CFPB director for cause and the director may request a budget equal to as much as 12 percent of the Federal Reserve’s operating expenses without input from Congress, the complaint also highlighted the oft-noted ambiguity surrounding the bureau’s authority under the Dodd-Frank Act provision prohibiting unfair, deceptive or abusive acts or practices (UDAAP), particularly in relation to the term “abusive.”
“Congress’s delegation of UDAAP authority here, even with the act’s attempt at further definition, affords the bureau discretion that is far too subjective and imprecise,” the complaint states. “As former Director Cordray himself told Congress, the delegation of authority over ‘abusive’ practices is ‘a little bit of a puzzle because it is a new term,’ which is ‘[p]robably not useful to try to define … in the abstract.’ ”
Specifically, the lawsuit lists six counts against the CFPB pertaining to its payday lending rule.
First, the lawsuit alleges that the CFPB’s structure violates the Constitution’s provision stipulating separation-of-powers. The complaint contends that “[i]t is unconstitutional for Congress to vest executive power in officers who are not removable by, and hence not accountable to, the president” and that “[t]he sole exception to this rule applies only in the case of certain independent commissions headed by bipartisan, multimember bodies (such as the Federal Trade Commission).”
A 10-judge panel for the D.C. appellate court gave varied opinions on the question of the CFPB’s constitutionality when issuing a majority ruling in February overturning a lower court’s decision in PHH Corp. v. CFPB. The appeals court noted that PHH’s argument challenged the validity of all independent agencies, not just the CFPB.
“Wide margins separate the validity of an independent CFPB from any unconstitutional effort to attenuate presidential control over core executive functions,” the appeals court stated. “The threat PHH’s challenge poses to the established validity of other independent agencies, meanwhile, is very real. PHH seeks no mere course correction; its theory, uncabined by any principled distinction between this case and Supreme Court precedent sustaining independent agencies, leads much further afield. Ultimately, PHH makes no secret of its wholesale attack on independent agencies — whether collectively or individually led — that, if accepted, would broadly transform modern government.”
Second, the complaint asserts that Congress violated the nondelegation doctrine, the administrative theory that Congress infringes upon the constitutional separation of powers when it delegates too much legislative authority to another branch of government. The complaint argues that Congress did just that when it delegated legislative power to the CFPB, an executive agency, under the Consumer Financial Protection Act (CFPA).
“By virtue of its grant of legislative authority to the bureau under the act’s provisions for prescribing rules identifying as unlawful unfair, deceptive, or abusive acts or practices, and its lack of an intelligible principle to which the bureau is directed to conform in the exercise of that authority, the CFPA unconstitutionally delegates legislative power to an administrative agency,” the complaint states.
Third, the complaint alleges that the payday lending rule exceeds the bureau’s statutory authority. To that point, the complaint asserts that the rule’s “identification of unfair and abusive lending practices conflicts with the express limitations on the bureau’s authority to declare an act or practice unfair or abusive as set forth in section 1031 of the CFPA.” The complaint also alleges that the rule violates the Dodd-Frank statute prohibiting the CFPB from establishing usury limits by targeting loans it deems to be “high-interest,” and that the bureau “lacks statutory authority to impose an ability-to-repay requirement.”
“An agency may not disrupt an established regulatory framework absent a clear congressional command,” the complaint states. “American law has long eschewed any legal requirement that lenders assess consumers’ ability to repay extensions of consumer credit or otherwise evaluate the appropriateness of credit for a consumer. In those few instances where Congress has authorized imposition of an ability-to-repay requirement, such as for certain mortgages and credit-card payments, it has done so clearly.”
The plaintiffs also allege that the rule exceeds the CFPB’s authority because the bureau statutorily is not allowed to: prohibit a particular product from being sold in the financial marketplace; use public policy considerations as a primary basis for determining whether a company has committed a UDAAP violation; or issue rules that are not “necessary or appropriate to enable the bureau to administer and carry out the purposes and objectives of the federal consumer financial laws, and to prevent evasions thereof.”
Fourth, the complaint argues that the rule violates the Administrative Procedures Act (APA), claiming that it relies on “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” pertaining to the bureau’s UDAAP authority. Under this count, the complaint reiterates its claim that the bureau has ignored evidence that the payday lending industry provides valuable credit options to low-income consumers who do not qualify for traditional forms of credit.
Fifth, the lawsuit claims that the bureau used a defective cost-benefit analysis to assess the rule’s potential benefit to consumers. The complaint argues that the bureau failed to meet its statutory obligations for such a cost-benefit study because “(1) the purported benefits of the final rule are speculative because the bureau simply presumes the existence of harms caused by covered short-term loans (as currently marketed without the bureau’s ability-to-repay determination) and fails to account for the benefits of those loans, (2) the costs of the final rule are understated because the bureau has not seriously considered the impact on consumers of the loss of a crucial source of credit, (3) the bureau has failed to consider the cost of depriving consumers of their free choice to make a financial decision, (4) the bureau has failed to consider the final rule’s impact on consumer privacy, and (5) the bureau has failed to fully evaluate the final rule’s impact on consumers in rural areas.”
The sixth and final count alleges that the CFPB violated the APA by not following at least four rulemaking procedures required by law by: not holding a meaningful notice-and-comment period; allowing outside groups opposed to payday lending to drive rulemaking process; failed to comply with the Regulatory Flexibility Act (RFA) by not sufficiently assessing the rule’s impact on small businesses and by “improperly going through the motions of a small-business-review panel process under the Small Business Regulatory Enforcement Fairness Act (SBREFA) without any meaningful thought or analysis towards a foregone conclusion”; and not taking into account comments from individuals expressing favor toward the payday lending industry.
The plaintiffs are asking for an order and judgment holding the payday lending rule to be unlawful. They also are asking to be reimbursed for costs and attorneys’ fees pursuant to any applicable statute or authority any other relief that the court deems just and appropriate.