[co-author: Hannah Winiarski]
The election of Donald Trump and the new administration means a changed political reality for the Consumer Financial Protection Bureau (CFPB). The President-elect is expected to replace Director Richard Cordray as head of the CFPB soon after taking office. Looking further ahead, the Republican majority in Congress will likely revive legislation aimed at changing the CFPB’s structure to a bipartisan commission and subjecting its budget to the congressional appropriations process.
The agency, however, will probably survive. Despite Trump’s promises to “replace” Dodd-Frank, an attempt at wholesale repeal is unlikely. Repealing legislation likely would not survive a Senate filibuster, and redistribution of the rulemaking, supervisory and enforcement authorities now concentrated in the CFPB would involve significant frictional costs.
The impact of the election results on the CFPB’s current regulatory agenda is less clear. Trump’s election, and the overwhelming reelection of congressional Republicans, can be interpreted as public support for a more limited government and general dissatisfaction with the growth of the administrative state. As the CFPB reviews its current rulemakings, the payday lending rule, initially proposed on June 2, merits particular concern. As currently drafted, the proposed rule is broadly preemptive of existing consumer lending laws in 36 states.
The proposed rule, which covers payday loans, title loans and certain installment loans, contains a detailed set of borrower suitability requirements, presumptions and restrictions on loan frequency. The primary focus is on preventing extended periods of indebtedness on covered loans. The CFPB has posited that payday borrowers often roll over or renew their loans multiple times because lenders do not underwrite based on an ability to repay and typically require repayment in a single pay cycle. The proposed rule offers lenders two options for making account-secured, short-term loans: (1) confirm that the borrower can repay the loan in full and on time and still meet basic living expenses and major financial obligations; or (2) cap the loan amount at $500 and limit the borrower to two rollovers with a mandatory one-third principal payoff on each rollover.1 The second option is available only with respect to borrowers who do not have an outstanding short-term covered loan and have not been in debt on short-term loans for more than 90 days in the previous 12 months.
State financial regulators have expressed concern that the proposed rule will upend the regulatory regimes they administer. The CFPB has downplayed these concerns, describing the relationship between the proposed payday lending rule and existing state law as an unremarkable example of conflict preemption—a federal “floor” above which the states are free to regulate.2 That structure has long been accepted with respect to securities and environmental regulation, but there is a discontinuity between traditional conflict preemption and what the CFPB is currently proposing. The highly prescriptive CFPB rule will, upon implementation, encounter 36 complex and varied state financial regulatory regimes, most of which were developed over decades and informed by continuing state-specific, on-site supervision of consumer lenders. State laws that offer consumers greater protection than the CFPB rule will survive, but the CFPB has offered only one example of such a law: a usury cap that effectively bans payday loans. It is not at all clear how any state regulatory system that allows regulated payday lending will remain intact post-implementation.
This uncertainty has been a pressure point for the Bureau and the subject of legislation, called the Accounting for Consumer Credit and Encouraging State Solutions (ACCESS) Act3, introduced in the House by Colorado Representative Scott Tipton. The ACCESS Act would allow any state or sovereign tribe to petition for a waiver from the CFPB rule. The bill was referred to the House Financial Services Committee, where it has remained. It could, however, inform reinvigorated Republican legislative efforts to curb the CFPB.
There are also questions of statutory authorization for the Bureau to consider. The Bureau’s proposed payday lending rule is an attempt at preemption by administrative regulation rather than by statute. Dodd-Frank does not grant the Bureau express authority to issue rules preempting state law on a national basis; the Bureau has inferred this authority from congressional silence. It is questionable whether Congress, post-Obama, will approve that inference, however. Dodd-Frank is an essentially anti-preemption statute.
Where Congress did address regulatory preemption in the text of Dodd-Frank, it acted to limit, not expand. The statute explicitly curbs the Office of the Comptroller of the Currency’s (OCC) issuance of nationally preemptive rules. The OCC may now issue such rules only on a case-by-case and state-by-state basis and subject to heightened judicial scrutiny.4 If Congress intended, in the same legislation, to empower the CFPB, acting through a single individual, its Director, to override the consumer lending laws of 36 states, it would be expected to do so in the statutory text. In the absence of text, an agency interpreting the silence as authorization should be expected to explain itself—something the CFPB has not done.
Regulatory preemption of state law raises federalism concerns that have been the focus of bipartisan executive directives dating back to the Reagan Administration. Of those directives, the most detailed is President Clinton’s Executive Order 13,132, which was based on, and superseded, a similar Order by President Reagan.5 Executive Order 13,132 requires federal executive agencies considering preemptive regulations to obtain input from state officials in accordance with a formal, “accountable” process and document the results of that process in the Federal Register publication of each covered rule.6 Additionally, Executive Order 13,132 requires agencies to restrict preemption to “the minimum level necessary” to achieve regulatory objectives.7
Although independent agencies are expressly urged to comply with Executive Order 13,1328, they are technically exempt. By its terms, the Order applies only to “executive” agencies. Traditionally, federal agencies have been classified as either “independent” or “executive” based, in part, on whether their directors were removable by the President at will or only for cause. The CFPB, in addition to being expressly included in the definition of “independent regulatory agency” for purposes of Executive Order 13,1329, was set up with a “for cause” removal provision.10
The CFPB was thus entitled to exemption from the Order and has chosen not to comply. The Bureau has established no formal process for engaging state officials on rulemakings, though it has such processes in place for supervisory and enforcement matters. In the Federal Register publication of the proposed rule, the Bureau describes its interaction with state officials as a series of “calls” and “meetings,” but the only discussion topic mentioned is a narrow one—the operation of state-wide payday lending databases adopted in some states.
The October 11 decision of the U.S. Court of Appeals for the D.C. Circuit in PHH Corporation v. CFPB11 complicates the CFPB’s decision to ignore Executive Order 13,132. In a three-judge decision, which may be reviewed en banc by the full Circuit Court, the court struck the “for cause” removal provision from Dodd-Frank, making Director Cordray removable at the will of the President. The decision does not otherwise change the organization or operation of the Bureau, nor does it make the payday rulemaking subject to any new statutory requirements. The decision does, however, make the CFPB’s non-compliance with Executive Order 13,132 more difficult to defend on any principled basis. By making the CFPB’s director removable at the will of the President, the D.C. Circuit placed the CFPB on a similar footing with executive agencies that are expressly subject to the Order, and the payday lending rule as currently proposed would be broadly preemptive in an area where states have long regulated.
If called upon to defend its sweeping regulatory preemption of state consumer lending law, the CFPB will not be able to cite a detailed, state-by-state analysis of existing regulatory regimes. The CFPB is not proposing to preempt on a case-by-case basis, as Congress required the OCC to do in Dodd-Frank, but to displace state regulatory regimes wholesale and remake the payday consumer lending market. In supplemental findings published contemporaneously with the proposed payday lending rule12, the CFPB examined the percentage of borrowers in 22 states who reborrowed their loans within 7, 14, 30 and 60 days after payoff. In most of those states, 60-day reborrowing rates ranged from 80% to 92%. Some states, however, had markedly lower rates. For example, 60 days post-payoff, only 56% of Illinois borrowers and 68% of Virginia borrowers had reborrowed.
The CFPB concluded that, in all of the 22 states it studied, reborrowing rates were unacceptably high. The CFPB did not, in reaching this conclusion, examine whether the reduced borrowing frequency in Illinois and Virginia was worthy of further study, explain why the reborrowing rates in those states were still too high, or specify what level of reborrowing would be acceptable. Perhaps most importantly, the Bureau did not explain how the proposed payday lending rule would improve the situation of consumers in states that have reformed their consumer financial laws, sometimes through extended trial and error, in an effort to balance consumer protection with access to credit.
The CFPB is almost certainly reevaluating its regulatory agenda in light of the election results, which promise a less favorable environment for large-scale regulatory preemption of the kind represented by the payday loan rulemaking. The CFPB’s approach to the rulemaking may make the resulting rule more vulnerable to challenge as regulatory overreach. The CFPB’s authority to preempt nationally using its UDAAP authority is inferred from textual silence in a statute that is overtly focused on preserving state law from federal encroachment. The Circuit Court’s decision in PHH Corporation removes any principled basis for the Bureau’s exemption from the requirement to consult with state officials set out in Executive Order 13,132. Perhaps most significantly, the CFPB has not, to date, devoted serious time and study to understanding the existing state regulatory approaches it would preempt.
1 Payday, Vehicle Title, and Certain High-Cost Installment Loans, 81 Fed. Reg. 47,864, 48,168-171 (July 22, 2016) (to be codified at 12 C.F.R. pr. 1041).
2 See, e.g., Rachel Witkowski, State A.G.s, Lawmakers Tell CFPB to Back Off on Payday Rule, Am. Banker, Feb. 11, 2016, available at http://www.americanbanker.com/news/law-regulation/state-ags-lawmakers-tell-cfpb-to-back-off-on-payday-rule-1079322-1.html.
3 ACCESS Act of 2016, H.R. 5552, 114th Cong. (2016), available at https://www.congress.gov/bill/114th-congress/house-bill/5552.
4 12 U.S.C. § 5136C (2012).
5 Exec. Order No. 12,612, 52 Fed. Reg. 41,685 (Oct. 26, 1987) (superseded by Exec. Order 13,132), available at https://www.archives.gov/federal-register/codification/executive-order/12612.html; Exec. Order No. 13,132, 64 Fed. Reg. 43,255 (Aug. 10, 1999), available at http://www.gpo.gov/fdsys/pkg/FR-1999-08-10/pdf/99-20729.pdf; Memorandum for Heads of Executive Departments and Agencies, 74 Fed. Reg. 98 (May 22, 2009), available at http://www.gpo.gov/fdsys/pkg/FR-2009-05-22/html/E9-12250.htm.
6 64 Fed. Reg. at 43,257.
7 Id.
8Id. at 43,259.
9 Dodd-Frank amended the Paperwork Reduction Act to add the CFPB’s name to the list of agencies defined as “independent regulatory agencies.” Executive Order 13,132 incorporates that definition.
10 The Consumer Financial Protection Act of 2010, 12 U.S.C. § 5491(c)(3) (2012).
11PHH Corp. v. CFPB, No. 15-1177, 2016 WL 5898801 (D.C. Cir. Oct. 11, 2016).
12 CFPB, Supplemental Findings on Payday, Payday Installment, and Vehicle Title Loans and Deposit Advance Products (2016), available at http://files.consumerfinance.gov/f/documents/Supplemental_Report_060116.pdf.
