The CFPB has filed a motion to dismiss the federal district court lawsuit brought by the National Association for Latino Community Asset Builders (NALCAB). That lawsuit seeks to overturn the CFPB’s July 2020 final rule (2020 Rule) rescinding the “ability-to-repay” (ATR) or “mandatory underwriting provisions” in its 2017 final payday/auto title/high-rate installment loan rule (2017 Rule). The motion to dismiss argues that NALCAB’s allegations of injury are mere “conjecture” and that, even if such injuries were to come to fruition, they are not the sort of concrete and demonstrable injuries needed for Article III standing. The Consumer Financial Services Association (CFSA), which previously intervened in the NALCAB lawsuit, also filed a motion to dismiss.
Despite approving the filing of a motion to dismiss, Acting CFPB Director Dave Uejio went to great pains to emphasize his concerns with short-term, small-dollar lending and the problems he sees with the way the industry operates. In a blog post regarding the motion to dismiss, Acting Director Uejio explained that the 2020 Rule “was challenged in court and the Bureau had a legal obligation to respond to the lawsuit,” which it did by filing a brief “addressing only the court’s jurisdiction to hear the case.” He stated further:
The brief does not address the merits of the underlying rule, and the Bureau’s filing should not be regarded as an indication that the Bureau is satisfied with the status quo in this market. To the contrary, the Bureau believes that the harms identified by the 2017 rule still exist, and will use the authority provided by Congress to address these harms, including through vigorous market monitoring, supervision, enforcement, and, if appropriate, rulemaking.
According to Mr. Uejio, “[t]he CFPB is acutely aware of consumer harms in the small dollar lending market, and is particularly concerned with any lender’s business model that is dependent on consumers’ inability to repay their loans.” Asserting that “[y]ears of research by the CFPB found the vast majority of this industry’s revenue came from consumers who could not afford to repay their loans,” Mr. Uejio stated that “[t]he Bureau continues to believe that ability to repay is an important underwriting standard. To the extent small dollar lenders’ business models continue to rely on consumers’ inability to repay, those practices cause harm that must be addressed by the CFPB.”
This language is much more in keeping with the philosophy of the 2017 Rule than the 2020 Rule. Thus, if the lawsuit survives the CFPB motion to dismiss, we would not be shocked to see a tepid CFPB defense of the 2020 Rule on the merits or even a concession that the 2020 Rule’s rescission of the ATR provisions of the 2017 Rule was mistaken. As a result, it may well fall upon the CFSA to carry the water for the small-dollar lending industry in defending against the existential threat posed by the 2017 Rule. Certainly, the CFSA is much better suited than the “new CFPB” under the Biden Administration to make the case for the consumer benefits provided by payday, vehicle title and high-rate installment loans. Even the CFPB under former Director Kraninger did not make this argument as forcefully as it could (and should) have.
In addition to the risk to the industry posed by the NALCAB lawsuit, Acting Director Uejio has explicitly threatened new rulemaking “if appropriate,” as well as “vigorous market monitoring, supervision [and] enforcement.” Accordingly, participants in the small-dollar lending industry would be well-advised to ensure that their houses are in order with respect to both ATR, “sustained use” and “cycle of debt” UDAAP risks and also as to the panoply of federal laws that apply to their products.