Trade groups file summary judgment motion in Texas lawsuit challenging CFPB payday loan rule

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The industry trade groups challenging the CFPB’s final rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans (the Rule) have filed a motion for summary judgment.  The motion follows the filing of an Amended Complaint by the trade groups focused on the Rule’s payments provisions and the filing of an Answer to the Amended Complaint by the CFPB.

In the Amended Complaint, the plaintiffs alleged that the Rule violates both the Constitution and the Administrative Procedures Act (APA) and that the payments provisions have additional infirmities that render them invalid.  In their summary judgment motion, the plaintiffs argue that the payments provisions should be held unlawful and set aside for the following reasons:

  • Because the U.S. Supreme Court decided in Seila Law that the CFPB’s Director who adopted the Rule was unconstitutionally insulated from discharge by the President, the Rule was invalid from the outset and Director Kraninger’s ratification of the payments provisions is ineffective.  In support, the plaintiffs assert:
    • The remedy for a notice-and-comment process undertaken by a Bureau that lacked the power to act is a new notice-and-comment process initiated by a properly serving Director and not ratification.
    • Even if ratification can cure constitutional violations, it cannot do so where the violation limited the agency’s power to act.  As a matter of agency law, ratification requires a principal that had authority to act at the relevant time and an agent who lacked that authority, whose actions the principal must subsequently approve.  Because the constitutional violation resulting from the Bureau’s structure means the Bureau did not have the authority to adopt the Rule, Director Kraninger does not have authority to ratify the payments provisions.
  • The ratification of the payments provisions is arbitrary and capricious within the meaning of the APA because:
    • The payments provisions were based on a UDAAP theory expressly rejected by the CFPB in its revocation of the Rule’s underwriting provisions.
    • The ratification embodies an unexplained about-face by the Bureau regarding the time needed to implement the payments provisions.  After concluding that 21 months were needed for companies to comply, the Bureau has effectively proposed to replace that period with a 60-day deadline.  The payments provisions cannot be ratified in part, without ratification of the 21-month implementation period.
    • The Bureau’s declaration that it is an unfair and abusive practice for payday lenders to attempt an authorized withdrawal from a borrower’s bank account is based on a mode of analysis the Bureau expressly rejected in its revocation of the Rule’s underwriting provisions.
    • The Bureau’s cost-benefit analysis is fatally flawed because it is premised on the basis that the Rule’s underwriting provisions would reduce the costs to lenders of complying with the payments provisions, and that premise no longer stands because the underwriting provisions have been revoked.  Additionally, the Bureau’s cost-benefit analysis is defective because the Bureau failed to weigh important effects of the payments provisions such as the increased likelihood that a loan would enter into collections sooner than it otherwise would have (if it would have at all) and failed to account for additional accrued interest that consumers would incur as a result of the timing requirements of the notices that must be sent before payments can be processed.
    • The payments provisions contravene the Dodd-Frank Act provisions that prohibit the Bureau from (1) establishing a usury limit because the Rule targets a category of loans based on their interest rate and (2) making public policy considerations the primary basis for an unfairness determination and from considering public policy at all in determining whether an act or practice is abusive.
  • The Bureau’s denial of a petition for a rulemaking to amend the payments provisions to exclude debit-card transactions was arbitrary and capricious because such transactions typically do not, if ever, result in fees.
  • The Bureau continues to be unconstitutional because its funding mechanism usurps Congress’s role in the allocation of federal funds and the Bureau’s UDAAP authority is an unconstitutional delegation of authority of Congress due to the lack of any “intelligible principle” guiding the Bureau’s use of that authority.

Under the scheduling order entered by the court, the Bureau must file by October 23 its combined cross-motion for summary judgment and opposition to the plaintiffs’ summary judgment motion.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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