Courtesy of Joseph A. Smith Jr.
Regime change at the Consumer Financial Protection Bureau (CFPB) has involved, among other things, issuance of a statement of intention to reconsider a rule to regulate payday, auto title, and other high-cost short-term lending (the Payday Rule). Payday loans are made for fees that, when calculated on an annual percentage rate basis, can exceed 300% or 400% of principal. They are generally made by non-bank firms that are regulated by the CFPB and the states. According to a 2015 Pew Charitable Trusts study, thirty-five states and the District of Columbia allow payday lending, although nine of these states have adopted what Pew characterizes as “more exacting requirements” with regard to such loans. North Carolina, where I served as Commissioner of Banks, is one of fifteen states that do not allow storefront payday lending. This note will discuss my experience in dealing with payday lending and the issues raised by the proposed reconsideration of the Payday Rule.
Payday Loans and Me
I became North Carolina Commissioner of Banks in 2002 on the basis of a misapprehension: that I would mainly be involved in supervising banks. In fact, the major issues confronting me when I assumed office were mortgage regulation and payday lending. The North Carolina General Assembly had authorized payday lending in 1997 by legislation that sunset in 2001 and was not reenacted. Thereafter, payday loans were clear violations of the North Carolina’s Consumer Finance Act and usury laws. Local small loan firms and check cashers, who had been making payday loans prior to the sunset, were now shut out of the market. However, payday loans continued to be offered by national firms acting as agents for banks headquartered in states that did not have interest rate restrictions under the assertion that the offered rates were legally being “exported” under settled banking law (indirect payday lending).
The exportation assertion was not without controversy. John Hawke, who was at that time Comptroller of the Currency, considered participation of national banks in indirect payday lending to be “charter rental” and, through administrative action, essentially took national banks out of that part of the payday lending business. The national payday firms then went into indirect payday lending partnerships with state-chartered banks, accompanied by regulatory jousting with the FDIC comparable to that previously engaged in with the OCC. In states where direct payday lending was permitted, banks often financed such lending and, to my knowledge, continue to do so.
In February 2005, I took up the issue of indirect payday lending in North Carolina by commencing an administrative case under the Consumer Finance Act with regard to Advance America, the leading national firm. In December 2005, after numerous hearings and a review of voluminous evidence, I determined that Advance America was engaged in the business of lending and was in violation of the North Carolina Consumer Finance Act because the fees and charges it was collecting on North Carolina payday loans exceeded that statute’s limitations on such fees and charges. I ordered Advance America to cease and desist and, as a result, that firm and all of the other national firms doing indirect payday lending in North Carolina through physical storefronts closed down.
While I am not a fan of payday loans as a product, my decision in the Advance America proceeding had nothing to do with my personal preferences. It was based on a careful reading and application of a consumer protection statute adopted by duly elected legislators in their exercise of constitutionally granted powers.
The Payday Rule
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) created the CFPB and gave to it a number of specific authorities and responsibilities, including primary or shared responsibility for the implementation and enforcement of 18 federal consumer protection laws. It also gave the CFPB more general authority to: address “unfair, abusive or deceptive acts practices” in the delivery of consumer financial services, issue regulations with regard to federal consumer protection laws, facilitate supervision of non-bank consumer financial services providers, and “require disclosures to convey the costs, benefits and risks of particular consumer financial products or services.”
The Payday Rule was issued under these general authorities. The rule, among other things, requires lenders to determine a borrower’s ability to repay the loans before making them and to give notices in connection with attempts to withdraw funds from a borrower’s bank account. Failure to follow these rules would result in enforcement actions based on per se unfair, abusive and deceptive conduct in the provision of a consumer financial product. Consistent with the Dodd-Frank act, the Payday Rule does not seek to preempt additional state requirements, so long as they are no less protective of consumers than the rule.
Because it is a regulatory construct rather than implementation or enforcement of an explicit statutory provision, the Payday Rule may be amended or rescinded by CFPB administrative action. Any such action would require rulemaking under the Administrative Procedure Act. On January 16, 2018, the CFPB announced its intention to engage in rulemaking to “reconsider the Payday Rule.” The agency also signaled that it would facilitate requests for exemption from compliance pending the conduct and completion of such proceedings.
What Happens Next?
While “reconsideration” of the Payday Rule could result in no changes, this outcome is highly unlikely. Indeed, it is difficult to see why the commencement of rulemaking is necessary if amendment or repeal isn’t in prospect. Repeal, or substantial modification, of the Payday Rule would be in keeping with Director Mulvaney’s declarations of policy regarding limiting the CFPB’s exercise of implied powers (no more “pushing the edge of the envelope”) and reducing regulatory burden faced by financial services firms. The nature of the CFPB’s intentions will become clearer when, and if, it commences rulemaking.
Given the lack of an express delegation of normative rulemaking authority regarding payday lending in Dodd-Frank and that statute’s preservation of the right of states to have more restrictive standards of consumer protection, it is unlikely that there will be a preemption fight regarding payday lending of the kind that characterized home mortgage lending before the financial crisis and student lending at present. The right of states such as North Carolina to continue their restrictions on payday lending will likely remain intact.
The Fundamental Issues
The debate over high-cost lending (including payday lending) has been going on for decades. It is often heated because it is, at its foundation, a debate about ethics and morality. Proponents of restrictions on high-cost lending take the view that such lending is inherently an abuse or oppression of people who are poor, improvident, unlucky, ignorant, or some combination of the foregoing. Restrictive legislation is grounded in a public policy determination that such lending is immoral, either under the biblical proscriptions against usury or a humanist assertion of fairness and civil justice. Against these powerful moral arguments, payday lenders assert the rights of individuals to govern their own lives – the dignity of choice, if you will – and that the consequences to borrowers of not taking out such loans (bounced check fees, missed rental payments, defaulted medical bills or unmade car repairs) are worse than the cost of doing so. Payday lenders also argue that the conventional financial system does little or nothing to help the people they serve. Whatever the fate of the Payday Rule may be, payday lending will remain with us for the foreseeable future. The only real issue is how extensively it will be regulated and by whom.
Debate about the Payday Rule obscures a more basic issue: why does payday lending exist at all? Addressing that issue requires a debate about income and wealth distribution, access to financial services, and a social milieu that equates current consumption and borrowing with happiness. That debate would raise uncomfortable questions about America as a polity and society, so I’m not holding my breath until it begins.
 In addition to a network of storefront payday lenders, there is an online payday market that has been estimated to equal the storefront market.