Last week, I wrote a blog post on how the Bureau of Consumer Financial Protection could go about narrowly rewriting the payday loan rule. This would allow the rule to easily avoid being struck down by the courts under “arbitrary and capricious review,” while still significantly reshaping the law.
As I noted, however, the Bureau could also rewrite the entire rule if it sought to do so. As the Supreme Court confirmed in the case Motor Vehicle Manufactures Association v. State Farm, “An agency’s view of what is in the public interest may change, either with or without a change in circumstances. But,” the court continued, “an agency changing its course must supply a reasoned analysis.”
The reasoned analysis on behalf of rewriting the payday loan rule is rather straightforward. The research underlying the payday rule is deeply flawed, to the extent that the entire rule is unfounded. As I highlighted in comments to the Bureau, the flaws include the fact that the Bureau:
- Did not base its rulemaking on the consumer complaints portal or any empirical survey data concerning consumer sentiment.
- Failed to design an appropriate and representative study of the small-dollar loan market.
- Failed to study whether protracted borrowing actually harmed consumers through reduced consumer welfare.
- Failed to demonstrate the behavioral economic claims made in favor of regulation.
- Failed to consider empirical research that refuted its claims for both protracted borrowing and behavioral economic claims.
- Failed to test the implications of its proposals, even when it had the ability to do so.
Furthermore, the findings the Bureau did generate do not represent a sufficient justification for regulation, let alone the near-elimination of the entire industry. Indeed, the 50 state “laboratories of democracy” have been dealing effectively with payday loan regulation for the past century. As the Department of Treasury recently recommended, there is no need for federal regulation, as the states are more than capable of dealing with these issues.
The one issue that seemed to be standing in the way of a broader rewriting of the payday loan rule is the compliance date: the industries impacted by the rule have only until August 2019 to comply, making time of the essence. But that issue seems to be resolved. A federal court recently delayed the effective compliance date to comport with the new rulemaking. Further, the Bureau could have made use of the Paperwork Reduction Act to solve the issue. Under the Paperwork Reduction Act of 1995 (PRA), federal agencies are generally required to seek approval from the Office of Management and Budget (OMB) for information collection requirements prior to implementation. The Bureau’s payday loan rule is entirely structured around information collection requests that need to be approved by OMB. As the final rule makes clear:
This final rule contains information collection requirements that have not yet been approved by the OMB and, therefore, are not effective until OMB approval is obtained.
But according to the OMB website, the rule has yet to be approved. This means that firms would not have to comply with the information collection requirements, which comprise major parts of the rule. And there is little merit for OMB to approve the payday collections. In January this year, the Competitive Enterprise Institute sent a letter to OMB requesting that they disapprove the rule on Paperwork Reduction Act grounds, highlighting the completely inadequate compliance with the law.
With the compliance date issue resolved, the Bureau should go ahead and conduct a broader rulemaking. To start with, the payment provisions of the rule are arbitrary and unnecessary. The rule prevents lenders from charging a customer’s checking account after failed attempts at collection. As I described in my paper on the rule, this has important implications, particularly for online lenders:
While a substantial portion of payday loans are repaid in person at a storefront, online lenders rely on having access to a customer’s bank account. Without any collateral or the ability to service their debts, online lenders are at a much greater risk of fraud, default, or bad faith borrowing (borrowing without intent to repay). Indeed, some online payday lenders already charge higher fees to consumers who do not commit to electronic debits to compensate for the higher risk.
Another particularly arbitrary and burdensome provision is the limitations on bank and credit union small-dollar lending. The Bureau decided to exempt banks and credit unions making fewer than 2,500 loans or deriving less than 10 percent of their annual revenue from such loans. This arbitrary determination is puzzling—why would a small dollar loan be suitable for the first 2,500 people, but not anyone after that? The Bureau had no evidence to support this measure. It would therefore be a short hurdle to overcome if the Bureau was to rescind this portion of the rule.
Lastly, it is important to remember that courts have all but eroded their once-stringent review of agency actions. The Supreme Court has affirmed time and time again that courts cannot place additional procedural hurdles on agency rulemakings, cannot substitute their judgement for the technical judgements of agencies, and cannot strike down agency activity that seemingly violates the separation of powers. It has further ruled that courts conducting arbitrary and capricious review, the predominant method of review of agency rules, should rely on the highly deferential “rational basis” standard. Even further, the court has ruled that when a statute is ambiguous, they must defer to an agency’s reasonable interpretation of that statute—which is also provided for in §5512(b) (4) (B) of the Dodd-Frank Act. While many of these decisions are both unwise and unconstitutional—and should be reversed by the Supreme Court—they remain the law of the land. Under such a deferential standard of review, the Bureau should endeavor to conduct a broader revision of the payday rule.