April 9, 2018 | Federal & CFPB Regulations
The Community Financial Services Association of America (CFSA) and the Consumer Service Alliance of Texas today filed a lawsuit in the U.S. District Court for the Western District of Texas, Austin Division, against the Consumer Financial Protection Bureau (CFPB or Bureau) seeking to invalidate the Bureau’s final rule on “Payday, Vehicle Title, and Certain High-Cost Installment Loans.” The lawsuit alleges that the rule violates the Administrative Procedure Act (APA) because it exceeds the Bureau’s statutory authority and is arbitrary, capricious, and unsupported by substantial evidence. The lawsuit also argues that the CFPB’s structure is unconstitutional under the Constitution’s separation of powers because the agency’s powers are concentrated in a single, unchecked Director who is improperly insulated from both presidential supervision and congressional appropriation, and hence unaccountable to the American people.
“The Final Rule rests on unfounded presumptions of harm and misperceptions about consumer behavior, and was motivated by a deeply paternalistic view that consumers cannot be trusted with the freedom to make their own financial decisions,” the plaintiffs’ Complaint states. “In fact, the Bureau ignored and attempted to discount the available research showing that short-term, small-dollar loans result in improved financial conditions, not harm, because in many cases they are better than the alternative options available to consumers.”
In June 2016, the CFPB proposed a rule that would virtually eliminate small-dollar, short-term loans. These loans provide a financial lifeline for millions of consumers to weather unexpected financial hardships, with approximately twelve million Americans per year relying on small dollar loans. During the CFPB’s public comment period, more than one million customers voiced their opposition to the rule through submissions that included hundreds of thousands of handwritten comments. In addition to consumer opposition, the Small Business Administration’s Office of Advocacy expressed concerns about the rule’s harmful impact on small businesses nationwide. Despite the overwhelming opposition, the Bureau finalized the rule on October 5, 2017, without taking these concerns into account.
The CFPB’s rulemaking process rested on numerous erroneous presumptions and assumptions about consumer harm that have been unsupported by substantial evidence. Most remarkably, the Bureau simply equated the very use of small-dollar loans with unavoidable, substantial injury to consumers. In its rulemaking, the CFPB ignored research and data that did not fit its pre-determined, partisan agenda and relied on flawed research to push through its small-dollar loan rule.
The CFPB’s rulemaking also violated the procedural requirements of the Administrative Procedure Act. Throughout the rulemaking process and during the rule’s public comment period, the Bureau ignored the input of small-dollar loan customers. Serious concerns arose during the comment period over the inaccurate categorization of comment letters, and the questionable and inconsistent process through which the Bureau posted comment letters for public viewing as it rushed to finalize the rule. Questions also arose about whether the CFPB was appropriately reviewing and considering all public comments as required by the APA.
“The Bureau received more than 1.4 million written comments from interested persons, including over one million comments from consumers who opposed the proposed rule. Showing disdain for the views of those who will be most affected by the Final Rule, however, the Bureau failed to adequately take these highly relevant comments into account or give them the individualized consideration required by the APA,” reads the Complaint.
The lawsuit further states that the Bureau’s structure violates the U.S. Constitution’s separation of powers because the Bureau exercises wide-ranging executive power immune from supervision by both the President, who lacks the authority to fire the Director except for malfeasance, and Congress, which lacks the power to fund the Bureau through the appropriations process. As such, the Bureau’s final rule is an unconstitutional agency action.
“This fundamentally flawed rule is the product of a fundamentally flawed agency—one whose substantial power over the U.S. economy is unconstitutionally concentrated in a single, unaccountable and unchecked Director insulated from both the President and the Congress and hence from the people. The Bureau’s policies—including the Final Rule—are therefore those of the Director alone, without any mechanism of political accountability,” add the plaintiffs.
“We are seeking our day in court to obtain relief for American consumers and small businesses who will be hurt by the regulatory overreach of the CFPB under former Director Richard Cordray’s highly partisan tenure,” said Dennis Shaul, CEO of CFSA. “The Bureau’s rulemaking process was seriously flawed from the very beginning. The Bureau failed to demonstrate consumer harm from small-dollar loans, ignored customer input on the rule, and disregarded unbiased research and data that undercut its pre-determined agenda. What’s more, the Bureau’s structure is unconstitutional, therefore rendering its rule an unconstitutional agency action.”
The defendants in the lawsuit are the Consumer Financial Protection Bureau and Acting Director CFPB Mick Mulvaney. The Complaint can be found here.