The Consumer Financial Protection Bureau’s bitterly contested payday lending rule is set to take effect next year after a federal appeals court declined to reopen an industry challenge that included a trip to the US Supreme Court.
The US Court of Appeals for the Fifth Circuit ruled in October 2022 that the CFPB had followed all necessary procedures allowing its watered-down payday lending rule to take effect. The panel put the rule on hold, however, finding that the agency’s funding through the Federal Reserve, and outside the congressional appropriations process, was unconstitutional.
But the Supreme Court overturned the Fifth Circuit’s ruling on the CFPB’s funding in a 7-2 decision last month in CFPB v. Community Financial Services Association of America Ltd.
The Fifth Circuit on Wednesday ruled in favor of the CFPB, determining that the payday lending rule should stand following the high court’s decision upholding the agency’s funding.
The CFPB declined to comment. INFiN, the payday lending trade group that is the successor to the CFSA, didn’t immediately responded to a request for comment Thursday.
Payday Changes
The CFPB has been preparing the market for the rule to take effect.
Payday lenders will have to comply with the regulation beginning March 30, 2025, the agency said in a blog post earlier this month.
When consumers take out a payday loan, they give the lender direct access to their bank accounts to collect payments. The CFPB’s 2020 rule establishes a “two-strikes-and-you’re-out” standard that bars payday lenders from attempting to access an account after they’ve been denied twice, according to the post.
CFPB research found instances where lenders made 11 failed withdrawal requests in one day.
“With each failed withdrawal attempt, the borrower might be charged nonsufficient fund fees, overdraft fees, and others,” the post by CFPB Deputy Director Zixta Martinez said.
The CFPB in its scaled-back final rule also eliminated stringent standards adopted in 2017 under the leadership of former CFPB Director Richard Cordray, an Obama appointee, that had required payday lenders to assess borrowers’ ability to repay. The Trump administration’s CFPB rescinded the ability-to-repay requirements.
Jones Day represents the CFSA.
The case is Community Financial Services Association of America Ltd. v. CFPB, 5th Cir., No. 21-50826, unpublished 6/19/24.
