AUSTIN, Texas (CN) – The federal consumer watchdog agency was sued Monday over a regulation that the payday loan industry says would wipe out the lending practice.
The lawsuit targets an Obama-era regulation restricting payday loans to borrowers who can verify an ability to afford the debt on top of their other financial obligations. The rule also imposes a limitation on the amount of times a borrower can take out successive loans to three, followed by a mandatory 30-day “cooling off period.”
The “draconian” rule would “effectively eliminate payday lending,” according to the 38-page lawsuit filed against the Consumer Financial Protection Bureau by Community Financial Services of America and Consumer Service Alliance of Texas.
“It prohibits the vast majority of payday loans currently made, and makes payday lending so unprofitable that few if any companies will be able to remain in the business, even to offer loans that the bureau concedes are beneficial to consumers,” according to the complaint filed in Austin federal court by lead attorney Laura Durfee with Jones Day.
Mike Mulvaney, who leads the federal agency and is also named as a defendant in the lawsuit, has said in previous statements that he is reviewing the regulation.
About 12 million Americans use payday loans each year and typically borrow a few hundred dollars with a fee of $15 per $100 borrowed, the lawsuit states. The loans are designed as short-term, but the borrower has the option, depending on the state, on renewing it for an additional charge.
Dennis Shaul, CEO of plaintiff Community Financial Services of America, said the CFPB ignored customer impact on the rule and disregarded research and data that undercuts its purpose.
“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,” Shaul said in a statement. “The bureau's rulemaking process was seriously flawed from the very beginning.”
The lawsuit claims the agency’s rulemaking process violated the Administrative Procedure Act and is unconstitutional. The group seeks an order prohibiting the rule from taking effect.
Supporters of the regulations say payday loans do more harm than good and often leave struggling consumers strapped with high-interest loans.
“Time and again the CFSA and the predatory lenders it represents have demonstrated why they simply cannot be trusted to deal honestly with the CFPB and the American people,” said Karl Frisch, executive director of Allied Progress. “Mick Mulvaney has a responsibility to defend the CFPB from such baseless attacks. If he truly is not influenced by the tens of thousands of dollars he received in campaign cash from payday lenders belonging to this trade group, he will do the right thing and mount a vigorous defense of the bureau’s constitutionality and payday lending rule.”
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