The Community Financial Services Association of America (CFSA) and Consumer Service Alliance of Texas (CSAT) [advocacy websites] filed a lawsuit [complaint, PDF] Wednesday in the US District Court for the Western District of Texas, alleging the Consumer Financial Protection Bureau’s (CFPB) [official websites] final rule on “Payday, Vehicle Titles, and Certain high-Cost Installment Loans” is unconstitutional and violates the Administrative Procedure Act (APA) [materials] and Dodd-Frank Act.
Specifically, the complaint argues that the final rule [text, PDF] violates the Separation of Powers clause and Non-Delegation doctrine to unconstitutionally regulate payday lending activity. Further, the industry groups alleged that the CFPB engaged in arbitrary and capricious rulemaking, took action in excess of its statutory authority, failed to observe legal procedures, and created a defective cost-benefit analysis.
In essence, the rule sets forth an ability-to-repay requirement, which limits persons eligible for short-term loans known as “payday loans” or “payday advances”. The lawsuit challenges the CFPB’s basis for limiting credit availability.
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. 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. By effectively eliminating a critical form of credit for millions of borrowers who are in dire need of it, the Final Rule severely injures the very consumers the Bureau is charged with protecting.
CFSA issued a statement [text] concerning CFPB’s unlawful rulemaking process, saying: “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.”
CFPB published the final rule last October, setting forth unfair, deceptive, and abusive acts and practices in issuing these payday loans. These provisions are at the heart of CFSA and CSAT’s challenge.