It will take a while to digest the CFPB’s 1,700-page release on payday, title and high-rate installment lending but, naturally, I have a number of preliminary observations:

1. It remains highly uncertain that the Rule will ever go into effect.  Once Director Cordray leaves office, his successor may have very different views on the costs and benefits of these products and may, at a minimum, want to assure himself or herself that there is a strong basis for the Rule.  The CFPB has never established, as it must, a strong empirical case that any consumer injury associated with these loans outweighs off-setting consumer benefits.  The industry will surely litigate this issue and has a good chance of succeeding.  As we have previously speculated in our blog on numerous occasions, we expect that Director Cordray soon will resign to run for governor of Ohio, and, given that his term expires in July of next year regardless, there will be a new director or acting Director at least a year before the rule becomes effective as a result.  His successor may feel that he or she has better things to do with the initial period in office than to defend a badly flawed Rule. Of course, Director Cordray will not need to defend the Rule in industry lawsuits.

2. The CFPB’s decision to carve longer-term high-rate (>36% APR) loans out of the Rule’s ability-to-repay (ATR) requirements is a big win for the industry.  It undoubtedly reflects the CFPB’s recognition, as reflected in two comment letters we submitted on the proposal, that: (a) the CFPB’s study of installment lending, as opposed to short-term payday and title loans, was particularly weak; and (b) the combination of the Rule’s 36% rate trigger and onerous requirements for longer-term loans effectively established a usury limit, in violation of a provision of Dodd-Frank that explicitly denies the CFPB the power to set usury limits.

3. While the CFPB made a sensible decision to exclude longer-term loans from the Rule’s ability-to-repay requirements, this prudence was not matched by its treatment of card payments in the Rule’s so-called “penalty-fee prevention” provisions. These provisions apply to both short-term and to longer-term loans with APRs exceeding 36%.  The CFPB professes to impose these requirements to protect consumers against excessive bank NSF charges and account closures yet it applies the requirements not only to ACHs and check transactions but also to debit and prepaid card payments.  This makes no sense since card transactions, by their very nature cannot give rise to bank NSF fees and/or account closures.  Either a card transaction is authorized or it is declined, and no fee is associated with a decline.  To my mind, the application of penalty-fee prevention provisions to card payments is arbitrary and capricious and, accordingly, in violation of the Administrative Procedures Act.

4. The 21-month deferred effective date, up from 15 months in the proposal, is a win for the industry.

5. The Rule appears to be good news for lenders focused on providing longer-term title loans, which fall entirely outside the coverage of the Rule.

6. The Rule, coupled with the OCC’s action withdrawing its prior deposit advance guidance, also appears to be good news for banks interested in providing deposit advance products.  Notably, longer-term deposit advance products will fall entirely outside the Rule (including its penalty-fee prevention provisions, provided that the bank offering the product ensures that its borrowers are never charged overdraft or NSF fees in connection with such loans. We will have additional blog updates on this topic in the coming days.