The payday-lending industry sued the Consumer Financial Protection Bureau on Monday in an attempt to block an agency rule the industry says will destroy it.
The regulation, which was finalized under the Obama administration, will radically change how payday lenders operate by requiring firms to verify that borrowers can afford the debt before giving them the money and capping the number of times someone can take out successive loans.
It is “draconian” and would “virtually eliminate” the payday-lending industry, according to the lawsuit by the Community Financial Services Association of America, which was filed in the U.S. District Court for the Western District of Texas. The rule “was motivated by a deeply paternalistic view that consumers cannot be trusted with the freedom to make their own financial decisions.”
The rule was already under assault. Republicans in the House and Senate have introduced legislation to block its implementation, and Mick Mulvaney, appointed by President Trump to temporarily lead the financial protection agency, has said he is reviewing the regulation.
But the payday-lending industry is moving even more aggressively to block its implementation. “We do not take lightly that we are suing our federal regulator, however, we have long said we are pursuing all options with regard to the CFPB’s harmful small-dollar lending rule, and one of these options was litigation,” said Dennis Shaul, chief executive of the Community Financial Services Association of America, the primary industry group for payday lenders.
The CFPB did not immediately respond to an inquiry about the lawsuit, and it is unclear whether the agency will fight it.
Payday loans are a small, scorned part of the financial industry. But in the states where such lenders are legal, they are pervasive — there are almost as many payday lenders as McDonald’s and Starbucks in the United States. About 12 million Americans take out such loans each year, spending more than $7 billion on fees, according to Pew Charitable Trusts. These loans provide a “financial lifeline for millions of consumers who need access to funds and choose these products over other available forms of credit,” according to the industry lawsuit.
But consumer advocates claim that payday loans often trap people in a cycle of debt with high interest rates and unscrupulous practices. “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,” Karl Frisch, executive director of Allied Progress, said in a statement.