CFPB Signals Shift by Dropping Payday Lender Lawsuit

Updated on
  • Filing in Kansas case slows effort to regulate high-rate loans
  • Trump-appointed Mick Mulvaney also reconsidering rule changes

Mick Mulvaney

Photographer: Andrew Harrer/Bloomberg

The Consumer Financial Protection Bureau is dropping a lawsuit against a group of payday lenders associated with an American Indian tribe in a sign the regulator is changing direction under Mick Mulvaney, the acting director appointed by the Trump administration.

The agency had accused the lenders of deceiving consumers and failing to disclose the true cost of the loans, which carried interest rates as high as 950 percent a year. The agency asked for the case in federal court in Kansas to be dismissed in a court filing on Thursday, giving no details about its reasoning.

The case, which was filed last year, shook the industry of online payday lenders associated with American Indian tribes. It’s a surprisingly big business that grew out of a loophole. Because payday loans are largely regulated at the state level, tribes can argue that the rules don’t apply to them. Regulators and consumer advocates say the loans, which are intended to be repaid quickly, can trap borrowers in cycles of costly debt that are difficult to escape.

“It’s an earth-shattering change,” said Christopher Peterson, a former CFPB employee who left the agency in 2016 and is a law professor at the University of Utah. “This is signaling that the CFPB is going to stand down on the online payday lenders who refuse to comply with state interest-rate caps.”

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Earlier this month, a federal judge in Manhattan sentenced payday loan mogul Scott Tucker to 17 years in prison. Jurors found Tucker and his lawyer guilty of collecting unlawful debts, using misleading contracts and falsely stating that the businesses were owned and operated by Native American tribes.

The CFPB lawsuit had targeted four companies owned by the Habematolel Pomo of Upper Lake tribe. 

“This case should never have been brought in the first place,” said Rakesh Kilaru, a lawyer representing the tribe, adding that the lawsuit had been “distracting the tribe’s resources and attention away from economic activity to benefit its members.”

The CFPB sought to dismiss the suit, but said in a statement that “the bureau will continue to investigate the transactions that were at issue.”

Regulating the market for payday loans was a priority for former CFPB Director Richard Cordray, an Obama administration appointee who frequently clashed with Republican lawmakers and financial firms. The agency is now in the hands of Mulvaney and Cordray is running for governor of Ohio. The CFPB announced plans Jan. 16 to reconsider rules for the payday-loan industry that were approved in October in the face of a massive industry lobbying campaign.

The rule was likely to have upended the industry. Payday lenders argue that the high fees and interest rates they charge are necessary because borrowers have a high risk of not repaying the loans and that they serve millions of customers who often are unable to get credit elsewhere.

— With assistance by Jesse Hamilton

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