Payday Loan Bar Association The Consumer Financial Protection Agency Act of 2009

1. Payday Loan Bar Association The Consumer Financial Protection Agency Act of 2009 Catherine M. Brennan Hudson Cook LLP Hilary B. Miller Law Offices of Hilary B. Miller

2. Scope of CFPA • New agency to regulate consumer financial products or services • CFPA would regulate “covered persons” that provide a “financial product or service” • Does not preempt more restrictive state laws • Exclusion for retailers, merchants and sellers of nonfinancial services where good or service is not a consumer financial product or service

3. CFPA Authority • Transfers consumer financial protection functions of FTC and banking agencies to CFPA • CFPA will assume rulemaking and enforcement authority for existing consumer protection statutes, including TILA, ECOA, FCRA, FDCPA

4. CFPA Rulemaking Authority • Broad authority to promulgate new rules to: • Prohibit unfair, deceptive or abusive practices • Require disclosure of costs, benefits and risks associated with consumer financial products or services • Regulate manner, setting and circumstances for provision of consumer financial products or services • Impose duties to ensure fair dealing with consumers • Establish duties with respect to compensation practices

5. CFPA Authority • CFPA can restrict mandatory predispute arbitration • CFPA cannot require a covered person to offer a specific financial product or service (i.e., a “plain vanilla” product)

6. CFPA Supervisory Authority • Examination for compliance with regulations • Registration requirement • Impose and collect assessments • Reporting requirements

7. Enforcement • CFPA has primary enforcement authority • CFPA can seek: • Rescission • Restitution • Damages • Civil penalties • State attorneys general can also enforce

8. Coverage of Payday Loans by the CFPA • Payday loans appear one of the principal ills intended to be addressed by the CFPA (see, e.g., sponsor’s statements at markup and in press conferences) – despite lack of contribution to the Crash • Multiple public statements referring to payday loans as “unregulated” • What features of payday loans are “unregulated” and what new regulation is intended? Guess: The Internet.

9. Unfairness Standard • “The Director and the Agency shall have no authority … to declare an act or practice … to be unlawful on the grounds that such act or practice is unfair unless the Agency has a reasonable basis to conclude that the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and such substantial injury is not outweighed by countervailing benefits to consumers or to competition.” CFPA § 131(c)(1).

10. Impact on Payday Lending— Legal Questions • No authority to impose a usury limitation (CFPA §125[j]) • Section manifests congressional intent that the agency cannot set interest rates • are rollovers, without more, potentially “abusive”? No principled argument for that. • quaere whether interest rates may be taken into account along with other factors in determining that a loan product is “abusive”; probably yes.

11. Likely Agency Regulatory Scenario • “Blank check” rulemaking authority will shift balance of influence efforts from political contributions and lobbying to academics, former bank regulators and, to a lesser extent, grass roots • Possible early attempts to “pick off” payday lending as low-hanging fruit • Industry must gear up principled, fact-based, data-driven arguments to counter anecdotal consumerist claims

12. What Research Shows • Like it or not, the consumer-welfare impact of payday-loan usage is mixed: • (a) Some consumers use the product as the industry claims and likely derive a net economic benefit • (b) Some consumers use the product to excess and do themselves more harm than good • Consumers lack ability to stay out of group (b) (“not reasonably avoidable”) • The industry remains in denial

13. Possible Regulatory Outcomes • There is a principled case that the product should survive in some form • Some combinations of interest rates and rollovers are highly likely to be non-welfare-enhancing; therefore arguably “abusive” or “unfair”

14. Gaming the Future • Federal reluctance to meddle with thoughtful, well-policed state-law lending models suggests possibly minor changes for those states • Possibly larger changes for other states • Industry survivors will be low-cost producers who can profit on few rollovers • Expect massive changes in Internet lending