Borrowers Using Payday Lenders Will Be Much Safer in 2025

Yeah, it is another legal/court commentary. This one is about borrowers using Payday lenders. The ruling is expected to take effect in 2025. I am sure borrowers having to use Payday Lenders are thrilled to wait till March 2025.

Supreme Court ruling in May, the federal government is expected to get tougher on regulating payday lenders and other firms that offer high-interest, short-term loans. This type of lending — which often targets low-income borrowers — has long drawn fire from consumer groups on grounds that these small-dollar loans quickly balloon when they’re not repaid, accruing exorbitant fees and interest.

The Supreme Court ruling resolved a challenge to the Consumer Financial Protection Bureau’s authority to act — meaning that the agency can come off the sidelines and get back in the game of fighting predatory lending.

“The U.S. wants to crack down on payday loans,” The Washington Post.

What if you owe money to a payday lender?

Several years ago, the CFPB issued a rule to end an unfair and abusive practice in payday and installment lending. After a thorough review of the market, the CFPB found that even after a consumer’s account had been shown to be empty, lenders would keep trying to withdraw money from the account to pay off the loan—over and over and over again. For example, the CFPB found one instance of a lender making 11 failed withdrawal attempts in one day.

The result for consumers was a pile of junk fees: With each failed withdrawal attempt, the borrower might be charged nonsufficient fund fees, overdraft fees, and others. Enough failed withdrawal attempts could even lead to the consumer’s account being closed. And at the same time that this tactic piled pain on consumers, it rarely benefited the lenders. That’s because—not surprisingly—once multiple withdrawal attempts have failed, it’s extremely unlikely that further attempts will succeed.

To address lenders’ unfair and abusive collection practices, the CFPB issued a regulation in 2017 adopting a two-strikes-and-you’re-out rule. After two tries to withdraw money from an account have failed, covered lenders can’t try again unless the borrower specifically authorizes another attempt.

The regulation was originally set to take effect in 2019 but was delayed by litigation brought by the payday lender lobby who sought to block the rule. In 2022, the court of appeals hearing the case rejected most of the payday lenders’ claims, upheld the CFPB’s finding that the prohibited practice was unfair, and affirmed the reasonableness of the rule. May 2024, the Supreme Court issued a decision (7-2) in CFPB v. CFSA rejecting the payday lenders’ sole remaining claim, pertaining to the CFPB’s funding.

Writing for the Majority

Thomas: “CFPB’s funding scheme falls squarely within this definition of a congressional “appropriation,” Thomas concluded: Congress specified the source – the Federal Reserve – from which the CFPB can draw its funding, and it indicated how the CFPB is supposed to use that funding. The court therefore reversed the 5th Circuit’s decision striking down as unconstitutional the CFPB’s funding mechanism.

Kagan: “the same would have been true at any other time in our Nation’s history.” She described a “continuing tradition” in which “Congress has created a variety of mechanisms to pay for government operations.” Even if there was no “exact replica” for the CFPB in U.S. history, she stressed, “its essentials are nothing new. And it was devised more than two centuries into an unbroken congressional practice, beginning at the beginning, of innovation and adaptation in appropriating funds.” 

Borrowers will be Much Safer in 2025, sigh . . .

Now that the appeal is over, the rule is on track to take effect. An existing court order pausing the rule is set to expire 286 days after the Supreme Court enters its judgment in the payday lenders’ case, which the Court is expected to do on June 17. As a result, the rule should go into effect on March 30, 2025.

Once that happens, the rule’s important and long-delayed protections for borrowers can finally put an end to an unfair and abusive collections practice that has gone on too long. New protections for payday and installment loans slated to take effect next year. “New protections for payday and installment loans,” Consumer Financial Protection Bureau.