Payday Rule: Where Are We Now?
The Payday, Vehicle Title and Certain High-Cost Installment Loans Rule (Payday Rule) is taking a very circuitous route to full implementation, and it has left a lot of financial institutions very confused about when and if they need to comply. So, where are we?
This article will give a very brief overview of the Payday Rule’s requirements, what has occurred with the Payday Rule since it was published and where it currently stands. For a more detailed description of the Payday Rule’s requirements, see Restrictions on Payday, Vehicle Title, and Certain High-Cost Installment Loans are Here, for Now.
Summary of the Payday Rule’s Requirements
The CFPB released the Payday Rule in October 2017 to create consumer protections for certain covered loans. It applies to covered loans with a term of 45 days or less and loans with a term longer than 45 days that have either a balloon payment or an APR of more than 36% and some form of leveraged payment that allows the lender a right to initiate transfers from the consumer’s account without further action by the consumer. The Payday Rule does not apply to purchase money loans secured by the property being purchased, dwelling or real estate secured loans, credit cards, student loans, non-recourse pawn loans, overdrafts, wage advances and no-cost advances. It also conditionally exempted certain alternative loans and accommodation loans.
The Payday Rule has two main provisions. The mandatory underwriting provisions apply to covered short-term loans and longer-term balloon payment loans. Before making the loan or advance on the loan, a lender must reasonably determine that the consumer will be able to make the payments on the loan while also meeting major financial obligations and basic living expenses without needing to re-borrow over the next 30 days. The payment provisions have two separate requirements that apply to all covered loans:
- When the lender makes two consecutive failed attempts to withdrawal payments from the consumer’s account due to insufficient funds, the lender may not attempt another withdrawal from the same account until the lender obtains a new and specific authorization to make further withdrawals from the consumer’s account.
- The lender is required to provide a written notice before its first attempt to withdraw payment from a consumer’s account and before subsequent attempts that deviate from scheduled amounts or dates or that involve a different payment channel than the prior attempt.
What Has Happened Since
The Payday Rule was released in October 2017 and became effective on January 16, 2018. Even though the Payday Rule was effective on January 16, 2018, lenders did not need to comply with the Payday Rule until August 19, 2019. Various lenders brought several legal actions challenging numerous aspects of the Payday Rule. In one such case, Community Financial Services Association v. CFPB, a federal court issued an order staying the CFPB’s implementation of the Payday Rule indefinitely. Lawmakers in both the House and Senate introduced bills to reverse the Payday Rule under the Congressional Review Act. While these bills and cases were pending, the CFPB announced that it was reconsidering the Payday Rule.
Congress failed to override the Payday Rule and the CFPB proposed a rule that would rescind the mandatory underwriting provisions and a rule to delay the mandatory compliance date for the underwriting provisions. In June 2019, the CFPB issued a final rule that delays the compliance date for the underwriting provisions form August 19, 2019 to November 19, 2020. The CFPB has not yet issued a final rule rescinding the mandatory underwriting provisions and the federal court has not yet lifted the stay.
Where We Are Now
This leaves lenders wondering when they need to comply with the payment provisions, if they need to worry about implementing the mandatory underwriting provisions, and if they do, when do they need to comply with the mandatory underwriting provisions. The short answer is, we don’t know. I know you were hoping for a better answer. We anticipate the CFPB to issue a final rule rescinding the mandatory underwriting provisions, but until it does so, lenders should continue to work towards implementing the changes required to comply with these requirements.
Officially, the “mandatory compliance dates” are August 19, 2019 for the payment provisions and November 19, 2020 for the mandatory underwriting provisions. But because the CFPB is prohibited from enforcing the Payday Rule while the stay is in effect, lenders need not comply with either the payment or mandatory underwriting provisions until the court issues an order lifting the stay.
Realistically, a lender does not need to comply with the payment provisions until the latter of August 19, 2019 or the date the stay is lifted, and a lender does not need to comply with the mandatory underwriting provisions until the latter of November 19, 2020 or the date the stay is lifted. Unfortunately, we do not know if or when the court will lift its stay.
Ideally, if the court lifts the stay, it will provide for a period before the CFPB can begin to enforce the requirements of the Payday Rule, but that is not certain. Therefore, the best course of action is to plan to have everything implemented by the applicable compliance date, so all you need to do is flip a switch when necessary. If the CFPB rescinds the mandatory underwriting provisions, or the court permanently enjoins the CFPB from enforcing the Payday Rule, you are in a much better position than if you wait for that date and it never happens, which will cause you to scramble to comply.