While there are always growing pains associated with the development of compliance regulations, few rules have seen as much uncertainty in advancement as the Payday Lending Rule. This is one of those rules that was born, brought to the brink of extinction, redesigned, and finally seems on the road to becoming a reality for many lenders.
Let’s take a step back and remind ourselves what the Payday Lending Rule is, and was, all about since the rule has been nearly a decade in the making. It was all the way back in 2013 when the CFPB published their first white paper on this topic, raising their eyebrows at the short-term small dollar loan industry. In subsequent years numerous reports were dispensed and panels convened studying the consumer impact of this type of lending, eventually leading to the issuance of a final rule in late 2017 entitled Payday, Vehicle Title and Certain High-Cost Installment Loans (the “Payday Lending Rule”). That final rule was essentially made up of two parts: the ability-to-repay provisions and the payment provisions.
Disagreements in the industry quickly erupted with two trade groups challenging the 2017 final rule in a Texas federal district court, resulting in a stay of the initial 2019 compliance date for both parts of the rule. A series of actions eventually led to the CFPB rescinding the ability-to-repay provisions, but not the payment provisions. As the 2019 compliance date came and went, lenders were insulated from having to comply with the remaining payment provisions due to a court ordered stay remaining in place while the parties sorted out their withdrawals of the lawsuit, as well as other constitutional challenges that had arisen since the beginning of the disputes.
At long last, barring the outcome of any appeals that may be filed in the future, we seem to have ourselves a mandatory compliance date for the payment provisions of the Payday Lending Rule – June 13, 2022.
This rule applies to three types of consumer purpose loans, as follows:
- Short-term loans: These loans require repayment within 45 days of consummation or advance. These loans are covered regardless of the cost of credit.
- Longer-term balloon-payment loans: These loans are those that are either open-end or closed-end that require the borrower to repay substantially the entire amount of an advance in a single payment more than 45 days after the advance, or requires at least one payment that is more than twice as large as any other payment. These loans are covered regardless of the cost of credit.
- Longer-term loans: These loans are those with an annual percentage rate that exceeds thirty-six percent (36%) and includes a leveraged payment mechanism that gives the lender the right to initiate transfers from the consumer’s account without further action by the consumer.
There are also certain types of loans that may fit the criteria above, but are exempted from coverage under the Payday Lending Rule, as follows:
- Purchase money security interest loans
- Real-estate secured credit
- Credit card accounts
- Student loans
- Non-recourse pawn loans
- Overdraft service; overdraft lines of credit
- Wage advance programs
- No cost advances
- Alternative loans that generally conform to the NCUAs requirements for the PAL program, and
- Accommodation loans
Covered loans that are not otherwise exempted will be subject to the payment provisions as of June 13, 2022. Under this rule, a lender generally may not attempt to initiate a payment transfer if the lender previously has made two consecutive failed payment transfers in connection with the loan. If the consumer has multiple covered loans with the same lender, the failed payment transfers do not need to be connected to the same loan for this prohibition to be triggered. To make a third transfer attempt, the lender generally would need to obtain a new authorization from the consumer, unless the consumer requests a single immediate payment transfer subject to certain conditions.
While a lender holding the consumers account at the lender’s institution is generally subject to the payment transfer limitation, transfers that meet certain conditions will not be considered “payment transfers” under the rule. First, the loan agreement or account agreement must prohibit the lender from charging a fee if the lender initiates a transfer to the covered loan and the account lacks sufficient funds to cover the transfer. This includes nonsufficient funds fees, return item fees, or overdraft fees. This restriction must be part of the agreement at the time the loan is consummated and remain for the term of the loan. Second, the loan agreement or account agreement must contain a provision that prevents the lender from closing the account in response to failed transfer attempts to the covered loan. Again, this provision must be in place at consummation and continue for the duration of the loan term.
A lender is also required to provide three notices in relation to payment transfers, as follows:
- First payment withdrawal notice: this notice must be provided in advance of initiating the first payment transfer. Keep in mind this may not be the first payment withdrawal in connection with the loan, but rather will be the first covered “payment transfer” as that term is defined under the rule. Timing requirements will vary based on the delivery method of the notice.
- Unusual payment withdrawal notice: this notice must be provided in advance of initiating an unusual payment withdrawal. An unusual payment withdrawal includes those with varying amounts from the regularly scheduled payment, those that occur on dates other than a regularly scheduled payment, those that use a different payment channel than the previous transfer, or those that are for the purpose of re-initiating a returned transfer. Timing requirements will vary based on the delivery method of the notice.
- Consumer rights notice: this notice must be provided if the lender has initiated two consecutive failed payment transfers from the consumer’s account. This notice must be provided no later than three business days after receiving information that the second consecutive attempt has failed.
While these disclosures may be provided electronically without regard to the E-sign act, they must be provided in accordance with the electronic consent provisions of the Payday Lending Rule.
Keep in mind that NACHA rules governing payment transfer attempts may differ from these requirements and lenders are expected to comply with the Payday Lending Rule. Additionally, a lender must not take any action with the intent, knowing or reckless, to evade the prohibition on payment transfer attempts. For further details on the payment provisions, including notice content requirements, definitions, and examples, the CFPB Payday, Vehicle Title, and High-Cost Installment Lending Rule Small Entity Compliance Guide is an excellent resource. As always, feel free to contact the Temenos Compliance Advisory Team with any questions you may have.