Payday, Vehicle Title, and High-Cost Installment Lending Rule

(Payday Lending Rule)

 

Status & Timeline

Currently, the Payday Lending Rule is stayed pursuant to a court order issued in Community Financial Services Association v. CFPB, No. 1:18-cv-00295 (W.D. Tex. Nov. 6, 2018) Compliance with the Rule is not required until the court-ordered stay is lifted.

October 5, 2017 – The CFPB issued its final Payday, Vehicle Title, and High-Cost installment Lending Rule (Payday Lending Rule).

The effective date was January 16, 2018 with a general effective compliance date of August 19, 2019.

• Payday, Vehicle Title, and Certain High-Cost Installment Loans

February 14, 2019 – The CFPB issued a proposed rule to rescind (1) the requirement to reasonably determine that consumers have the ability to repay those loans according to their terms; (2) mandatory underwriting requirements for making the ability-to-repay determination; and (3) reporting, and recordkeeping requirements.

Comments on the proposed rule are due May 15, 2019. 

• Payday, Vehicle Title, and Certain High-Cost Installment Loans
• Unofficial redline of the proposed amendments to the Payday Lending Rule

February 14, 2019 – The Bureau also issued a proposed rule to delay the compliance date for the mandatory underwriting provisions of the Payday Lending Rule until November 19, 2020.  Comments are due by March 18, 2019.  The disclosure of payment transfer attempts and prohibited payment transfers are not included in the proposed delay, and will be effective August 19, 2019.

• Payday, Vehicle Title, and Certain High-Cost Installment Loans; Delay of Compliance Date

February 20, 2019 – The CFPB issued a Small Entity Compliance Guide regarding the payment related requirements of the Payday Lending Rule.  The payment related requirements are not included in the areas of the rule that the Bureau plans on rescinding, and once effective, institutions will need to comply with them.

The following is a high-level summary of the Payday Lending Rule and does not include all the requirements of the Rule.  You should refer to the actual rule and official interpretations for compliance.

Coverage

The Payday Lending Rule applies to three types of loans (covered loans) extended to a consumer for personal, family, or household use.  These, generally, are:

1. Covered short term loans that require repayment within 45 days of consummation or an advance – regardless of the cost of credit;
2. Covered longer-term loans that have certain types of balloon-payment structures – regardless of the cost of credit; and
3. Covered longer-term loans that have a cost of credit exceeding 36% APR and have a leveraged payment mechanism giving the lender the right to initiate transfers from the consumer’s account without further action by the consumer.

A leveraged payment mechanism is when a lender or service provider obtains a right to initiate a transfer or money, through any means, from a consumer’s account to satisfy an obligation on a loan.  This can include the right to initiate a transfer from a consumer’s account by means of a check, an electronic fund transfer, a remotely created check or payment order, or a transfer by an account-holding institution.

Exclusions

Not included in the Rule’s requirements are:

1. Alternative loans, which are loans that generally conform to the NCUA’s requirements for the PAL program regardless of whether the lender is a federally insured credit union;
2. Accommodation loans, provided the lender together with its affiliates do not originate more than 2500 covered loans in a calendar year and did not derive more than 10 percent of their receipts from covered loans during the previous tax year.
3. Purchase money security interest loan, when the credit is extended solely and expressly for the purpose of financing a consumer’s initial purchase of a good, and the credit is secured by that good.
4. Real estate secured credit, where the credit is secured by any real property or by personal property that is used as a dwelling.
5. Credit card accounts, as defined by Regulation Z.
6. Student loans, authorized by the Higher Education Act or private education loans as defined by Regulation Z.
7. Non-recourse pawn loan, if the lender has sole physical possession and use of the property securing the loan for the entire loan term, and the lender’s sole recourse is the retention of that property.
8. Overdraft service; overdraft line of credit, as defined by Regulation E.
9. Wage advance program, made by an employer to an employee only on accrued, unpaid, wages.
10. No cost advance, where no fee or charge is assessed, and the lender warrants that there is no legal claim based on failure to repay, no collection activities will occur, and the loan will not be reported to the credit bureaus.

The Small Entity Compliance Guide focuses on the payment related requirements of the Rule, including the disclosure of payment transfer attempts and prohibited payment transfer attempts.  One area that is absent in the Guide is the mandatory underwriting requirements.  While the proposed recession of these requirements is out for comment, the CFPB must be planning on dropping them.

Pending the stay being lifted, the following sections are effective August 19, 2019.

Disclosure of Payment Transfer Attempts

There are three types of disclosures required relating to payment transfers initiated in connection with a covered loan:

1. First payment withdrawal notice. A lender must provide a first payment withdrawal notice to a consumer in advance of initiating the first payment withdrawal from a consumer’s account.
2. Unusual payment withdrawal notice. A lender must provide an unusual payment withdrawal notice in advance of initiating an unusual payment withdrawal from the consumer’s account.
3. Consumer rights notice. A lender must provide a consumer rights notice to a consumer if a lender has initiated two consecutive failed payment transfers from a consumer’s account.

These notices may be provided electronically if the lender obtains consent in accordance with the Rule.  E-Sign consent is not required.  When delivering the notices electronically through certain deliver methods, such as text messaging, a lender is required to provide a short notice to the consumer.  Use of the Bureau’s model forms provides a safe harbor for the institution.

In addition to timing requirements, the notices must contain specific disclosures relating to the transfer.

Prohibited Payment Transfer Attempts

“Payment transfer” means a debit or withdrawal of funds from a consumer’s account that the lender initiates for the purpose of collecting any amount due or purported to be due in connection with a covered loan. A debit or withdrawal meeting this description is a payment transfer regardless of the means the lender uses to initiate it. For example, a payment transfer includes, but is not limited to, a debit or withdrawal initiated by an electronic fund transfer (such as a debit card, prepaid card, or ACH transfer), a signature check, a remotely created check, and a remotely created payment order.

The Rule provides for a conditional exclusion for prohibited payment transfers for lenders that are also the account-holding institution.  Unless the Rule’s conditional exclusion applies, a lender that is also the account-holding institution initiates a payment transfer if it does any of the following:

1. Initiates an internal transfer from a consumer’s account to collect a payment on a covered loan;
2. Sweeps a consumer’s account in response to a delinquency on a covered loan; or
3. Exercises a right to set off or offset in order to collect an outstanding balance on a covered loan.

The conditional exclusion for account holding institutions applies when the lender does not charge a fee when the transfer account lacks sufficient funds for the transfer (e.g. overdraft, NSF, returned items) and the lender does not close the consumer’s account in response to a negative balance relating to the transfer.  Note – that for the conditional exclusion to apply, both of these provisions must be spelled out in the loan or account agreement.

Generally, a lender is prohibited from initiating payment transfers after the lender has attempted two consecutive failed payment transfer attempts in relation to any covered loan the consumer has with the lender.

A first failed payment transfer occurs if it meets any of the following:

1. The lender has initiated no other payment transfers from the account in connection with the covered loan or any other covered loan that the consumer has with the lender;
2. The immediately preceding payment transfer was successful, regardless of whether the lender has previously initiated a first failed payment transfer; or
3. The payment transfer is the first payment transfer to fail after the lender obtains the consumer’s new and specific authorization for additional payment transfers

A second failed payment transfer occurs when a second attempt follows the immediately preceding failed payment transfer, including an attempt initiated at the same time or the same day.

After two failed payment transfer attempts, the lender must obtain new authorization from the consumer before attempting any additional transfers.

Compliance Program and Record Retention

A lender must have written policies and procedures designed to reasonably comply with the Payday Lending Rule.

A lender must retain evidence of compliance with the Payday Lending Rule for 36 months after a loan is no longer outstanding.

For each covered loan, the lender must retain or be able to reproduce an image of the following documentation, as applicable:

1. Leveraged payment mechanisms the lender obtained from the consumer,
2. Authorizations of additional payment transfers, and
3. Underlying one-time electronic transaction authorizations or underlying signature checks.

And, the lender must retain electronic records in tabular format of the history of payments received and attempted payment transfers.  This must include:

• The date of receipt of the payment or attempted payment transfer,
• The amount of the payment due,
• The amount of the attempted payment transfer,
• The amount of the payment received or transferred, and
• The payment channel used for an attempted payment transfer.

 

The compliance professionals at CSG are not attorneys and, therefore, the services we provide should not be considered a legal opinion or other legal analysis pertaining to the information covered. We urge you to consult with your legal advisor before revising products or services or taking other action based on this information.