The Payday Lending Rule

The CFPB Payday Lending Rule

What is the Payday Lending Rule?

The Payday Lending Rule (which actually covers payday, vehicle title, and certain high-cost installment loans, was enacted by the CFPB to create consumer protections for certain consumer credit products. The Rule has two primary parts.

First, for short-term and longer-term loans with balloon payments, the Rule makes it an unfair and abusive practice for a lender to make such loans without reasonably determining that consumers have the ability to repay the loans according to their terms. The CFPB has exempted certain short-term loans from the ability-to-repay determination if they are made with certain consumer protections.

Second, for the same set of loans and for longer-term loans with an annual percentage rate greater than 36% that are repaid directly from the consumer’s account, the Rule makes it an unfair and abusive practice to attempt to withdraw payment from a consumer’s account after two consecutive payment attempts have failed, unless the lender obtains the consumer’s new and specific authorization to make further withdrawals from the account. The rule also requires lenders to provide certain notices to the consumer before attempting to withdraw payment for a covered loan from the consumer’s account.

Summary of Covered Loans and Payment Requirements

A “lender” is defined in the Payday Lending Rule as a person that regularly extends credit to consumers primarily for personal, family, or household purposes.  The Rule applies to lenders that make “covered loans” as that term is defined in the Rule. Generally, covered loans include:

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

The Payday Lending Rule’s payment provisions impose two types of requirements regarding lenders’ repeated attempts to withdraw payments from consumers’ accounts after prior attempts have failed due to insufficient funds.

First, where two consecutive withdrawal attempts have failed due to insufficient funds, the Rule prohibits a lender from attempting another withdrawal from the same account unless the lender obtains the consumer’s new and specific authorization to make further withdrawals from the account. This prohibition on further withdrawal attempts applies whether the two failed attempts are initiated through a single payment channel or different channels, such as the automated clearinghouse (ACH) system or the check network.

Second, a lender is required to provide a written notice before its first attempt to withdraw payment for a covered loan 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. The Rule also requires a lender to provide a consumer rights notice if two consecutive attempts to withdraw payment have failed due to insufficient funds in a consumer’s account. The Rule details the information that must be included in the notices and how they can be provided, including permissible methods of electronic delivery.

A lender making a covered loan must develop and follow written policies and procedures designed to ensure compliance with the Payday Lending Rule.  Lenders must also retain evidence of compliance for 36 months. The Rule outlines the types and format of information that lenders must retain.

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