CFPB Payday Delays: Payment Provisions and Recording Requirements
For credit unions seeking to provide loans under the Bureau of Consumer Financial Protection (CFPB)’s payday lending rule, today, August 19, 2019 would have been the compliance deadline for many of the requirements. On June 6, 2019, the CFPB delayed the compliance date for the mandatory ability-to-repay (ATR) provisions to November 19, 2020, while the CFPB works to rescind this part of the rule. As for the other aspects of the rule, including the payment transfer restrictions and recordkeeping requirements, the mandatory compliance deadline would also have been today; however, the U.S. District Court for the Western District of Texas recently issued a stay of this compliance deadline, meaning it may not go into effect before the underlying lawsuit is resolved or the stay is lifted. In any event, this presents a great opportunity to discuss the non-ATR aspects of the CFPB’s Payday rule. So, what is a “covered loan” you ask?
The rule covers both short term and longer term balloon payment loans. Covered short-term loans include both open-end and closed-end credit products that have terms of 45 days or less, or where the consumer is required to repay substantially the entire amount of the loan or advance in less than 45 days. Longer-term balloon payment loans are those close-end or open-end loans that have a longer than 45 day term, but require the consumer to repay substantially the entire amount of the loan or advance more than 45 days after consummation in either a single payment or at least one payment that is more than twice as large as any other payment. See, 12 CFR §1041.3(b).
In addition to the two covered loans discussed above, the final rule also covers a third loan type, known as "covered longer-term loans." This category includes loans that do not fit the previous definitions discussed above, but carry a “cost of credit” that exceeds 36 percent and has a leveraged payment mechanism giving the lender a right to initiate transfers from the consumer's account without further action by the consumer. See, 12 CFR §1041.3(b)(3). Cost of credit is determined according to the finance charge rules set out in section 1026.4 of Regulation Z. This product type is less common for federally-chartered credit unions given the 18% lending rate cap established in section 701.21(c)(7) of NCUA’s regulations.
Aside from the three covered loan types, the rule outlines some safe harbors, exemptions and exceptions. Among other types of products, purchase money security interest loans, home mortgages, credit cards, student loans, overdraft services, and wage advance programs are not covered loans. See, 12 CFR §1041.3(d). Second, alternative loans that meet the National Credit Union Administration's (NCUA) Payday Alternative Loan (PAL) program parameters are provided with a safe harbor from being covered. See, 12 CFR §1041.3(e). Third, accommodation loans are conditionally exempt so long as lenders did not originate more than 2,500 covered loans in a calendar year or did not derive more than 10 percent of their receipts from covered loans during the previous tax year. See, 12 CFR §1041.3(f).
Payment Transfer Provisions. Section 1041.9(b) requires credit unions to provide advance notice to members at least six days before its first attempt to withdraw payment or before an attempt to withdraw an unusual payment. Examples of unusual payments include: varying payment amounts, payments taken on a different day, or payments taken through a different channel. The notice must contain key information about the payment attempt, or alert the member to the unusual payment circumstances. A credit union is permitted to provide notices electronically as long as the member consents to electronic communications requirements. If provided electronically, the advanced timing requirement is shortened to three days.
Section 1041.8(b) establishes special payment provisions to prevent credit unions from making multiple attempts to withdraw payment from member's accounts in connection with a covered loan. The rule prohibits additional attempts after the credit union's second consecutive attempt to withdraw payments from the same account for which prior attempts were made and failed due to a lack of sufficient funds, unless the credit union obtains a new and specific authorization. The prohibition on further withdrawal attempts applies even in situations where different payment channels are used for each of the two failed attempts. See, 12 CFR §1041.8(b)(2)(iii). FWhen the prohibition has been triggered, the rule requires credit unions to provide a consumer rights notice to members under section 1041.9(c) and follow the procedures outlined in section 1041.8(c)(3) to obtain a new payment authorization for any future payments.
Recording Requirements. Section 1041.10 requires credit unions to furnish specific loan information at consummation to certain CFPB-designated “registered information systems” (RISs). While the loan is outstanding, credit unions are also required to provide RISs with timely updates to any information. Credit unions must also inform RISs when the loan ceases to be outstanding as soon as feasible. Credit unions making covered loans must also develop written policies and procedures appropriate to the size and complexity of the credit union and retain evidence of compliance with such policies for at least 3 years. See, 12 CFR §1041.12.
For additional information, the CFPB’s Small Entity Compliance Guide explains these requirements in further detail. NAFCU members may also find the following resources informative: