In July 2020, the Consumer Financial Protection Bureau (“Bureau”) finally finalized the rule governing payday loans, vehicle title, and certain high-cost installment loans (“Small Dollar Rule”). . The rule, originally proposed in 2016, has seen a wild ride – from its “finalization” in 2017 to the repeal of substantial sections in 2020, including mandatory underwriting provisions. As a result, all that remains are the “payment arrangements”.
The payment provisions impose requirements regarding payment attempts – in particular, prohibiting subsequent payment attempts following a second consecutive payment transfer failure without re-authorization. The Rule also requires finance companies providing secured loans to send three different types of payment advices to borrowers.
While compliance with the Small Dollar Rule is currently on hold pending the outcome of a dispute between a trade association and the Bureau, finance companies may be required to comply with the Small Dollar Rule soon.
So what does this mean for you? Below are five key questions you need to consider when creating a Small Dollar Rule compliance plan.
The Small Dollar Rule covers three categories of loans: (1) short-term consumer loans with terms of 45 days or less; (2) long-term lump sum consumer loans; and (3) longer term consumer loans that exceed 45 days with a rate greater than 36% APR in which the lender obtains a leveraged payment mechanism. A lender or service provider gets a leveraged payment mechanism if they have the right to transfer money from a consumer’s account.
- Some retail installment sales are covered
Among other exclusions, the Little Dollar Rule includes an express exemption for “certain purchase money loans”, defined as “”[c]the extended repayment in the sole and express of financing the initial purchase of a good by a consumer when the credit is secured by the good purchased, whether or not the security is perfect or registered. The dollar rule and its official interpretations do not focus on the legal distinctions between retail installments and loans, but rather appear to deal with all transactions such as “loans.”
Therefore, the dollar rule will apply to retail transactions that meet the definition of a covered loan and are not used solely and expressly to finance the initial purchase of a good by the consumer (i.e. i.e. including an ancillary product). Under the Rule, a loan is made only and expressly to finance the initial purchase of a good by the consumer, even if the amount financed includes federal, state or local taxes or amounts to be paid under. applicable federal and state licensing and registration requirements. Adding any other service or amount, such as insurance or a waiver of guaranteed asset protection, will make the transaction fall under the Rule.
- Payment attempts – Key terminology
The remaining provisions of the Small Dollar Rule impose requirements on attempted payments on covered loans. Businesses should be familiar with several terms of the Rule to understand the specific requirements and prohibitions regarding attempted payments, such as “first failed payment transfer”, “second consecutive failed payment transfer” and “unusual withdrawal”. Understanding these terms will be essential in developing an effective compliance plan. In addition, although the definitions may appear straightforward in some cases, there are several nuances that must still be taken into account when applying these terms. Legal counsel can help you navigate these nuances.
- Obtaining electronic consent
The Rule requires finance companies to obtain consent before they can provide the required notices electronically. Your business is probably already getting E-Sign consent during the origination phase. However, the electronic consent required under the Small Dollar Rule differs from that required under the E-Sign Act. Finance companies must ensure that any consent used meets the requirements of the E-Sign Act and the Small Dollar Rule.
The Rule does not expressly impose requirements on the terms of payment authorizations that finance companies may use in their transactions. However, businesses should consider whether their payment authorizations need to be revised to more adequately address the concepts covered by the Rule. For example, the Small Dollar Rule limits the number of payment attempts a business can make, which may differ from the number currently allowed by applicable law as well as the rules of the National Automated Clearing House Association. Ensuring that your payment authorization complies with the dollar rule could help your business reduce some of the potential risks associated with allegations of unfair or deceptive acts or practices.
The small dollar rule requires finance companies to provide borrowers with three types of notices: (1) a first payment withdrawal notice; (2) an unusual withdrawal notice; and (3) an opinion on consumer rights. The Rule provides model templates, which should be followed primarily as the Rule provides a safe harbor for those who use such forms.
Finance companies should also be familiar with the triggers for each of the three notices in order to provide the correct notice to the consumer in each set of circumstances. For example, an unusual withdrawal notice should be sent if the upcoming payment transfer will vary in amount from the previous payment transfer, the upcoming transfer will be initiated on a date other than the date of a regular payment, the transfer payment will be initiated through a different payment channel than the previous payment, or the payment transfer is intended to restart a returned payment transfer. It can be difficult to understand the specific triggers for various opinions, but knowledgeable legal counsel can help you understand what advice is required and when.
Making sure your business understands these topics will help your business begin the process of establishing an effective plan to comply with the Little Dollar Rule. And while the precise date you will need to comply is still in the hands of a federal court in Texas, the countdown is on and the time remaining to put a plan of action in place is ticking. Make sure you tackle these five key topics before the clock hits zero.
 The court recently lifted the stay of the litigation itself. The parties to the case can now proceed with filings and other matters. However, the requirement to comply with the Rule itself continues to be suspended.