CFPB Small-Dollar Rule Basics

As of 10/19/22, the United States Court of Appeals for the Fifth Circuit has ruled that the Consumer Financial Protection Bureau is in violation of the constitution and invalidated the Small-Dollar Rule, though this decision is likely to be appealed.

Introduction

You may be familiar with the Consumer Financial Protection Bureau's (CFPB) new rules on small-dollar loans, which go into effect June 2022. This article will cover some of the basics: Who it affects, what it requires, and how LoanPro can help you stay compliant. This will be a high-level overview; for more info, you'll want to see our articles What Loans Does the CFPB Small-Dollar Rule Apply to? and CFPB Small-Dollar – Next Steps.

Disclaimer: This article and the articles linked to it are the result of our research of the CFPB Small-Dollar Rule. It does not constitute legal advice.

The New Small-Dollar Rule

Because of its thorny legal history, there is some confusion surrounding the Small-Dollar Rule. In 2017, the original rule was established, consisting of mandatory underwriting requirements and provisions on withdrawing payments from borrowers' accounts. In 2020, the Supreme Court overturned parts of the rule, and later that year, the CFPB released a revised Final Rule that removed the mandatory underwriting provisions. This new rule, which takes effect in June 2022, still includes provisions on payments and customer communication.

What loans are subject to the Rule?

"Small-dollar" or "payday loans" are hazy terms, where different states have different definitions. The CFPB's new Small-Dollar Rule, however, specifies which loans it regulates. There are three categories:

  1. Short-term consumer loans with a term of 45 days or less.
  2. Longer-term consumer loans with a 'balloon' payment. (A balloon payment is at least twice the amount of any other payment, or a single payment that covers the entire balance of the loan.)
  3. Longer-term consumer loans with an APR above 36%, where the lender can initiate transactions.

For more info on those definitions, and some exceptions, check out our article What Loans Does the CFPB Small-Dollar Rule Apply to?

What does the new rule do?

The new provisions rule prohibits lenders from making new attempts to withdraw funds from an account where two consecutive attempts have failed, unless consumers consent to further withdrawals. It also requires lenders to provide consumers with written notice before making their first attempt to withdraw payment from their accounts and before payment attempts that involve different dates, amounts, or payment channels. The small-dollar rule will apply to retail installment transactions that meet the definition of a covered loan.

Requirements

LoanPro Solutions

After two consecutive failed payment attempts, the lender is required to get new authorization from the borrower.

The best strategy for complying with the rule is to simply avoid failed transactions for insufficient funds in the first place. For that, we recommend our integrated payment processor LoanPaymentPro. With its pre-transaction verification, you will never be in danger of any failed payment attempts. This verification double checks that there are funds in the borrower's account before actually charging them.

If you can't prevent those failed payments, the next best solution is an automated system that stops future payment attempts. NACHA has a built-in-system that can automatically prevent payment attempts when more than one payment has failed. NACHA notifies you of any failed payment attempts which informs you if you can charge that same account again.

The rule requires lenders to communicate with borrowers about specific loan events, such as unusual withdrawals and consecutive failed payments.

The best strategy for sending out tons of communications to borrowers is using trigger-based notifications that are sent out automatically — you can set it and forget it. When setting up these notifications, you get to define what specific events will trigger notices going out to customers. The notifications will be sent out every time the system detects an unusual withdrawal when an account is past due, upcoming payments, etc.

For the entire life of the loan and 36 months after it closes, a lender must keep a record of the loan agreement as well as borrower's payment accounts, authorizations, and individual payments.

You will never fail to keep record of any loan in LoanPro. All payments and loan information are going to automatically be saved in Amazon Web Services (AWS) as long as you're a LoanPro customer. This simple storage service in LoanPro will save any documents and loan information for an indefinite amount of time, even after the loan ends. Any loan that is created will be saved on record in the AWS long-term storage.

The rule requires lenders to develop and follow a plan designed to ensure their compliance.

The beauty of our solutions lies in the automation — with these safeguards properly implemented, the software can keep you compliant all on its own, with minimal additional work from your employees. Our historical archive and system notes keep a meticulous record of your agents' actions within the software, making it easy to audit your actions and ensure that you're in line with the rule.


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