CFPB Small-Dollar – Next Steps

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

This article gives specific information about the updated Consumer Finance Protection Bureau (CFPB) Small-Dollar Rule, which goes into effect on June 13, 2022. This is a deep-dive, so if you're unfamiliar with the rule, you may want to start with our article CFPB Small-Dollar Basics. Additionally, we have a whole separate article about What Loans Does the CFPB Small-Dollar Rule Apply to?

This article summarizes the main points of the Small-Dollar rule and explains the LoanPro features that can help lenders comply. However, the very act of summarizing means we're taking out details, so this is by no means an authoritative guide. We encourage you to consult with your legal team to ensure you stay in compliance with the rule.

The information in this article was pulled from the CPFB's interactive regulations for Title XII of the US Code of Federal Regulations § 1041. Although it's official name in the US Code is Final Rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans, that's a bit of a mouthful. People have taken to calling it the Small-Dollar Rule, the Payday Rule, the Final Rule, the Revised Final Rule, and a few others, but in this article we'll stick to 'the Small-Dollar Rule' or just 'the rule'.

Small-Dollar Rule Requirements

There are three primary things that the small-dollar rule requires:

  1. Consecutive Failed Payments: Reauthorization of the use of a payment profile after consecutive failed payment attempts
  2. Required Notices: Sending of notices when specific events surrounding payment attempts occur
  3. Compliant Record Keeping: Keeping records of payment profiles and the history of payment attempts in a compliant way

LoanPro Small-Dollar Rule Solutions

  1. Safeguards against submitting payments that will fail and tracking of failed payment attempts
  2. Automated communication of notices
  3. Compliant document storage and record keeping

LoanPro doesn't completely implement these solutions by default, but the sections below will go over what the new small-dollar rule says, and how to configure LoanPro to help you with compliance.

Requirement 1: Consecutive Failed Payments

The rule requires reauthorization by the borrower of the use of a payment profile after consecutive failed payment attempts.

What the Rule Says
Lenders must get a written reauthorization to use a payment profile (i.e. a specific card or bank account) if two consecutive unsuccessful payment attempts are made with that profile. Many companies and legal minds have interpreted this to include both bank accounts and debit cards.

The purpose of this is to prohibit attempting to charge an account that has repeatedly lacked funds (see §1041.8(b)), so borrowers don't continue to receive overdraft fees on their accounts. If a payment profile has two consecutive transactions fail because of insufficient funds, a lender is legally restricted from trying that payment profile again unless and until they get reauthorization from the borrower. The restriction takes effect as soon as the lender or their agent (such as a payment processor) receives notice of a second failed payment.

Note that the rule's two consecutive failed payment criteria are met when there are any failed transactions using the payment profile for a loan covered by this rule. This means that if a borrower has multiple covered loans with the same lender, which use the same payment profile to make payments, the requirement is triggered by any two consecutive failed payments on that payment profile, even if the payments failed for two different covered loans. It does not, however, include any failed payments for loans not covered under the rule.

The best way to comply with the consecutive-payments portion of the rule is to avoid consecutive failed payment attempts. This may not always be possible, so it is also important to have a way to detect failed transactions for a payment profile.

The easiest way to avoid consecutive failed transactions is never to submit a transaction that will fail. This may not seem helpful, but lenders usually have an understanding of their customers, and some information on payment history. If you have used a payment profile in the past that has a high failure rate, think twice about attempting a payment using that profile. Use information you have to set up pre-scrubbing to avoid submitting high-risk transactions. If possible, keep multiple payment profiles on file for problem accounts.

Solution: LoanPaymentPro Pre-Transaction Verification

This feature lets you verify that funds are available for a debit card transaction before you attempt to process a payment. Here are the steps you need to take to use this feature.

  1. If you haven't already, sign up to use LoanPaymentPro as a payment processor. You can start the signup process using the form here.
  2. Create a Secure Payments LoanPaymentPro bank card processor.
  3. Turn on the pre-transaction verification feature.
Configuration Details
Our article LoanPaymentPro's Pre-Transaction Verification gets into the details and explains how to turn this feature on.

Lenders who use LoanPaymentPro (LPP) as a payment processor can choose to enable a pre-transaction verification. While LPP can process both ACH and bank card transactions, this option only works for card transactions. This option sends out a verification prior to each transaction that ensures there are sufficient funds in an account before any withdrawal attempts are made. This verification double-checks the borrower's account information and will prevent you from trying to pull funds if they aren't there. If funds are present, the payment will be completed. You won't have to worry about failed payment attempts, and your borrowers will appreciate that they aren't getting hit with overdraft fees.

Solution: NACHA Multiple Returns

This features keeps track of failed payment attempts and lets you specify what to do when failures happen. This feature only works with NACHA payments. Here are the steps you need to take to use this feature:

  1. Configure the LMS Multiple Returns Feature.
  2. Process payments through a Secure Payments NACHA processor.
  3. Upload the returns file from the batch of payments to Secure Payments.
Configuration Details
If you process payments through NACHA, failed transactions will be returned along with return codes indicating why payments failed, such as insufficient funds, an invalid bank account number, or the account being closed. In LMS, our Multiple Returns tool lets you use those return codes as triggers for automated responses.

You can set up a rule-based action in Multiple Returns that will inactivate a payment profile the instant you receive two consecutive returns. You could even set it to inactivate the first time you receive a failed return in order to avoid getting a second consecutive return in the first place. If you do end up receiving two consecutive failed returns, you can also set up a trigger based notification that will automatically send the required Consumer Rights Notice (covered below in 3.5). These two actions can even be linked by setting the multiple returns action to send a loan to a specific portfolio that is tied to a trigger based notification.
If you don't use LoanPaymentPro or NACHA Multiple Returns, we encourage you to speak with your payment processor to see what they can do to help you track or avoid consecutive failed payments.

Requirement 2: Required Notices

The new rule requires companies to provide their borrowers with notices under three different circumstances:

  • The first withdrawal made by the lender
  • Anytime the payment is considered 'unusual'
  • When two consecutive failed payments occur.

All of these notices must be formatted according to the Small-Dollar Rule's specifications.

Small-Dollar Rule Disclosure Specifications
The Small-Dollar Rule specifies that all disclosures must meet specific criteria (see §1041.9(a)). Some of the criteria are common sense; the communication has to be clear and conspicuous, with the location and font readily noticeable, and the message needs to be readily understandable. It also needs to be

Delivered in writing, whether it is physically or electronically, in a retainable form. A retainable form is either a physical copy, or a digital copy that can be saved, downloaded, or emailed.

Segregated from any other communication. (This means that other information cannot appear above, below, or around the notice. It can, however, appear in a separate sheet of paper or a separate webpage.)

Available in English upon request, but can be sent in a language other than English.

Electronic Disclosures

In order to send disclosures electronically, the lender must obtain the borrower's written consent. Lenders are also required to have an available email option, separate from mobile apps or text messages. A borrower's consent to receive electronic disclosures can be revoked by the borrower at any time through any means of communication, including: phone call, mail, text message, email, or an 'unsubscribe' link. Consent is also revoked if the lender finds out that the borrower is unable to receive disclosures through that method. (If there is a bounced email notice, a message from the borrower indicating that they can't access the communication, etc.) Finally, disclosures must be machine-readable; in other words, they must use machine-readable text that is accessible via both web browsers and screen readers.

Consent must be obtained for each method of electronic delivery, and borrowers must be given the option to select a particular method of electronic delivery. A checkbox during a borrower's origination process can count as written consent.

Sending Electronic Short Notices Through SMS or other Applications
If a lender chooses to send a disclosure through a mobile app or text message, an Electronic Short Notice is required ( see §1041.9(b)(4)). The short notice is basically a way to send basic information included in the notice with a link to a retainable form. If the notice is delivered by email, an electronic short notice is not required as long as the full notice is delivered in the body of the email. If an emailed notice is provided as an attached PDF or linked URL, the electronic short notice is required and needs to be provided in the body of the email. All electronic short notices need to contain the following information:

- Identifying statement

- Transfer terms (including the date, amount, and borrower account)

- Website URL (linking to the full notice)

And just like the full notices, an electronic short notice sent in regards to an unusual withdrawal needs to explain what makes the withdrawal unusual:

- Varying amount

- Date other than the regularly scheduled date

- Different payment channel

An electronic short notice for consumer rights notice (see §1041.9(c)(4)(i)) also requires additional information, including:

- Statement that the last two withdrawal attempts were returned

- Borrower account information

- Statement of Federal law prohibition

There are not any requirements for what order this information needs to be displayed in for the electronic short notice.

First Payment Withdrawal Notice

A lender is required to give a First Payment Withdrawal Notice (see §1041.9(b)(2)) after they obtain payment authorization (the information needed to withdraw the payment), before the first withdrawal. If a borrower provides a first payment in cash or a single immediate payment transfer, the First Payment Withdrawal Notice will not be given until authorization for a withdrawal is made for the first time. Once the First Withdrawal Notice has been given, the lender does not need to do so again even if the borrower makes an unscheduled intervening payment.

Specifics about how to create this notice can be found here.

When should the notice be sent?
The earliest point that a lender can provide the First Payment Withdrawal Notice is when the lender first obtains the payment authorization (the information to withdraw the payment). The latest the notice can be given is dependent on whether the notice is sent by mail or electronically. The notice can be sent one of three ways:

In Person – Notice must be provided no earlier than when the lender obtains the payment authorization and no later than 3 business days prior to initiating the transfer.

Mail – Notice must be sent (placed in the mail) at least 6 business days before the withdrawal.

Electronic Delivery – Notice must be sent 3 business days prior to initiation of the transfer.

Unusual Withdrawal Notice

Notice must be of unusual withdrawals (e.g. withdrawal on a date other than the scheduled payment date), prior to attempting the transaction.

Specifics about how to create this notice can be found here.

When is a withdrawal considered unusual?
A withdrawal is considered unusual (see §1041.9(b)(3)) in the case of:

Varying Amounts – If the withdrawal will be for an amount different from the regularly scheduled payment, the notice will need to include both the amount of the payment and whether it's greater or lesser than the norm.

Varying Dates – If the payment comes on a date that isn't part of the regular schedule, the notice should include the date for the payment.

Different Payment Channel – If you're using a payment method different from the one used in the previous payment (i.e., a different payment profile,) this notice will note that you're processing it through a different method.

Re-Initiating a Returned Transfer – If you're retrying a failed payment, this notice should include "the date and amount of the previous unsuccessful attempt, and a statement of the reason for the return."
When should the notice be sent?
The timing of the notice varies based on how it is delivered.

In person – If the notice is provided in person, it should be provided no earlier than 7 business days and no later than 3 business days prior to initiation of the transfer.

Mail – If the lender sends the unusual withdrawal notice by mail, it must be mailed no earlier than 10 business days and no later than 6 business days prior to initiation of the transfer.

Electronic Delivery – If the lender sends the unusual withdrawal notice through electronic delivery, the notice must be sent no earlier than 7 business days and no later than 3 business days prior to initiation of the transfer.

Consumer Rights Notice

The Consumer Rights Notice (see §1041.9(c)) is required any time that the lender has initiated two consecutive failed payment transfers from a consumer's account. The lender is prohibited from initiating any further payment transfers until further authorization has been obtained (see section 3.5.2 for requirements). A payment transfer is deemed to have failed when it results in a return indicating that there are insufficient funds.

Specifics about how to create this notice can be found here.

Account Holding Institutions
If the lender is the consumer's account-holding institution (such as a banking institution that holds both the borrower's checking account and loan account), a payment transfer is deemed to have failed any time the account lacks sufficient funds to cover the payment amount. (This means the lender doesn't need to receive a return stating the account lacks sufficient funds in order for the notice to become a requirement if the account lacks sufficient funds for two payments in a row.)
When should the notice be sent?
The requirement is triggered anytime information is provided to the lender or its agents that a second consecutive payment transfer has failed. The lender must send the notice no later than 3 business days after the second consecutive payment transfer has failed. This timing applies regardless of the method of sending the notice (by mail or electronically).

The lender cannot request authorization for additional payment transfers until the Consumer Rights Notice has been sent. A lender can send a request one of three ways:

Through letter communication (by sending it in the mail or giving it in person)

By email (if the borrower has given written consent)

By phone call (this only applies if the consumer contacts the lender in response to the consumer rights notice and agrees to receive the terms and statement in that same phone call). A retainable form must be sent if authorization is received by phone call.

Take another look at Requirement 1 for information on how to prevent and track consecutive failed transfers.

If you obtain authorization to initiate a payment transfer after two consecutive failed payments, an additional Unusual Payment Notice does not need to be sent even if the payment meets the criteria for an unusual payment.

Solution: LoanPro Notification Solution

LoanPro LMS has a notifications feature that will let you set up each required notification, so that the notification will be sent out automatically at the correct times. This CFPB Small-Dollar Rule Templates article will instruct you on how to implement these template notifications. You can also contact our Support team if you need assistance.

How LMS Automated Notifications Work
Since there are specific criteria that need to be met in regards to the templates and formats used for each of these notices, LoanPro has prepared forms that follow the rule's safe harbor templates. Every lender is able to access these notification forms in CFPB Small-Dollar Rule Templates. The process of sending the notifications can also be automated through the LMS trigger-based notifications feature. You can set your triggers to automatically send the notifications in the required time frame by mail, email, or text message (see electronic short notice requirements in section 3.6). Once these trigger-based notifications are set, you never need to worry about compliance to notification requirements because the process will be completely automated.

If you don't want the process to be completely automated, you can also use trigger-based notifications within the system to notify your agent user, and you have the option to create your own notification templates through custom forms. The rest of section 3 will go over the specific notifications and their requirements.

Requirement 3: Compliance & Record Keeping

Compliance Program

Lenders are required to create a compliance program by developing written policies and procedures (see §1041.12(a)). The purpose of this compliance program is to provide guidance to lenders' employees on how to comply with the requirements; as such, the procedures and policies need to be appropriate for the size and complexity of the lender and its affiliates, as well as the nature and scope of their covered lending activities.

Record Keeping

There are a few considerations related to Small-Dollar Rule record keeping. All records related to the loan, including transaction history and authorization, need to be kept for the entire life of the loan and at least 3 years after the loan is no longer outstanding, and there are some documents that need to be retained specifically in tabular format.

What is tabular format?
Tabular format means that the "individual data elements comprising the record can be transmitted, analyzed, and processed by a computer program, such as a widely used spreadsheet or database program. Data formats for image reproductions, such as PDF, and document formats used by word processing programs are not tabular formats" (§1041.12(b)(5) interpretation).

Record-Keeping Details
In order to keep evidence of compliance, lenders must retain documentation for 36 months after the date when a covered loan ceases to be an outstanding loan (see §1041.12(b)).

Records that must be retained physically or by reproducible image:

- Loan agreements for each covered loan
- Leveraged payment mechanisms (bank accounts, bank cards)
- Authorization of additional payment transfer
- Underlying one-time electronic transfer authorization or underlying signature check

Records that must be retained electronically in tabular format:
- Date payment was received or payment transfer was attempted
- Amount of payment due
- Amount of attempted transfer
- Amount of payment received
- Payment channel used for attempted transfer

Anytime authorization is obtained by phone call, a recording of the call must be kept.

Solution 1: AWS S3 Document Storage

One way that LoanPro helps you to stay compliant is through AWS S3 Document Storage. The S3, or Simple Storage Service, is where LoanPro will put any uploaded documents for long term storage, and it is ideal for record retention. All of your records can be retained compliantly for as long as you remain a customer of LoanPro; that goes for the documents that need to be in tabular format, too. As long as documents are uploaded in the correct format, you'll never need to worry about your compliance in regards to record keeping. Additionally, the S3 is easily accessible and well organized.

Solution 2: Audit Trail

LMS automatically keeps many records. The primary features that show transaction and historical records are system notes and historical loan archives, which together form a detailed audit trail. Through the system notes, a lender can track all actions taken within the system, including:

  • which user performed the action
  • the IP address where the action was performed
  • the time and date the action was taken
  • what the action was
  • what the action specifically did
  • which entity the action was performed on

The historical loan archives, on the other hand, keep a log of specific account information each day that an account exists, which includes any custom fields a lender elects to include.

These features are always running within the system and available for you to access.


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