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.

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.

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. 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.

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.

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:
ment 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.

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.

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."

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.

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.)

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.

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 dynamic templates. The rest of section 3 will go over the specific notifications and their requirements.

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).

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.