I. INTRODUCTION
The Consumer Financial Protection Bureau (CFPB) has issued a final rule on Small Dollar Lending. The final rule exempts small dollar accommodation loans made by many banks. For banks that exceed the thresholds for this exemption, the final rule preserves the ability of these banks to offer installment loans of 46 days or more.
The final rule identifies the following practice as unfair and abusive: absent express consumer authorization, making attempts to withdraw payments from consumers’ accounts after two withdrawal attempts have failed.
In a related move, the Office of the Comptroller of the Currency repealed its Guidance on bank Deposit Advance Products, however, the FDIC Guidance remains in effect.
The Final Rule became effective on January 16, 2018. The compliance date for all provisions of the rule with the exception of section 1041.11 (Registered Information Systems) is November 20, 2020. The deadline to submit an application for preliminary approval for registration pursuant to section 1041.11(c)(1) is April 16, 2018.
II. SCOPE (COVERED LOANS)
The final rule covers three types of loans:
III. EXEMPTIONS
The final rule completely exempts any bank that made 2,500 or fewer covered loans in each of the current and preceding calendar years if the bank derives no more than 10% of its receipts from those loans. (accommodation loan exemption)
The final rule also completely exempts certain types of credit, including non-recourse pawn loans, overdraft services and overdraft lines of credit, wage advance programs, no-cost advances, and so called “payday alternative loans” (a covered loan that is closed-end, has a term from one to six months, in an amount of $200 to $1,000, repayable in two or more amortizing payments that are substantially equal in amount and due in substantially equal intervals, for which the lender generally does not impose any charges other than the rate and permissible application fees, the consumer must not be indebted on more than three such loans within a 180-day period, and no more than one at a time, and the lender must maintain and comply with policies and procedures for documenting proof of recurring income).
IV. REPORTING REQUIREMENTS
For short-term loans and longer-term balloon-payment loans, the final rule also requires lenders to furnish information about the loan to a “registered information system” at loan consummation, during the period that the loan is outstanding, and when the loan is paid off. A lender is also required to retain the loan agreement and other documentation and origination calculations in the format of “electronic records in tabular format.”
V. PAYMENT RESTRICTIONS
The final rule seeks to curtail repeated debits from an account – and the assessment of repeated NSF fees – by prohibiting the withdrawal of payment from an account after two unsuccessful withdrawal attempts unless the lender obtains the borrower’s authorization for additional debits to the account. The lender must provide notice to the borrower when this prohibition has been triggered and follow certain procedures in obtaining new authorizations.
The final rule requires lenders to provide a written notice to each customer, (i) a certain number of days before its first attempt to withdraw payment for a covered loan from a consumer’s account, (ii) before an attempt to withdraw such payment in a different amount than the regularly scheduled payment amount, (iii) on a date other than the regularly scheduled payment date, (iv) by a different payment channel than the prior payment, or (v) to re-initiate a returned prior transfer. This written notice must contain key information about the upcoming payment attempt and, if applicable, alert the consumer to unusual payment attempts. A lender is permitted to provide electronic notices as long as the consumer consents to electronic communications.
This provision applies to a broader set of loans than are subject to the ATR requirements described above: it applies to longer-term installment loans where the APR – as calculated under Regulation Z – exceeds 36% and the bank obtains a leveraged payment mechanism over the account, in addition to short-term loans and longer-term balloon-payment loans.
However, the rule exempts from this provision attempted withdrawals by financial institutions and other lenders that hold the consumer’s account from which the transfer is attempted, if, pursuant to the financial institution’s loan or account agreement with the borrower, the institution does not charge the borrower an NSF or overdraft fee for the attempted withdrawal.