In light of the final decision in Consumer Financial Protection Bureau v. Community Financial Services Association of America (CFPB v. CFSA), the CFPB has announced that the “Payday Lending Rule” will go into effect on March 30, 2025. The Payday Lending Rule was initially set to become effective in 2019, but an injunction issued in the CFPB v. CFSA case delayed the rule until the case was finally resolved in June of 2024.
The payday lending rule will apply to short-term consumer loans with terms under 45 days, loans with balloon payments, and loans with a leveraged payment mechanism and an APR over 36%, but there are exceptions, including purchase money loans, certain mortgage loans, credit card accounts, student loans, and overdraft lines of credit. Loans that meet certain “alternative loan” criteria may also be exempt. There are also exemptions for lenders that make less than 2,500 covered loans per year and do not derive more than 10% of receipts from covered loans.
For loans that are covered by the rule, however, there are restrictions on how payments may be taken. If a bank has made two unsuccessful attempts at payment transfers, additional attempts would be considered an unfair and abusive practice unless the bank obtains a new authorization from the consumer. This restriction applies to all payment methods, so it would include redepositing a check, charging a debit card, or initiating an ACH transfer. If the payment is being pulled from an account at the bank, additional transfer attempts would not violate the rule as long as the bank does not charge the consumer a fee for insufficient funds and the bank does not close the account due to a negative balance that results from the payment.
There are also notices that the bank must provide to the consumer under the Rule:
- First payment withdrawal notice. The bank must notify the consumer prior to initiating the first payment withdrawal from a consumer’s account.
- Unusual payment withdrawal notice. The bank must notify the consumer before initiating a payment in an unusual amount, on an unusual date, through an unusual payment channel, or for the purpose of re-initiating a returned transfer.
- Consumer rights notice. The bank must notify the consumer of certain rights after the bank has initiated two consecutive failed payment transfers.
In advance of the new effective date, institutions will want to make sure they have determined the extent to which it may apply to loan products that they offer, update procedures to ensure compliance, and ensure that the bank is prepared to send required notices to consumers.
As always, the advisors on the Compliance Hotline are available to answer any questions you have about these requirements.