Almost four years after the Consumer Financial Protection Bureau (CFPB) published its last rule of November 2017 “on payday, vehicle title and certain high-cost installment loans” (payday rule), we finally have a compliance date – June 2022.
What is the pay day rule?
The payday rule, as initially finalized, had two main elements. First, for most short and long term loans with lump sum payments, the payday rule has made it an unfair and abusive practice for a lender to grant such loans without performing a repayment capacity analysis. (compulsory subscription provisions). Second, for the same set of loans and for longer-term loans with APRs above 36% and repaid directly from the consumer’s account, the payday rule made it an unfair and abusive practice for one. lender to attempt to withdraw funds from the account after two consecutive unsuccessful attempts without further specific authorization from the consumer (Payment Arrangements). These attempts could also include debit card payments, although debit card payments do not carry the possibility of NSF fees.
What happened to the compliance date?
In 2018, a Texas Federal District court suspended the August 19, 2019 initial compliance date of the mandatory underwriting provisions and payment provisions pending litigation. In 2019, the CFPB published a final rule, postponing the date of entry into force of the provisions on payments to November 2020. In particular, the CFPB did not delay the date of entry into force of the mandatory subscription provisions, and in 2020, the CFPB issued a final rule revoking the Mandatory Subscription Provisions. So, in early summer 2021, only the payday rule payments provisions survived, with their compliance date suspended, pending litigation.
In April 2018, the Community Financial Services Association of America and the Consumer Service Alliance of Texas (collectively, the Trade Groups) sued the CFPB in US District Court for the Western District of Texas, challenging the payday rule. In their initial action in April 2018, the Trade Groups, among other things, alleged that the payday rule exceeded the statutory authority of the CFPB and challenged the constitutionality of the structure of the CFPB. After the Supreme Court decision of June 2020 in Seila Law v. CFPB and the subsequent ratification by the CFPB of the payment arrangements, the Trade Groups amended their complaint to challenge the ratification of the CFPB.
How did the litigation end?
On August 31, 2021, the district court granted the CFPB’s summary judgment motion. The district court concluded that the payment provisions were not void simply because they had been enacted by an unconstitutionally structured CFPB. The district court also found that the CFPB had not overstepped its authority in crafting the provisions of the payday rule and that the payday rule was neither arbitrary nor capricious.
Although the district court allowed the CFPB’s summary judgment motion, it extended a kind of olive branch to the industry. The CFPB had argued for a compliance date of 30 days after the resolution of the lawsuit. Trade groups, on the other hand, have advocated 445 days (the initial 21-month compliance period) or, at a minimum, 286 days (the number of days remaining in the compliance period when the compliance date has been suspended) . The district court sided with the business groups and ordered the compliance date to be 286 days after the final judgment. This is in addition to a new compliance date of June 13, 2022. The business groups appealed the district court ruling and the agencies filed a separate petition to suspend the 286-day compliance period until the appeal is resolved.
What does all this mean?
Well, in very simple terms, that means the provisions for payments arrive in June 2022. We warn that despite the name, the Payroll Rule applies not only to traditional payday loans, but also to the following loans:
- Closed single disbursement loans to be repaid largely within 45 days;
- Loans of indefinite duration and multiple advances, where any advance must be substantially repaid within 45 days;
- Closed single disbursement loans with a lump sum payment of more than double any other disbursement amount;
- Open-ended and multiple loans structured so that payment of the required minimum payments may not fully amortize the outstanding balance by a specified date or time, and the final payment amount to repay the outstanding balance at that time could be more than double the amount of other minimum payments; and
- Loans with an APR of 36% (closed and open) and a leveraged payment mechanism.
- A lender or service provider obtains a leveraged payment mechanism whether he has the right to initiate a transfer of money, by any means, from a consumer’s account to meet an obligation on a loan.
This means that all types of lenders offering any of the products listed above must be ready for payment arrangements by June 2022.