Almost four years after the Consumer Financial Protection Bureau (CFPB) issued its last “Payday, Vehicle Title, and Certain High Priced Installment Loans” rule in November 2017, we finally have a fulfillment date – June 2022.
What is the payday rule?
The payday rule in its original form consisted of two main components. First, the payday rule for most short and long term balloon loans made it an unfair and abusive practice for a lender to issue such loans without performing a repayment capability analysis (mandatory underwriting provisions). Second, the payday rule for the same loans and for longer term loans with an APR greater than 36% repaid directly from the consumer’s account made it an unfair and abusive practice for a lender to attempt to withdraw funds from the account, after two consecutive unsuccessful attempts without a new and specific consumer authorization (payment terms). These attempts could include debit card payments as well, although debit card payments do not include the possibility of NSF fees.
What happened to the compliance date?
In 2018, a Texas federal district court postponed the initial mandatory subscription and payment compliance dates to August 19, 2019 while a lawsuit was pending. In 2019, the CFPB issued a final rule that postponed the entry into force of the payment terms to November 2020. In particular, the CFPB did not postpone the entry into force of the Mandatory Underwriting Regulations and in 2020 the CFPB issued a final regulation setting out the Mandatory Underwriting Regulations. So at the beginning of summer 2021, only the payment terms of the payday rule survived, the date of which remained until a legal dispute was pending.
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 the U.S. District Court for the Western District of Texas to challenge the payday rule. In their first lawsuit in April 2018, the trade groups alleged, among other things, that the payday rule exceeded the legal powers of the CFPB and called into question the constitutionality of the structure of the CFPB. According to the Supreme Court ruling of June 2020 in Seila Law v CFPB and the subsequent ratification of the payment terms by the CFPB, the trading groups amended their complaint to challenge the ratification of the CFPB.
How did the litigation end?
On August 31, 2021, the district court upheld the CFPB’s application for a fast-track judgment. The district court found that the payment terms were not void simply because they had been issued by an unconstitutional CFPB. The district court also found that the CFPB has not exceeded its powers in developing the provisions of the payday rule and that the payday rule is not arbitrary and arbitrary.
Although the district court granted the CFPB’s motion for a summary judgment, it has expanded a sort of olive branch to the industry. The CFPB had spoken out in favor of a settlement date of 30 days after the complaint had been settled. The trading groups, on the other hand, advocated 445 days (the original 21-month compliance period) or at least 286 days (the number of days remaining in the compliance period if the compliance date was suspended). The district court sided with the trade groups and ordered the fulfillment date 286 days after the final judgment. This adds up to a new fulfillment date of June 13, 2022. The trading groups have appealed the district court’s ruling, and authorities have filed a separate motion to suspend the 286-day compliance period pending resolution of the appeal.
What is that supposed to mean?
Well, in very simple terms, it means that the payment terms will come in June 2022. We warn that, despite the name, the payday rule applies not only to traditional payday loans, but also to the following loans:
- One-time closed-ended loans that are essentially repayable within 45 days;
- Closed, multiple advance loans, in which each advance payment is essentially repaid within 45 days;
- Closed single payout loans with a balloon payment of more than double another installment amount;
- Closed, multiple advance loans that are structured so that paying the minimum required payments may not fully amortize the outstanding balance by a certain date or time, and the amount of the final payment to repay the outstanding balance at that point 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 receives one leveraged payment mechanism if it has the right to somehow transfer money from a consumer’s account to meet a credit obligation.
This means that all types of lenders offering any of the products listed above must be ready for the payment terms by June 2022.