This content was published prior to the combination of Dentons Sirote. Learn more about Dentons Sirote. 

Remember 2017? Seems a long time ago. In the waning days of 2017, the Consumer Financial Protection Bureau (CFPB) issued its final rule on Small Dollar Lending—the Payday, Vehicle Title, and Certain High-Cost Installment Loans Final Rule. The Rule, which had been in the works since the Obama Administration, was designed to rein-in payday loans, title pawn loans, and balloon loans with Annual Percentage Rates of 36% or more.  

Consumer finance companies were rightfully concerned about being included in the mix with vehicle title loans and payday loans.  After all, traditional installment loans (TILs) made by consumer finance companies are (i) fully amortizing loans with equal installment payments (ii) underwritten (iii) made for customers who have the ability to repay (iv) and based on repayment with a clear pathway out of debt. TILs show with clarity precisely when the loan will pay out based upon the payment schedule. 

Also, consumer finance company customers build their credit record because companies report to credit bureaus.  This encourages both responsible borrowing and responsible lending.  Another hallmark of installment lending is that TILs have no prepayment penalties; and such loans are transparent, making them the safest loan product for consumers.

All of this is to say that there is a fundamental difference between installment lending and payday loans/title pawns.

The last version of the Small Dollar Loan Rule that has been published omitted TILs from the basic application of the Rule with one glaring exception:  If a 36% APR loan allowed for a “leveraged payment mechanism” for repayment, then the loan is subject to the Rule.  So, the definition of leveraged payment mechanism has been the subject of much scrutiny.  

Requiring the customer to pre-authorize an ACH payment is one example of a leveraged payment mechanism that may bring a TIL within the Rule.  Based on the definition of “single immediate payment transfer at the consumer’s request,” a voluntary but continuing ACH authorization given to a consumer finance company also will not meet the exception.

I raise all of this with you again because there is “talk” that the court ordered stays blocking the final rule may soon be resolved. So, it is time to get ready.

Practice Pointer #1:  To stay far away from the world of making “covered longer-term” loans, remove any reference from the loan contract to any right of the creditor to demand/require a leveraged payment mechanism. Consider even adding self-serving language that the creditor does not and will not require such.  

Practice Pointer #2:  Consider creating a separate form to address a consumer’s single immediate “request” directed to you from time-to-time, for an ACH transfer, when and if that is to happen.  

Practice Pointer #3:  You probably may advise the consumer that he/she may voluntarily choose to set up an auto-payment feature through his/her own bank, if that is the consumer’s desire—not required by you.