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

This blog is titled “Back to Basics” for a reason.  It is designed as a discussion of the everyday, important laws, regulations, policies and practices that directly impact installment lenders and credit sellers.  The CFPB’s poorly-named “Payday, Vehicle Title, and Certain High-Cost Installment Loans” Rule,” is a proposed regulation that has been hanging over the industry for years.  It has resurfaced.  And, it is time once again to focus on it.

My primary focus for the years that I have been talking about this Rule has been to explain to creditors how not to become subject to it. Certainly, the latest version of it, released two weeks ago, has made compliance with the Rule simpler for those subject to it. However, for installment lenders and credit sellers, the best strategy can still be to avoid this regulation entirely by not making “covered loans.” Accordingly, this blog does not discuss complying with the Rule—rather I discuss avoiding becoming subject to it.

For traditional installment lenders and credit sellers, it is not difficult to avoid being subject to the Rule.  Generally, installment lenders and credit sellers are not offering the types of financing that the Rule is designed to regulate.   However, if an installment lender or credit seller uses a “leveraged payment mechanism” in connection with a traditional credit loan/sale, then the creditor may indeed become subject to the regulation.  So, the definition of “leveraged payment mechanism” becomes exceedingly important to this discussion.

A “leveraged payment mechanism” in a consumer transaction exists if a creditor “has the right to initiate a transfer of money, through any means, from a consumer’s account to satisfy an obligation on a loan, except that the lender or service provider does not obtain a leveraged payment mechanism by initiating a single immediate payment transfer at the consumer’s request.”

There has been considerable discussion over the meaning of the last phrase—"initiating a single immediate payment transfer at the consumer’s request.”  My understanding is that if a creditor can “pull” funds—e.g. transfer from a consumer’s account by means of a check, an ACH, or a remotely created check without the consumer taking further action—then the creditor enjoys a leveraged payment mechanism.  However, if the consumer must “push” funds by using his or her bank’s online banking services or by giving a single, immediate instruction to the creditor to “pull” funds, then that is not a leveraged payment mechanism. “Immediate” is defined to mean within one business day of receipt of a consumer’s authorization for a one-time transfer.

The effective date of the Rule remains in limbo because of litigation.  However, with the CFPB’s newly released final rule that rescinds the mandatory underwriting provisions of the previous 2017 Rule (which was the fundamental objection of payday lenders leading to such litigation), it seems likely that the Rule will soon become effective.

Practice Pointer:  If you have not already done so, review your contracts to make certain that you do not enjoy the right to “pull” funds from a customer; and if so, let’s discuss a fix.

Please note: This is the one hundred seventeenth blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.