The Consumer Financial Protection Bureau's payday lending rule is going into effect, eight years after it was finalized.
The rule is a critical test of whether CFPB officials in the Trump administration will try to rescind the rule entirely, extend the compliance date or provide an exception to specific industries such as buy now/pay later providers. The compliance date is Sunday.
"It's been quite a saga and it's amazing that it's taken so long to get to this point," said Richard Cordray, the CFPB director who promulgated the rule in 2017. Cordray's original ability-to-repay underwriting standards were
He expressed uncertainty about the rule finally being implemented. "I'll believe it when I see it," Cordray said.
If implemented, the payday rule would be the first federal regulation of short-term small-dollar loans, vehicle title loans and certain high-cost installment loans. The CFPB could still consider making a last-minute change to accommodate so-called BNPL transactions, which are instantaneous loans provided at the point of sale that are paid off in installments.
Under the payday rule's payment provisions, lenders must give consumers a "first payment withdrawal notice" at least three business days before the first attempt to withdraw funds from a consumer's account. That requirement does not fit with the BNPL industry.
"We are very hopeful that the bureau will act expeditiously on the payday lending rule to grant the exception for buy now pay/later loans," said Ian P. Moloney, senior vice president and head of policy and regulatory affairs at the American Fintech Council. "The payday lending rule in its form that stands now was intended to limit the activities of payday lending and does so in a very functional manner to ensure that responsible actors should be able to operate in that space — not related to BNPL."
In February, acting CFPB Director Russell Vought instructed the bureau to delay any new rules. But the payday rule has already been through a
[Separately, the CFPB said this week that it
Adam Rust, the director of financial services at the Consumer Federation of America, said that since the rule was stripped of the ability-to-repay requirement in the first Trump administration, the CFPB would have to provide specific details and a strong rationale to stop the rule at this late date.
"The compliance date starts on March 30th, and unless they make an announcement to the contrary, the expectation is that the rule applies to new loans," Rust said.
Mark Calabria, who has been serving as a senior advisor at the CFPB on detail from the Office of Management and Budget, has been fielding questions about the payday rule from industry trade groups. He serves as an advisor to Vought, who is also the director of the Office of Management and Budget. Calabria is guiding the CFPB until Jonathan McKernan, a former director at the Federal Deposit Insurance Corp., gets confirmed by the Senate. Senate scheduling is tight, and some experts suggest McKernan could be confirmed by April 20.
Andrew Duke, CEO of the Online Lenders Alliance and a former policy associate director at the CFPB, said the payday rule holds small dollar lenders to a stricter payment standard than any other industry.
In addition to sending the consumer what the rule calls a "first payment withdrawal notice," the rule requires other notices intended to protect consumers from harm associated with lenders' payment practices. Lenders must send an "unusual payment withdrawal notice" if a consumer's account is tapped after two consecutive failed attempts. For a third attempt, lenders are required to send a "consumer rights notice," to get consent for further payments. The rule states that repeated attempts at automatic withdrawals constitutes an unfair and abusive practice.
"If allowed to become effective, it could seriously impact access to credit for those consumers most in need, as it will actively discourage lenders from serving consumers who present a higher risk of returned payments," Duke said. "Furthermore, industry circumstances have changed dramatically in the last eight years, and the Rule is based on obsolete and irrelevant data as old as 2011. We urge the CFPB to conduct a regulatory review of the rule to evaluate its effects and act accordingly based on its findings."
In January, the CFPB
Moloney, with the American Fintech Council, said he welcomes additional research on the issue. He also noted that lenders already comply with standards set for electronic payments between banks set by the National Automated Clearing House Association. NACHA generally allows for three attempts to retry an ACH payment if an initial payment is returned.
"This case has dragged on for years," said Lauren Saunders, associate director at the National Consumer Law Center. She noted that the payment provisions were reaffirmed by Kraninger and
