The Clock is Ticking on the “Final Final” Payday Rule

Lawfulness and Compliance Date Still Debated

BY JUSTIN B. HOSIE

Today, as you read this article, we’re closer than we’ve ever been to actual enforcement of the long-awaited “Payday Rule” from the CFPB. And while the CFPB issued its “final final rulemaking” in early July, the Payday Rule isn’t quite across the finish line. At the time of this article, the industry is still litigating the rule’s lawfulness and its compliance date. For an industry that has always welcomed reasonable regulation in an effort to help consumers fulfill their credit needs, it’s been a long and windy road.

The CFPB’s quest to regulate small-dollar lenders began in January of 2012 when then- CFPB Director Richard Cordray signaled to an audience at a CFPB field hearing on payday lending that the CFPB was going to “ask tough questions” about small-dollar loans and “fix any problems” it would “uncover.” Director Cordray indicated from the start that “these products” should be made to “actually help consumers.” Apparently, despite the industry’s popularity with its actual consumers, Director Cordray started the rulemaking process with a goal of remaking small-dollar loans into the health food of the credit marketplace.

While prudent regulation of the financial services marketplace – including stopping unfair, deceptive, and abusive practices – makes sense across all financial services, it seemed that Director Cordray’s mind was made up: The small-dollar industry must be heavily regulated. He went on to say that some practices “present immediate risk to consumers and are clearly illegal” and called other practices “outrageous.”

From there, Director Cordray’s team never altered that mindset. Rather, the team dutifully followed his lead, and began to issue “white papers” purporting to study payday lending. In an April 2013 white paper addressing payday loans and deposit products, the CFPB indicated it was focused on “long-term use” of the industry, even though consumers using rollovers as limited by state law were still the shortest-term credit transactions in the marketplace. The fees incurred were deemed to be at a “high level,” even though use of those fees and rollovers, as limited by state laws, were still lower than the dollar amounts paid on other types of credit transactions in the marketplace. Labels like “high level,” “long term,” and “high fees” were never substantiated with any comparisons. The CFPB stacked assumption upon assumption to note that a “pattern of sustained use” may indicate that a consumer is “unable to pay back a loan and meet her other expenses” during that same pay period. Without defining what it deems “harmful” or why, the CFPB concluded that “these products may become harmful for consumers when they are used to make up for chronic cash flow shortages.” Citing the April 2013 white paper as justification, the CFPB indicated the “potential consumer harm and the data gathered to date are persuasive that further attention is warranted to protect consumers. Based upon the facts uncovered through our ongoing work in this area, the CFPB expects to use its authorities to provide such protections.” From that moment on, it was clear that the self-described “data-driven agency” had prejudged the industry, and was going to find ways to assemble data most favorable to biases against the industry.

The CFPB’s cycle of prejudgment continued with additional white papers and hearings, all reflecting the CFPB’s negative preconceived notions concerning small-dollar lending. There was a report issued in March 2014, a Small Business Review Panel in March 2015, a meeting hosted in April 2015 attended by this author and others, a report in June 2015 ignoring industry considerations, a report in April 2016, and a report in May 2016.

The 2015 proposal presented to small businesses was so harsh that even a credit union’s official response noted that it would eliminate payday lenders, and have devastating repercussions in local communities.

IT’S BEEN A LONG AND TORTURED ROAD, WITH LITIGATION ONGOING ABOUT THE LAWFULNESS OF THIS PROCESS, AND THE COMPLIANCE DATE STILL LOOMING. SO, WHAT’S LEFT OF THE RULE?

Then in June 2016, the CFPB issued the long-awaited proposed rule, which included a requirement that lenders consider not only the ability to repay a provided loan, but also consider the consumer’s entire financial condition before making the loan. The proposed rule essentially sought to require small-dollar lenders to determine whether the consumer’s budget was balanced before making a shortterm, small-dollar loan. The proposed rule also limited payment processing to two payments rather than three, the standard across all payment systems, and required cumbersome and confusing notices. The industry was clear in its response, as it had been in the small business review process – the proposal would eliminate an industry comprised of licensed, regulated lenders and leave nothing to replace it.

Despite specific industry concerns and industry data, plus approximately one million consumers urging the CFPB to reconsider, Director Cordray and the CFPB did not significantly reconsider the proposal. On October 5, 2017, the CFPB issued its then-final rule. From there, litigation began and an election occurred. After leadership changes at the CFPB, the CFPB proposed to rescind the requirements to consider every aspect of every consumer’s budget, and to delay the compliance date for the onerous payment limitations. Finally, in July 2020, the CFPB issued its “final final rulemaking” that moves forward with the payment limitations only.

It’s been a long and tortured road, with litigation ongoing about the lawfulness of this process, and the compliance date still looming. So, what’s left of the rule? Only the single biggest change to the payments system to occur in my lifetime. Under this rulemaking, while all other ACH payments processed in the payments system can be processed three times, uniquely, payments presented to small-dollar lenders can only be presented twice. Parties are expected to know what type of payment is being processed –and if a payment such as a check, debit authorization or card payment happens to be presented by a small-dollar lender, they must make sure that it is only presented once, and then only re-presented once more, not twice. It’s a nearly impossible burden on banks, payment processors, and small-dollar lenders. It leaves consumers confused about why lenders can’t just reprocess a returned payment. Lenders are also expected to develop contrived notices about payments and send them to consumers.

Most notably, a consumer cannot instruct its lender to process a payment in two days’ time. There’s an immediate option, and there’s a three-day option with an electronic notice, but the CFPB effectively banned a consumer from instructing a small-dollar lender to process a payment in two days.

Finally, much of the rule is predicated on certain activities occurring within so many “business days” of certain preconditions. But the CFPB never defined the term “business day.” That’s right, most of the rule doesn’t consider that some lenders are open seven days a week, some six, and some five. Most of their processors are only operating five or six days a week, like their banks and the consumers’ banks. But all of the payment limitations just use the phrase “business day” without any definition. Despite issuing thousands of pages of supplemental information, a “small business guide,” and FAQs, the CFPB still will not explain what this pivotal term means, so that the industry can comply.

Hopefully, the industry, the agency, and the courts will figure out this mess. Of course, even if they figure out the current rulemaking, who knows what’s coming next. There’s an election in November, and changes are almost surely coming. The way this rulemaking has been altered, it seems reasonable to predict that, whether it’s after this November or after November 2024, at some point, it will be very easy for the next group of CFPB leaders to return those “ability to repay” provisions right back to where they started. At that point, where allowed by state law, offering installment loans may be the only real option for the industry.

Justin B. Hosie is a partner in the Ooltewah, Tennessee, office of Hudson Cook, LLP. He focuses his practice on regulatory compliance for alternative financial service providers including consumer lenders, rent-to-own providers, pawnbrokers, and small business lenders. Hosie may be contacted at jhosie@hudco.com or 423-490-7560.