The CFPB finalized one part of its regulatory rollback of the Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule (the "Payday Rule"), promulgating on June 6, 2019 a final rule delaying the effective date of the Mandatory Underwriting Provisions until November 19, 2020. It is unlikely that the Mandatory Underwriting Provisions will ever go into effect in their current form (if at all), since the CFPB has separately proposed to rescind them.
Bifurcation of the Payday Rule
The Payday Rule, however, comprises two parts: The Mandatory Underwriting Provisions and the Payment Provisions, and the CFPB has not proposed amending or rescinding the Payment Provisions. The Payment Provisions define any more than two consecutive unsuccessful attempts to withdraw a payment from a consumer's account due to a lack of sufficient funds as an unfair and abusive practice prohibited under the Dodd-Frank Act. The Payment Provisions also mandate certain re-authorization and disclosure obligations for lenders and account servicers that seek to make withdrawal attempts after the first two attempts have failed, as well as policies, procedures, and records that track the Rule's prescriptions.
Judicial Stay Keeps Full Payday Rule on Ice
The Payment Provisions are not stayed administratively, and this part of the Payday Rule retains a compliance date of August 19, 2019. However, in response to a legal challenge by industry trade associations, a court in the Western District of Texas has judicially stayed the compliance date of the entire Payday Rule, including the Payment Provisions. The court recently continued the stay in a May 31 order, and the parties are set to provide a status update on August 2.
The CFPB has not agreed that a long-term stay is needed for the Payment Provisions. However, in its briefings, the CFPB has indicated that it believes that the Payment Provisions should be stayed only until the questions of the agency's constitutionality in CFPB v. All American Check Cashing, Inc., currently under consideration in the Fifth Circuit, are resolved. In addition, the CFPB has stated that the court need only lift the stay on the motion of the CFPB, and then only after the parties have had a chance to brief the continuing need for the stay based on the likelihood of success on the merits of the case, as well as whether the court should allow time for creditors and servicers to come into compliance with the Payment Provisions.
The Payment Provisions Potentially Affect a Large Number of Lenders and Fintechs
As the CFPB notes in its final rule delaying the Mandatory Underwriting Provisions, the Payment Provisions apply to a wide scope of lenders and account servicers, not just traditional payday lenders. A possibly its widest point, the Payment Provisions apply to consumer credit when lenders:
- Charge 36% or more per year, and
- Use a leveraged payment mechanism (i.e., a form of payment whereby the lender/servicer has the right to initiate transfer of payments).
Even with the exclusion of certain retail installment loans, real estate-secured loans, credit cards, and student loans, among others, the scope of the Payment Provisions means that a large number of lenders will need to be in compliance once the court lifts the stay of the compliance date.
In its final rule delaying the Mandatory Underwriting Provisions, the CFPB acknowledges the uncertainty that many in the industry have highlighted (lenders are uncertain whether and when to spend the time and resources needed to come into compliance with the Payment Provisions) but has not suggested an administrative solution, such as an administrative stay or enforcement "grace period."