This is the last of a series of blog posts in which we share our reactions to the CFPB’s contemplated proposals taking aim at payday (and other small-dollar, high-rate) loans (“Covered Loans”). In this blog post, we share our thoughts on the CFPB’s proposed limits on payment collection practices. (Our previous blog posts have looked at the CFPB’s grounds for the proposals, how the proposals will impact “short-term” Covered Loans, the flaws we see in the CFPB’s ability to repay analysis, and the 36% “all-in” rate trigger and restrictions for “longer-term” Covered Loans.)

The contemplated rules on payment collection practices would require lenders making Covered Loans to give written notice at least three business days in advance of charging the borrower’s deposit or prepaid account for a payment and would require a new payment authorization if two successive payments fail. See Press Release, “CFPB Considers Proposal to End Payday Debt Traps” (Mar. 26, 2015), p. 4. Depending upon the details of the ultimate rules and the CFPB’s willingness to make appropriate modifications, we are somewhat less critical of these ideas than the other contemplated rules. Our suggestions include the following:

• Importantly, the CFPB suggests that it is considering allowing notice of impending payments to be made by email or any other “electronic means to which the consumer consents, such as by phone call, text message, or mobile application.” See Outline of Proposals under Consideration and Alternatives Considered (Mar. 26, 2015), p. 30. Hopefully, the CFPB will ultimately endorse notice of this type and conclude that it should not be necessary for lenders to comply with ESIGN’s (overly) rigid “reasonable demonstration” requirement.
• The requirement to provide written notice of a payment attempt at least three business days in advance would force lenders to wait at least three business days to resubmit a failed payment.  We think this will interfere with current practices and make it far harder to collect Covered Loans. Moreover, consumers likely expect that lenders will promptly re-submit dishonored payments. Accordingly, while some advance notice of re-submission might be warranted, we do not believe that it should entail a delay of three business days.
• Additionally, the CFPB should clarify that it is permissible for the creditor to take the new payment authorization required after two consecutive dishonored payments by a recorded telephone call and not just in writing.
• Currently, the CFPB contemplates treating dishonored debit card payments the same as other types of dishonored payments. This ignores a fundamental distinction between debit card payments and other forms of payment—when debit card payments fail, it is at the time of authorization and not at the time of processing. Accordingly, a rejected debit card payment does not give rise to bank NSF fees. Due to this circumstance, we would submit that there is no compelling need to require three days’ advance notice of a debit card re-submission or to limit re-submissions without new authorization to a single attempt. In short, the rules should not restrict debit card re-submissions.

The upcoming rule-making will not be easy. We plan to blog frequently along the way.