New FAQ Responses to Small Dollar Rule Address Auto and Mortgage Lending, Payment Transfers and Notices Inclusion

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On Tuesday, August 11, 2020, the CFPB issued a second round of answers to frequently asked questions related to the Small Dollar Rule. The FAQ responses range from addressing more nuanced provisions of the payment provision portion of the rule to the overall coverage of the rule.

Covered Loan Coverage

For the most part, auto loans are specifically excluded from the Small Dollar Rule. However, in the recent FAQs, the CFPB clarified that the exclusion only applies if “(a) the credit is extended solely and expressly for the purpose of financing a consumer’s initial purchase of a good; and (b) the credit is secured by that good.” Specifically, in the context of auto loans, this means that the auto loan exclusion “does not apply to an automobile loan that finances an extended warranty or service contract as well as the purchase price of the automobile.” Possibly, this could impact certain subprime products with an interest rate exceeding 36% with a leveraged payment mechanism.

Additionally, the CFPB indicated that if “an open-end loan becomes a covered longer-term loan because the cost of credit exceeds 36 percent at the end of a billing cycle, the lender must begin complying with the Payday Lending Rule at the beginning of the next billing cycle.” In other words, following origination, a loan can subsequently become subject to the Small Dollar Rule.

Finally, the CFPB addressed a potential issue arising for mortgage lenders refinancing a mortgage loan. Specifically, the CFPB answered the following: “Does the exclusion for real estate secured credit apply to a refinance if the mortgage or other security instrument is not re-recorded during the term of the refinance?” In responding “maybe” to the question, the CFPB explained that the exclusion for real estate secured credit applies only if the lender “records or otherwise perfects the security interest within the term of the loan.” While this clarification is unlikely to impact most mortgage lenders, it does emphasize the importance of mortgage lenders confirming their mortgage liens are properly recorded or perfected, especially in their subprime products and those that may have a balloon payment.

Payment Transfers

With respect to payment transfer, the FAQs clarified that a failed single immediate payment transfer at the consumer’s request counts as the first or second failed payment transfer for purposes of the Small Dollar Rule’s prohibition on two consecutive failed payment transfers. In other words, a single immediate payment transfer at the consumer’s request is still a “payment transfer” for purposes of the Small Dollar Rule. However, as the FAQs note, “a single immediate payment transfer at the consumer’s request that fails does not itself violate the Rule’s prohibition, even if the lender has previously initiated two failed payment transfers in connection with the consumer’s covered loan(s).”

The CFPB also finally addressed what a “business day” means. The CFPB noted that while “business day” is not defined by the Small Dollar Rule, a “lender may use any reasonable definition of business day, including the definition of ‘business day’ from another consumer finance regulation, such as Regulation E.” However, the CFPB explained that lenders must consistently apply one definition of “business day” in the handling of its loans. This will help lenders to structure their operating procedures to comply with the many timing requirements of the three new notices under the rule.

For lenders that are account holding institutions, there is a specific conditional exclusion related to the prohibition against attempting to collect after two consecutive failed payment transfers. Specifically, a transfer initiated by the institution does not count as a “payment transfer” if the institution does not charge the consumer a fee for the account lacking sufficient funds and the institution does not close the account in response to the account having a negative balance due to the attempted transfer. The CFPB explained that because this conditional exclusion removes the lender’s attempt to collect from the definition of “payment transfer,” it also means that a successful collection does not reset the clock on the prohibition against collecting after two consecutive failed payment transfers.

Notices

Finally, the CFPB responded to a question regarding the unusual payment withdrawal notice. In particular, the CFPB made clear that the unusual payment withdrawal notice is required “even if the difference [in the payment amount] is only a few dollars from the regular scheduled payment amount and is within a range authorized by the consumer.” As the CFPB explained, the Small Dollar Rule “does not provide an exception for small variations in the amount from the regularly scheduled payment amount.”

Takeaways

The CFPB is serious about moving forward with implementation of the Small Dollar Rule. In the past two months, not only has the CFPB issued the revised final rule (which left the payment provisions largely unchanged) and issued two rounds of FAQs, but it is also seeking to lift the stay issued by a district court in Texas related to the implementation date of the rule. Given the push by the CFPB, the Small Dollar Rule is likely to become a reality sooner rather than later. As such, this is the perfect time to evaluate loan products, compliance management systems, and employee training to ensure compliance with the rule.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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