Dear Boards of Directors and Chief Executive Officers:
On July 22, 2020, the Consumer Financial Protection Bureau issued a final rule (opens new window) amending parts of the Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule, 12 CFR Part 1041 (CFPB Payday Rule). Though the CFPB Payday Rule became effective on January 16, 2018, the compliance dates are currently stayed pursuant to a court order issued because of pending litigation.1 As a result, lenders are not obliged to comply with the rule until the court-ordered stay is lifted.
The July 2020 amendment to the rule rescinds the following:
- Requirement for a lender to determine a borrower’s ability to repay before making a covered loan;
- Underwriting requirements for making the ability-to-repay determination; and
- Some recordkeeping and reporting requirements.
The CFPB Payday Rule’s provisions relating to payment withdrawal restrictions, notice requirements, and related recordkeeping requirements for covered short-term loans, covered longer-term balloon payment loans, and covered longer-term loans were not changed by the July final rule. As noted below, some loans made under the NCUA’s Payday Alternative Loan (PALs) regulations are subject to the CFPB Payday Rule.2
CFPB Payday Rule Coverage
CFPB Payday Rule covers:
- Short-term loans that require repayment within 45 days of consummation or an advance. The rule applies to such loans regardless of the cost of credit;
- Longer-term loans that have certain types of balloon-payment structures or require a payment substantially larger than all others. The rule applies to such loans regardless of the cost of credit; and
- Longer-term loans that have a cost of credit that exceeds 36 percent annual percentage rate (APR) and have a leveraged payment mechanism that gives the lender the right to initiate transfers from the consumer’s account without further action by the consumer.3
CFPB Payday Rule expressly excludes:
- Purchase money security interest loans;
- Real estate secured credit;
- Credit card accounts;
- Student loans;
- Non-recourse pawn loans;
- Overdraft services and overdraft lines of credit as defined in Regulation E, 12 CFR 1005.17(a) (opens new window);
- Employer wage advance programs; and
- No-cost advances.4
The CFPB Payday Rule conditionally exempts from coverage the following categories of otherwise-covered loans:
- Alternative loans.5 These are loans that generally conform to the NCUA’s requirements for the original Payday Alternative Loan program (PALs I)6 regardless of whether the lender is a federal credit union.7
- PALs I Safe Harbor. Within the alternative loans provision, the CFPB Payday Rule provides a safe harbor for a loan made by a federal credit union in compliance with the NCUA’s conditions for a PALs I as set forth in 12 CFR 701.21 (opens new window)(c)(7)(iii). That is, a federal credit union making a PALs I loan does not have to separately meet the conditions for an alternative loan for the loan to be conditionally exempt from the CFPB Payday Rule.
- Accommodation loans. These are otherwise-covered loans made by a lender that, together with its affiliates, does not originate more than 2,500 covered loans in a calendar year and did not do so in the preceding calendar year. Further, the lender and its affiliates did not derive more than 10 percent of their receipts from covered loans during the previous year.
Key CFPB Payday Rule Provisions Affecting Credit Unions
- Lenders must calculate the finance charge under the CFPB Payday Rule the same way they calculate the finance charge under Regulation Z (opens new window);
- Generally, for covered loans, a lender cannot attempt more than two withdrawals from a consumer’s account. If a second withdrawal attempt fails due to insufficient funds:
- A lender must obtain new and specific authorization from the consumer to make additional withdrawal attempts (a lender may initiate an additional payment transfer without a new and specific authorization if the consumer requests a single immediate payment transfer; see 12 CFR 1041.8 (opens new window)).
- When requesting the consumer’s authorization, a lender must provide the consumer a consumer rights notice.8
- Lenders must establish written policies and procedures designed to ensure compliance.
- Lenders must retain evidence of compliance for 36 months after the date on which a covered loan is no longer an outstanding loan.
CFPB Payday Rule Effect On NCUA PALs and Non-PALs Loans
PALs I Loans: As stated above, the CFPB Payday Rule provides a safe harbor for a loan made by a federal credit union in compliance with the NCUA’s conditions for a PALs I loan (see 12 CFR 701.21(c)(7)(iii) (opens new window)). As a result, PALs I loans are not subject to the CFPB Payday Rule.
PALs II Loans: Depending on the loan’s terms, a PALs II loan made by a federal credit union may be a conditionally exempt alternative loan or accommodation loan under the CFPB Payday Rule. A federal credit union should review the conditions in 12 CFR 1041.3(e) (opens new window) of the CFPB Payday Rule to determine if its PALs II loans qualify for the aforementioned conditional exemptions. If so, such loans are not subject to the CFPB’s Payday Rule. Also, a loan that complies with all PALs II requirements and has a term longer than 45 days is not subject to the CFPB Payday Rule, which applies only to longer-term loans with a balloon payment, those not fully amortized, or those with an APR above 36 percent. The PALs II rules prohibit all those features.
Federal credit union non-PALs loans: To be exempt from the CFPB Payday Rule, a non-PAL loan made by a federal credit union must comply with the applicable parts of 12 CFR 1041.3 (opens new window) as outlined below:
- Comply with the conditions and requirements of an alternative loan under the CFPB Payday Rule (12 CFR 1041.3(e));
- Comply with the conditions and requirements of an accommodation loan under the CFPB Payday Rule (12 CFR 1041.3(f));
- Not have a balloon feature (12 CFR 1041.3(b)(1));
- Be fully amortized and not require a payment substantially larger than all others, and otherwise comply with all the terms and conditions for such loans with a term of 45 days or less 12 CFR 1041.3(2)); or
- For loans longer than 45 days, they must not have a total cost exceeding 36 percent per annum or a leveraged payment mechanism, and otherwise must comply with the terms and conditions for such longer-term loans (12 CFR 1041.3(b)(3)).9
The following table outlines the significant requirements for a loan to qualify as a PALs I or PALs II loan. Credit unions should review the applicable NCUA regulations (opens new window) for a full discussion of those requirements.
|Provision||PALs I||PALs II|
|Interest Rate||Up to 28%||Up to 28%|
|Membership Requirement||Must be a member for at least 30 days||Must be a member (no length of membership required)|
|Term||1–6 months||1–12 months|
|Application Fee||Maximum of $20||Maximum of $20|
|Limits on Usage||Limit of 3 PALs loans in a 6-month period; only one PAL loan may be outstanding at a time||Limit of 3 PALs loans in a 6-month period; only one PAL loan may be outstanding at a time|
|Structure||Must be closed-end and fully amortizing||Must be closed-end and fully amortizing|
|Volume Limits||Aggregate of loans must not exceed 20% of net worth||Aggregate of loans must not exceed 20% of net worth|
|Other Restrictions||No rollovers; credit unions may extend loan term provided it does not charge any additional fees or extend any new credit, and the extension is compliant with the maximum maturity limits||No rollovers; credit unions may extend loan term provided it does not charge any additional fees or extend any new credit, and the extension is compliant with the maximum maturity limits|
|Overdraft Fees||Does not prohibit overdraft fees||Overdraft fees are not permitted, as set forth in 12 CFR 701.21(c)(7)(iv)(A)(7)|
Credit unions should read the provisions of the CFPB Payday Rule (opens new window) to determine its effect on their operations. The CFPB also issued frequently asked questions related to the final rule (opens new window) and a compliance guide (opens new window).
If you have questions about the information in this Regulatory Alert, please contact the NCUA’s Office of Consumer Financial Protection at 703.518.1140 or ComplianceMail@ncua.gov. You can also contact your NCUA regional office or your state supervisory authority.
Rodney E. Hood
1 Community Financial Services Association v. Consumer Financial Protection Bureau, No. 1:18–cv–295 (W.D. Tex. 2018).
3 A leveraged payment mechanism does not include initiating a “single immediate payment transfer” (a one-time transfer initiated immediately after the consumer presents a check or authorizes an electronic transfer).
4 The CFPB Payday Rule defines no-cost advances as advances of funds for which the consumer is not required to pay any charge included in the cost of credit, or any application fees, provided the lender warrants the lender has no legal claim against the consumer based on the consumer’s failure to repay the amount advanced and the lender will not engage in post-default debt collection activities with respect to the amount advanced.
5 The CFPB’s Official Interpretation published with the July 8, 2020, final rule provides examples of how to determine if a loan meets the specified conditions in the CFPB’s payday loan regulation. See, e.g., Official Interpretation 1041.3(e)-2, -3 (opens new window).
7 All lenders, including but not limited to federal credit unions, may make alternative loans that are exempt from the CFPB Payday Rule, provided the loan is permissible under other applicable laws, including state laws. See Official Interpretation 1041.3(e)-1 (opens new window).
8 Credit unions should review the CFPB Payday Rule to see all applicable provisions about withdrawal attempts.
9 Non-PALs loans made by federal credit unions must also comply with the general lending provisions of NCUA regulation, 12 CFR 701.21 (opens new window)(c)(7), including the 18 percent per annum interest rate cap. See Board Action Memorandum (opens new window).