CFPB Expects Protections for Payday and Installment Loan Borrowers to Take Effect in 2025
The Consumer Financial Protection Bureau said that it will implement new protections for payday and installment loan borrowers on March 30, 2025. The protections stem from a 2017 rule designed to stop lenders from repeatedly attempting to withdraw funds from borrowers' accounts after two failed attempts.
In a blog post, the CFPB said it issued the 2017 regulation in response to lenders continued attempts to withdraw money from consumers' accounts to pay off loans even when the accounts were empty. According to the CFPB, one instance revealed a lender making 11 failed attempts in a single day. The CFPB said that this practice led to consumers incurring numerous fees such as nonsufficient fund fees and overdraft fees, sometimes resulting in account closures. The 2017 regulation established a "two-strikes-and-you're-out" rule, preventing covered lenders from making more than two withdrawal attempts, unless the borrower specifically authorizes another. In addition, the rule requires covered creditors to provide various notices including in the event of an "unusual" payment.
The regulation faced delays due to litigation from the payday lender lobby.
Commentary
This CFPB announcement means that, absent further litigation, this rule will take effect on March 30, 2025. The rule, which the CFPB first finalized almost seven years ago, regulates certain payday and installment loans. The CFPB amended the rule in 2020 to remove mandatory underwriting provisions, but the payment provisions remain and is now set to go into effect next year.
While the rule ostensibly targets higher-APR lending (e.g., loans with an APR above 36%), it also applies to most creditors, including banks, that offer loans that are substantially repayable within 45 days or less, or that have a bullet or balloon payment feature (this may include many mainstream financial products and products marketed to high-net worth individuals). Accordingly, now that there is some certainty with respect to the rule's effective date, coupled with the operational complexities of the rule, all financial institutions should evaluate whether their products may be within scope of the rule and develop appropriate compliance plans.
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