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In my recent blog here,  I mentioned that my focus has been on avoiding becoming subject to the new CFPB Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule (“Rule”), by staying away from the use of “leveraged payment mechanisms.”  A leveraged payment mechanism exists when the creditor “has the right to initiate a transfer of money, through any means, from a consumer’s account to satisfy an obligation on a loan, except that the lender or service provider does not obtain a leveraged payment mechanism by initiating a single immediate payment transfer at the consumer’s request.”

When you “pull” the funds from the customer by virtue of a continuing authorization, that is not within the exception because it is not “immediate.” More specifically, the transfer must be within one business day of the consumer’s authorization to be immediate.  

Of course, the customer can always have his/her own bank set up automatic withdrawal to make payments.  That is not pulling funds but is known as “pushing” funds. 

Several readers have asked me for a summary of the steps if they want to continue to include leveraged payment mechanisms as a means of repayment. So, just to be clear, the Rule does not prohibit a creditor from offering an optional leveraged payment mechanism.  However, to do so, one must comply with the notice requirements spelled out in the Rule. Otherwise, the use of a leveraged payment mechanism will render the loan a “covered loan" that is “unfair and abusive.”  

That is, when your loan becomes a covered loan (because it contains a leveraged payment mechanism), it is deemed to be unfair and abusive, if certain steps (actually disclosures and notices) are not taken.  Here they are:

• First, and foremost, the creditor would need a voluntary agreement in place with the consumer allowing the creditor to access the consumer’s funds via ACH, remote created check or other medium.
• Then, prior to initiating the first payment withdrawal, the creditor must provide to the consumer an Upcoming Withdrawal Payment Notice pursuant to Regulation Section 1041.9(b)(2).  Model form A-3 (or A-6 for the electronic short notice version).
• Prior to initiating an unusual payment withdrawal, the creditor must provide to the consumer an Unusual Withdrawal Alert.  There is a model form for this one too, Model form A-4 (or A-7 for the electronic short notice version).
• A creditor may not initiate a payment transfer after two unsuccessful attempts without giving a further notice and obtaining consent from the consumer.  Model form A-5 (or A-8 the electronic short notice version). 
• The creditor must have a compliance program including written policies and procedures that are reasonably designed to ensure compliance that is appropriate to the size and complexity of the creditor.
• The creditor must be able to retain records relating to payment practices for covered loans.
• And, finally, a creditor may not take any action with the intent of evading the requirements of the Rule.  

These are the steps to follow if a finance company decides to continue to offer leveraged payment mechanisms in connection with its repayment policies and procedures.

Stay tuned for more information about the effective date of the Rule.  

Please note: This is the one hundred nineteenth blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.