District Court Ruling Clears Way for Small Dollar Rule Compliance Date in June 2022
The Small Dollar Rule covers three categories of loans:
(1) short-term consumer loans with a term of 45 days or less;
(2) longer-term consumer balloon payment loans;
(3) longer-term consumer loans that exceed 45 days with a rate above 36% APR in which the lender obtains a leveraged payment mechanism.
SEP 1, 2021 | REPUBLISHED BY LIT: SEP 9, 2021
Yesterday, in Community Financial Services Association of America, Ltd. v. Consumer Financial Protection Bureau, a lawsuit involving implementation of the payment provisions of the Payday, Vehicle Title, and Certain High-Cost Installment Loans Regulation (the “Small Dollar Rule”), the district court ruled on the Consumer Financial Protection Bureau’s (CFPB) and the Community Financial Services Association’s (CFSA) cross motions for summary judgment.
Specifically, the court granted the CFPB’s motion and denied the CFSA’s motion and entered final judgment in the case.
Additionally, based on the parties’ additional briefing on an appropriate compliance date for the Small Dollar Rule, the court adopted the CFSA’s argument, setting a compliance-date stay of 286 days from entry of the court’s order.
The court’s order now clears the way for the regulation’s payment provisions to become effective in June 2022.
In April 2018, the CFSA filed an action against the CFPB related to the Small Dollar Rule.
At the time, the Small Dollar Rule contained two major provisions – an underwriting component and payment provisions that include new notice obligations. During the case, two major events occurred that delayed the action. First, the CFPB announced that it planned to engage in rulemaking to alter the Small Dollar Rule, which resulted in revocation of the underwriting component of the rule in July of 2020. Second, the Supreme Court rendered a decision in the Seila Law case, which addressed the unconstitutional structure of the CFPB.
In August 2020, following a stay in the action related to the new rulemaking and the decision in Seila Law, the parties agreed to proceed with a briefing schedule for cross-motions for summary judgment.
The parties completed briefing in December 2020.
Then, in July 2021, the court requested additional briefing from the parties on what the compliance date of the Small Dollar Rule should be if the court ruled in favor of the CFPB.
In response to the request for additional briefing, the CFPB indicated that it believed a 30-day stay would be appropriate based on the minimum time period required by the Administrative Procedures Act, and the CFSA requested that “any decision upholding the Payment Provisions should leave 445 days or alternatively, 286 days for companies to comply with those provisions,” which corresponded to the amount of time between the original stay and the August 19, 2019, compliance date set forth in the rule.
In its order, the court rejected the constitutionality arguments advanced by the CFSA. Of interest, the court spent the most space in the order addressing the CFSA’s argument related to the CFPB’s improper ratification of the payment provisions of the rule. In particular, the court indicated that the CFPB did not need to engage in a new notice and comment period related to the payment provisions of the rule because the CFSA “already received a meaningful remedy for the harm they suffered: a validly appointed Director reviewed the record pertaining to the 2017 Rule and chose to ratify a portion thereof.”
Finally, the court’s order addressed the appropriate length of the compliance-date stay. After discussing each of the parties’ arguments, the court indicated that it was “persuaded by the Associations’ arguments that they should receive the full benefit of the temporary stay and that a more substantial compliance date allows time for appeal.” As such, the court extended the compliance-date stay for 286 days from the court’s order.
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Many observers expected this result following the court’s order on additional briefing related to an appropriate compliance date.
While the CFSA is likely to appeal this decision (it did on 9/9/2021), it faces a difficult path in the Fifth Circuit to obtain a reversal of the district court’s decision.
It is likely that the compliance date for the payment provisions of the Small Dollar Rule will become effective in 286 days from August 31, 2021 (or June 13, 2022).
As such, it is imperative for companies with products covered under the Small Dollar Rule to begin revising policies and procedures, updating compliance management systems, working with vendors to ensure the complicated timing obligations of the new notice obligations are met, and conducting audits to ensure compliance with the Small Dollar Rule.
There are many pitfalls in the Small Dollar Rule, and with the compliance date now more certain than ever, now is the time to begin preparing for compliance.