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New protections for payday and installment loans slated to take effect next year

Several years ago, the CFPB issued a rule to end an unfair and abusive practice in payday and installment lending. After a thorough review of the market, the CFPB found that even after a consumer’s account had been shown to be empty, lenders would keep trying to withdraw money from the account to pay off the loan—over and over and over again. For example, the CFPB found one instance of a lender making 11 failed withdrawal attempts in one day.

The result for consumers was a pile of junk fees: With each failed withdrawal attempt, the borrower might be charged nonsufficient fund fees, overdraft fees, and others. Enough failed withdrawal attempts could even lead to the consumer’s account being closed. And at the same time that this tactic piled pain on consumers, it rarely benefited the lenders. That’s because—not surprisingly—once multiple withdrawal attempts have failed, it’s extremely unlikely that further attempts will succeed.

To address lenders’ unfair and abusive collection practices, the CFPB issued a regulation in 2017 adopting a two-strikes-and-you’re-out rule. Under that rule, after two tries to withdraw money from an account have failed, covered lenders can’t try again unless the borrower specifically authorizes another attempt.

The regulation was originally set to take effect in 2019 but was delayed by litigation brought by the payday lender lobby who sought to block the rule. In 2022, the court of appeals hearing the case rejected most of the payday lenders’ claims, upheld the CFPB’s finding that the prohibited practice was unfair, and affirmed the reasonableness of the rule. Then, last month, the Supreme Court issued a decision in CFPB v. CFSA rejecting the payday lenders’ sole remaining claim, pertaining to the CFPB’s funding.

Now that the appeal is over, the rule is on track to take effect. An existing court order pausing the rule is set to expire 286 days after the Supreme Court enters its judgment in the payday lenders’ case, which the Court is expected to do on June 17. As a result, the rule should go into effect on March 30, 2025. Once that happens, the rule’s important and long-delayed protections for borrowers can finally put an end to an unfair and abusive collections practice that has gone on too long.

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