Payday Lending Rule FAQs

Generally, the Payday Lending Rule applies to three types of loans extended to a consumer for personal, family, or household purposes. These three types of loans are:

1. Short-term loans. Short-term loans are extensions of credit that require repayment within 45 days. Closed-end credit that provides for a single advance is a short-term loan if the consumer is required to repay substantially the entire amount of the loan within 45 days of consummation. Open-end credit or closed-end credit that does provide for multiple advances is a short-term loan if the consumer is required to repay substantially the entire amount of any advance within 45 days of the advance. 12 CFR §1041.3(b)(1).

2. Longer-term balloon-payment loans. Longer-term balloon-payment loans are extensions of credit that have certain balloon-payment features, as described below.

Closed-end credit that provides for a single advance is a longer-term balloon-payment loan if the consumer is required to repay the entire balance of the loan in a single payment more than 45 days after consummation, or if the consumer is required to repay the loan through at least one payment that is more than twice as large as any other payment.

Open-end credit or closed-end credit that provides for multiple advances is a longer-term balloon-payment loan if the consumer is required to repay substantially the entire amount of an advance in a single payment more than 45 days after the advance is made, or if the consumer is required to make at least one payment on an advance that is more than twice as large as any other payment(s).

Additionally, open-end credit or closed-end credit that provides for multiple advances is a longer-term balloon-payment loan if: (a) the loan is structured such that paying the required payments may not fully amortize the outstanding balance by a specified date or time; and (b) the amount of the final payment to repay the outstanding balance at such time could be more than twice the amount of other minimum payments. 12 CFR §1041.3(b)(2).

3. Longer-term loans. Longer-term loans are extensions of credit that have a:

• Cost of credit exceeding a 36 annual percentage rate (APR) (or, for open-end credit, the lender imposes a finance charge in any billing cycle in which the principal balance is $0); and
• Leveraged payment mechanism giving the lender the right to initiate transfers from the consumer’s account without further action by the consumer. 12 CFR §1041.3(b)(3).

For more information on calculating the cost of credit for purposes of the Payday Lending Rule, see Payday Lending Rule Covered Loans Question 2. For more information on leveraged payment mechanisms, see Payday Lending Rule Covered Loans Question 3.

Certain accommodation loans and alternative loans are exempted from being covered loans. Additionally, eight other types of loans are excluded from being covered loans. If a loan satisfies the criteria for one or more of the exemptions or exclusions, the loan is not a covered loan and is not subject to the Payday Lending Rule. The exclusions and exemptions are discussed in Payday Lending Rule Covered Loans Questions 4 through 11.

More information on what loans are covered by the Payday Lending Rule is available in Section 2 of the Small Entity Compliance Guide .

Updated July 7, 2020

The coverage criteria for longer-term loans, as discussed in Payday Lending Rule Covered Loans Question 1, include a cost of credit condition. Generally, if the cost of credit for a loan exceeds a 36 percent annual percentage rate (APR), the cost of credit condition for longer-term loans is satisfied.

For purposes of the Payday Lending Rule, the cost of credit includes all finance charges as set forth in Regulation Z, 12 CFR §1026.4. These amounts are included in the cost of credit without regard to whether the credit is extended to a consumer or is consumer credit as those terms are defined in Regulation Z, 12 CFR §1026.2(a)(11) and (12). 12 CFR §1041.2(a)(6)(i).

For closed-end credit, the cost of credit is calculated according to the requirements of Regulation Z, 12 CFR §1026.22, at the time of consummation. 12 CFR §1041.2(a)(6)(ii)(A). Thus, the cost of credit for closed-end credit exceeds 36 percent if the APR properly disclosed on the Truth-in Lending disclosure at consummation exceeds 36 percent.

For open-end credit, the cost of credit is calculated according to the requirements of Regulation Z, 12 CFR §1026.14(c) and (d). 12 CFR §1041.2(a)(6)(ii)(B). However, if there is a billing cycle in which there is no balance other than a finance charge imposed by the lender, the loan is deemed to satisfy the cost of credit condition for longer-term loans. 12 CFR §1041.3(b)(3)(B)(1); comment 1041.3(b)(3)-2. For open-end credit, the cost of credit is determined at consummation as well as at the end of each billing cycle. Thus, a loan that does not satisfy the cost of credit condition at consummation may satisfy the condition and become a longer-term loan at a later time. Once open-end credit meets the cost of credit condition, it meets the condition for the duration of the plan. 12 CFR §1041.3(b)(3)(i)(B)(2).

Updated July 7, 2020

The coverage criteria for longer-term loans, as discussed in Payday Lending Rule Covered Loan Question 1, include a condition that a covered longer-term loan must have a leveraged payment mechanism.

A loan has a leveraged payment mechanism if the lender or a service provider has the right to initiate a transfer of money, through any means, from a consumer’s account to satisfy an obligation on the loan. Comment 1041.3(c)-1. This includes, for example, the right to initiate a transfer from a consumer’s account by means of a check, an electronic fund transfer (as defined in Regulation E, 12 CFR §1005.3(b)), a remotely created check or payment order, or a transfer by an account-holding institution. Comment 1041.3(c)-2.

A lender or service provider obtains the right to initiate a transfer from a consumer’s account when it can collect payment or otherwise draw funds from a consumer’s account (either on a single occasion or on a recurring basis) without the consumer taking further action. Generally, when a lender or service provider has the ability to “pull” funds or initiate a transfer from a consumer’s account, that person has a leveraged payment mechanism. However, a “push” transaction from the consumer’s account to the lender or service provider does not in itself give the lender or service provider a leveraged payment mechanism. Comment 1041.3(c)-1. An example of a push payment would be when a consumer uses her bank’s online banking services to initiate a payment to the lender.

A lender or service provider does not obtain a leveraged payment mechanism by initiating a single immediate payment transfer at a consumer’s request. 12 CFR §1041.3(c). A single immediate payment transfer at a consumer’s request is generally a one-time transfer initiated within one business day after the lender obtains the consumer’s authorization for an electronic fund transfer or the consumer provides a check to the lender. 12 CFR §1041.8(a)(2). The Payday Lending Rule Payment Transfers Questions below and Section 4.5 of the Small Entity Compliance Guide provide more information on single immediate payment transfers at a consumer’s request.

The condition regarding a leveraged payment mechanism may be satisfied before, at the same time as, or after the consumer receives the entire amount of the loan proceeds and regardless of the means by which the lender or service provider obtains the leveraged payment mechanism. Comment 1041.3(b)(3)(ii)-1. The condition is satisfied if a loan agreement authorizes the lender to obtain a leveraged payment mechanism. For example, it is satisfied if the loan agreement provides that the consumer authorizes or must authorize the lender or service provider to debit the consumer’s account on a recurring basis at some future date or on a one-time or recurring basis if the consumer becomes delinquent or defaults on the loan. Comment 1041.3(b)(3)(ii)-2.

Updated July 7, 2020

Yes. The Payday Lending Rule exempts two types of loans from coverage and excludes eight additional types of loans from coverage. The two exemptions are discussed in Payday Lending Rule Covered Loans Questions 5 through 8 and Section 2.5 of the Small Entity Compliance Guide. The exclusions are discussed in Payday Lending Rule Covered Loans Question 9 through 11 and Section 2.4 of the Small Entity Compliance Guide. If a loan satisfies the criteria for one or more of the exemptions or exclusions, it is not a covered loan and is not subject to the Payday Lending Rule.

The Payday Lending Rule also includes a partial exclusion from some of the payment-related requirements. 12 CFR §1041.8(a)(1)(ii). If the partial exclusion applies, certain payment withdrawals from consumers’ accounts are not subject to certain payment-related requirements. However, the loan remains a covered loan and subject to some of the Payday Lending Rule’s requirements. This partial exclusion is discussed in the Payday Lending Rule Payment Transfers Questions below and in Section 4.2 of the Small Entity Compliance Guide .

Updated July 7, 2020

The Payday Lending Rule includes two exemptions: (1) an exemption for alternative loans; and (2) an exemption for accommodation loans. The exemption for alternative loans is discussed in Payday Lending Rule Covered Loans Question 6 and Question 7 as well as in Section 2.5.1 of the Small Entity Compliance Guide . The exemption for accommodation loans is discussed in Payday Lending Rule Covered Loans Question 8 and in Section 2.5.2 of the Small Entity Compliance Guide .

Updated July 7, 2020

In order for a covered loan to be exempted as an alternative loan, certain loan term, borrower history, and income documentation conditions must be met.

An alternative loan must satisfy all of the following loan term conditions:

1. The loan is not structured as open-end credit.
2. The loan’s term is not less than one month and not more than six months.
3. The loan’s principal is not less than $200 and not more than $1000.
4. The loan is repayable in two or more payments.
5. All scheduled payments are substantially equal in amount and fall in substantially equal intervals.
6. The loan amortizes completely during its term.
7. The lender does not impose any charges other than the rate and the application fees permissible for federal credit unions under the NCUA’s regulations at 12 CFR §701.21(c)(7)(iii).

12 CFR §1041.3(e)(1).

An alternative loan also must satisfy borrower history conditions. Before making the loan, the lender must review its own records to determine that the loan will not result in the borrower being indebted on more than three outstanding alternative loans within a period of 180 days. 12 CFR §1041.3(e)(2); comment 1041.3(e)(2)-3. If the lender determines that the loan will result in the borrower being indebted on more than three outstanding alternative loans within 180 days, the loan does not satisfy the borrower history condition and cannot be an alternative loan. 12 CFR §1041.3(e)(2). The lender is only required to review its own records to make this determination. Comment 1041.3(e)(2)-1. Additionally, a lender may not make more than one alternative loan at a time to a consumer. 12 CFR §1041.3(e)(2).

A lender also must satisfy an income documentation condition for an alternative loan. During the time period that the lender is making alternative loans, the lender must maintain and comply with policies and procedures for documenting proof of recurring income. 12 CFR §1041.3(e)(3). A lender may establish any procedure for documenting recurring income that satisfies the lender’s own underwriting obligations. Comment 1041.3(e)(3)-1.

Alternative loans are loans that generally conform to the requirements created by the National Credit Union Administration (NCUA) for the Payday Alternative Loan (PAL) program pursuant to 12 CFR §701.21(c)(7)(iii). A loan made by a federal credit union in compliance with the NCUA’s conditions for a PAL I as set forth in 12 CFR §701.21(c)(7)(iii) is deemed to be an alternative loan under the Payday Lending Rule. 12 CFR §1041.3(e)(4).

Updated July 7, 2020

No. If a federal credit union originates a loan that complies with the conditions for the NCUA’s PAL I program, as set forth in 12 CFR §701.21(c)(7)(iii), that loan is deemed to be in compliance with the conditions and requirements for an alternative loan and is exempted from the Payday Lending Rule. 12 CFR §1041.3(e)(4).

Updated August 11, 2020

Maybe. The Payday Lending Rule does not include a specific exemption or exclusion for loans originated pursuant to the PAL II program, but such loans may be exempt or excluded depending on their terms.

On October 1, 2019, the NCUA published a rule expanding its original PAL program with a new program referred to as the “PAL II” program. That rule was effective December 2, 2019. Among other things, a loan originated under the PAL II program may have a larger loan amount and a longer loan term than a loan originated under the PAL I program. See 12 CFR §701.21(c)(7)(iv).

Although the Payday Lending Rule exempts loans that federal credit unions originate under the original PAL I program, the exemption is, by its terms, limited to the original PAL I program loans. 12 CFR §1041.3(e)(4). Thus, loans that a federal credit union originates pursuant to the PAL II program are not specifically exempted from coverage under the Payday Lending Rule.

If a federal credit union structures a PAL II loan to be substantially repaid within 45 days, it could be a covered loan under the Payday Lending Rule. However, federal credit unions are unlikely to structure PAL II loans to be repaid within 45 days because PAL II loans are generally designed for larger loan amounts of up to $2,000 and must fully amortize over the life of the loan. Consequently, it is highly unlikely that a loan originated pursuant to the PAL II program will be a covered short-term loan or a covered longer-term balloon loan under the Payday Lending Rule.

In addition, a loan originated pursuant to the PAL II program must comply with the program’s 28 percent interest rate limitation. Thus, a loan made pursuant to the PAL II program. should not be a covered longer-term loan because the cost of credit should not exceed 36 percent per annum.

Additionally, a loan originated pursuant to the PAL II program may also meet an exclusion or exemption. For example, it might meet the conditional exemption for accommodation loans in 12 CFR §1041.3(f). For more information on accommodation loans, see Payday Lending Rule Coverage FAQs 4 to 11.

Updated August 11, 2020

Yes. All lenders, including but not limited to federal credit unions, may make an alternative loan that is exempt from the Payday Lending Rule, provided the loan is permissible under other applicable laws, including state laws. Comment 1041.3(e)-1.

Updated July 7, 2020

A covered loan must meet both a volume condition and a receipts condition to be exempted as an accommodation loan.

First, the lender and its affiliates collectively must have made 2500 or fewer covered loans in the current calendar year, and made 2500 or fewer covered loans in the preceding calendar year. 12 CFR §1041.3(f)(1). Covered longer-term loans for which all transfers meet the conditions in 12 CFR §1041.8(a)(1)(ii) are not included for the purposes of determining whether this loan volume condition is met. 12 CFR §1041.3(f)(3).

Second, the lender and its affiliates that use the same tax year must have derived no more than 10 percent of their receipts from covered loans in the prior tax year. If the lender was not in operation in a prior tax year, the lender must reasonably anticipate that the lender and its affiliates will derive no more than 10 percent of their receipts from covered loans during the current tax year. 12 CFR §1041.3(f)(2). Covered longer-term loans for which all transfers meet the conditions in 12 CFR §1041.8(a)(1)(ii) are not included for the purposes of determining whether this receipts condition is met. 12 CFR §1041.3(f)(3).

Note that both conditions must be met in order for a lender to exempt loans as accommodation loans. In other words, if a lender and its affiliates make 2000 covered loans, but the lender’s receipts for such loans exceed the 10 percent receipts threshold, the lender may not exempt any loans as accommodation loans.

For information on loans that are excluded from coverage under the Payday Lending Rule, see Payday Lending Rule Covered Loans Question 9.

Updated July 7, 2020

The Payday Lending Rule excludes eight types of loans from coverage:

1. Purchase money security interest loan. Credit is excluded as a purchase money security interest loan if: (a) the credit is extended solely and expressly for the purpose of financing a consumer’s initial purchase of a good (e.g., a motor vehicle, television, household appliance, furniture); and (b) the credit is secured by that good. 12 CFR §1041.3(d)(1).

2. Real estate secured credit. Credit is excluded as real estate secured credit if the credit is secured by any real property or by personal property (e.g., mobile home, boat, cooperative unit) to be used as a dwelling. 12 CFR §1041.3(d)(2). The exclusion applies only if the lender records or otherwise perfects the security interest within the term of the loan. Comment 1041.3(d)(2)-1.

3. Credit card account. Credit is excluded as a credit card account if it is a credit card account under an open-end (not home-secured) consumer credit plan, as defined in Regulation Z, 12 CFR §1026.2(a)(15)(ii). 12 CFR §1041.3(d)(3).

4. Student loan. Credit is excluded as a student loan if it is made, insured, or guaranteed pursuant to a program authorized by subchapter IV of the Higher Education Act of 1965, 20 U.S.C. 1070 through 1099d. Additionally, credit is excluded if it is a private education loan as defined in Regulation Z, 12 CFR §1026.46(b)(5). 12 CFR §1041.3(d)(4).

5. Non-recourse pawn loan. Credit is excluded as a non-recourse pawn loan if both of the following conditions are satisfied: (a) the lender has sole physical possession and use of the property securing the loan for the entire loan term; and (b) the lender’s sole recourse is the retention of that property. 12 CFR §1041.3(d)(5).

6. Overdraft service; overdraft line of credit. Overdraft services under Regulation E, 12 CFR §1005.17(a), and overdraft lines of credit otherwise excluded from the definition of overdraft services under Regulation E, 12 CFR §1005.17(a)(1), are excluded from coverage under the Payday Lending Rule. 12 CFR §1041.3(d)(6).

7. Wage advance program loans. Advances by an employer (or its business partner) to the employer’s employee of the value of accrued wages are excluded from the Payday Lending Rule if the entity advancing the funds makes certain warranties as set forth in the Payday Lending Rule. The entity must make the warranties before the funds are advanced and as part of the contract between the parties and on behalf of itself and any business partners. 12 CFR §1041.3(d)(7). More information on this exclusion is available in Payday Lending Rule Covered Loans Question 10 and Question 11.

8. No cost advances. If the consumer is not required to pay any charge or fee to be eligible to receive or in return for receiving a credit advance, the no-cost advance is excluded from the Payday Lending Rule if the entity advancing the funds warrants all of the following to the consumer (before any amounts are advanced and as part of the contract between the parties):

• The entity does not have any legal or contractual claim or remedy against the consumer based on the consumer’s failure to repay. This provision does not prevent the entity from obtaining a one-time authorization to seek repayment from the consumer’s account. Comment 1041.3(d)(8)-1;
• With respect to the amounts advanced, the entity will not engage in any debt collection activities if the advance is not repaid on the scheduled date;
• The entity will not place the amount advanced as debt with a third party or sell it as debt to a third party; and
• The entity will not report information to a consumer reporting agency concerning the amount advanced.

12 CFR §1041.3(d)(8).

For information on loans that are exempted from coverage under the Payday Lending Rule, Payday Lending Rule Covered Loans Question 5.

Updated July 7, 2020

No. Advances of wages that constitute credit are excluded from the Payday Lending Rule only if all of the following are satisfied:

1. The advance is made by an employer, as defined in the Fair Labor Standards Act, 29 U.S.C. 203(d), or by the employer’s business partner (e.g., a company that provides payroll card services or accounting services to the employer, or a company that provides consumer financial products and services as part of the employer’s benefits program such that the company would have information regarding the employee’s accrued wages).

2. The credit is extended to the employer’s employee.

3. The advance is made only against the accrued cash value of any wages the employee has earned up to the date of the advance. The amount advanced must not exceed the employee’s accrued wages. Accrued wages are unpaid wages that the employee is entitled to receive for work performed for the employer in the event of separation. A lender determines this amount under applicable state law. Comment 1041.3(d)(7)(i)-1.

4. Before funds are advanced, the entity advancing the funds warrants all of the following to the employee (as part of the contract between the parties and on behalf of itself and any business partners):

• The consumer (i.e., the employee) will not be required to pay any charges or fees in connection with the advance (other than a charge for participating in the wage advance program);
• The entity and its business partners do not have any legal or contractual claim or remedy against the consumer based on the consumer’s failure to repay. This provision does not prevent the entity from obtaining a one-time authorization to seek repayment from the consumer’s account. Comment 1041.3(d)(7)(ii)(B)-1;
• With respect to the amounts advanced, the entity and its business partners will not engage in any debt collection activities if the advance is not directly deducted from the consumer’s wages or otherwise repaid on the scheduled due date;
• The entity and its business partners will not place the amount advanced as debt with a third party or sell it as debt to a third party; and
• The entity and its business partners will not report information to a consumer reporting agency concerning the amount advanced.

12 CFR §1041.3(d)(7).

Additionally, a wage advance or other transaction is not covered under the Payday Lending Rule unless it constitutes credit under the Rule. Thus, a wage advance that is not credit is not subject to the Payday Lending Rule. For this purpose, “credit” means the right to defer payment of debt or to incur debt and defer payment.

Updated July 7, 2020

In order for a loan to satisfy the exclusion for wage advance program loans, the entity making the advance must warrant that the consumer (i.e., the employee) will not be required to pay any charges or fees in connection with the advance, other than a charge for participating in the wage advance program. Thus, only a fee for participating in the program may be charged. The exclusion will not apply if any other fee, such as a per advance fee, is charged in connection with the advance.

Updated July 7, 2020

No. The Payday Lending Rule can apply regardless of whether a loan is a vehicle title loan or a loan commonly identified as a payday loan. To determine whether a loan is subject to the Payday Lending Rule, one should carefully review the coverage criteria, the exclusions, and the exemptions set forth in the Rule. More information on what loans are covered by the Payday Lending Rule is available in Payday Lending Rule Covered Loans Questions 1 through 11 and in Section 2 of the Small Entity Compliance Guide .

Updated July 7, 2020

No. Short-term loans and longer-term balloon-payment loans can each be covered loans regardless of the cost of credit. 12 CFR §1041.3(b)(1), (2). To determine whether a loan is subject to the Payday Lending Rule, one should carefully review the coverage criteria, the exclusions, and the exemptions set forth in the Rule. More information on what loans are covered by the Payday Lending Rule is available in Payday Lending Rule Covered Loans Questions 1 through 11 and in Section 2 of the Small Entity Compliance Guide .

Updated July 7, 2020

As noted in the statement on supervisory and enforcement practices regarding certain large loans under the Payday Lending Rule released on July 7, 2020, while the Bureau monitors and assesses the effects of the Payment Provisions, it does not intend to take supervisory or enforcement action under the Payment Provisions with regard to covered loans that exceed the Regulation Z coverage threshold in 12 CFR §1026.3(b). From January 1, 2020, through December 31, 2020, the Regulation Z threshold amount is $58,300. See Comment 1026.3(b)-3.xi.

To determine whether a loan is subject to the Payday Lending Rule, one should carefully review the coverage criteria, the exclusions, and the exemptions set forth in the Rule. More information on what loans are covered by the Payday Lending Rule is available in Payday Lending Rule Covered Loans Questions 1 through 11 and in Section 2 of the Small Entity Compliance Guide.

Updated August 11, 2020

No. The Payday Lending Rule does not specifically exclude or exempt banks or credit unions from coverage under the Rule, so it is possible that a bank or credit union could be required to comply with the Payday Lending Rule. Assuming that the bank or credit union regularly extends credit, a bank or a credit union has to comply with the Payday Lending Rule if it makes loans that satisfy the criteria for covered loans and that do not meet the conditions for exemptions or exclusions. See Payday Lending Rule Covered Loans Questions 1 through 11. In particular, banks and credit unions should review the exemptions for alternative loans and accommodation loans found in 12 CFR §1041.3(e) and (f). Additional information about the exemptions and exclusions is also available in Section 2 of the Small Entity Compliance Guide .

Also, as noted in the Payday Lending Rule Payment Transfers Questions below, and in Section 4.2 of the Small Entity Compliance Guide , the Rule also has a partial exclusion from some of the payment-related requirements for transfers initiated by lenders that are also account-holding institutions. 12 CFR §1041.8(a)(1)(ii). If a bank or credit union is both the lender for a covered loan and the institution that holds the consumer’s account, the bank or credit union may be able to rely on the partial exclusion from some of the payment-related requirements if the conditions set forth in 12 CFR §1041.8(a)(1)(ii) are met.

Updated July 7, 2020

Yes, a loan that is not a covered loan when it is made can later become a covered loan. A loan may become a covered loan at any time during the loan’s term. Once the loan meets the requirements for coverage, it is a covered loan for the remainder of the loan’s term. See 12 CFR 1041.3(b)(3); comments 1041.3(b)(3)-3 and 1041.9(b)(1)(i)-2.

To illustrate, a lender may extend a closed-end loan that is not a longer-term balloon-payment loan and that is to be repaid within six months of consummation. At consummation, the cost of credit is above 36 percent, but the loan does not have a leveraged payment mechanism. Thus, the loan is not a covered loan at consummation. 12 CFR 1041.3(b). After two weeks, the lender adds a leveraged payment mechanism. The loan is now a covered loan because it meets both requirements in 12 CFR 1041.3(b)(3)(i) and (ii). 12 CFR 1041.3(b)(3); comment 1041.3(b)(3)-3. Note that a lender does not obtain a leveraged payment mechanism by initiating a single immediate payment transfer at the consumer’s request. 12 CFR 1041.3(c).

Alternatively, a lender may extend an open-end credit plan with monthly billing cycles and a leveraged payment mechanism. At consummation and again at the end of the first billing cycle, the plan is not a covered longer-term loan because the cost of credit is below 36 percent. In the second billing cycle, the plan’s cost of credit increases to 45 percent because several fees are triggered in addition to interest on the principal balance. The plan is now a covered longer-term loan because it meets both requirements in 12 CFR 1041.3(b)(3)(i) and (ii). 12 CFR 1041.3(b)(3)(i)(B); comment 1041.3(b)(3)-3.

Similarly, a lender extends an open-end credit plan with monthly billing cycles and a leveraged payment mechanism. At consummation and at the end of the first billing cycle, the plan is not a covered longer-term loan because the cost of credit is below 36 percent. In the second billing cycle, the principal balance is $0. The lender imposes a finance charge in the second billing cycle. The plan is now a covered longer-term loan because it meets both requirements in 12 CFR 1041.3(b)(3)(i) and (ii). 12 CFR 1041.3(b)(3)(i)(B)(1); comment 1041.3(b)(3)-3.

For additional information on the timing for providing the first withdrawal notice for a loan that becomes a covered loan after it is made, see comments 1041.3(b)(3)-3 and 1041.9(b)(1)(i)-2.

Updated July 7, 2020

No. A closed-end loan is only a covered longer-term loan if the cost of credit at consummation exceeds 36 percent per annum. 12 CFR §1041.3(b)(3)(i). If the cost of credit at consummation is not more than 36 percent per annum, a closed-end loan does not become a covered longer-term loan if the cost of credit later exceeds 36 percent per annum. For purposes of the Payday Lending Rule, consummation means the time that a consumer becomes obligated on a new loan or a modification that increases the amount of an existing loan. 12 CFR §1041.2(a). See also comment 1041.2(a)(5)-1.

Lenders should keep in mind that the Payday Lending Rule prohibits lenders from taking any action with the intent of evading the prohibitions on certain payment transfer attempts. 12 CFR §1041.8(e). In determining whether a lender has acted with the intent of evading the requirements of the rule, the form, characterization, label, structure, or written documentation of the lender’s action shall not be dispositive. Rather, the actual substance of the lender’s action as well as other relevant facts and circumstances will determine whether the lender’s action was taken with the intent of evading the requirements of the rule. Comment 1041.8(e).

Updated August 11, 2020

Maybe. The answer depends on whether the security interest in the real property or the personal property used as a dwelling is otherwise perfected during the term of the refinance. If the security interest is otherwise perfected during the term of the refinance, the exclusion for real estate secured credit applies even if the mortgage or other security instrument is not re-recorded during the term of the refinance. For example, depending on applicable state law, a lender may be able to perfect the refinance by referencing a previously recorded mortgage in the promissory note or another document.

The Payday Lending Rule includes an exclusion for real estate secured credit. Credit is excluded as real estate secured credit if the credit is secured by any real property or by personal property (e.g., mobile home, boat, cooperative unit) to be used as a dwelling. 12 CFR §1041.3(d)(2). The exclusion applies only if the lender records or otherwise perfects the security interest within the term of the loan. Comment 1041.3(d)(2)-1. It is not necessary to record the mortgage or other security interest during the term of the loan as long as the lender otherwise perfects the security interest during the term of loan. Thus, in a situation where a lender is refinancing a real estate secured loan, the lender may be able to record the mortgage or other security instrument during the term of the original loan and then perfect the refinance without re-recording the mortgage or other security interest, if permitted under applicable state law.

Updated August 11, 2020

No, the purchase money exclusion does not apply to an automobile loan that finances an extended warranty or service contract as well as the purchase price of the automobile Under the Payday Lending Rule, credit is excluded as a purchase money security interest loan if: (a) the credit is extended solely and expressly for the purpose of financing a consumer’s initial purchase of a good (e.g., television, household appliance, furniture) (“sole purpose” test); and (b) the credit is secured by that good. 12 CFR §1041.3(d)(1); comment 3(d)(1). Although the exclusion may apply if the credit finances certain mandatory and unavoidable expenses, such as taxes and government licensing fees, it does not apply if the credit finances an extended warranty or service contract.

The purchase money exclusion applies if an automobile loan finances solely the purchase of the automobile, or includes mandatory and largely unavoidable expenses, such as federal, state, or local taxes and amounts required to be paid under applicable state and federal licensing and registration requirements. 12 CFR §1041.3(d)(1); comment 1041.3(d)(1). However, if the automobile loan includes an extended warranty or service contract that is being sold along with an automobile, the loan does not meet the “sole purpose” test and the purchase money exclusion would not apply. Similarly, if the amount financed is greater than the cost of acquiring the good (i.e., the amount financed for an automobile loan exceeds the cost of the automobile because the loan also finances the cost of an ancillary good or service), the loan does not meet the “sole purpose” test and cannot be excluded as a purchase money security interest loan. 82 FR 54472, 54544.

Updated August 11, 2020

If an open-end loan becomes a covered longer-term loan because the cost of credit exceeds 36 percent at the end of a billing cycle, the lender must begin complying with the Payday Lending Rule at the beginning of the next billing cycle. 12 CFR §1041.3(b)(6)(ii)(B); comment 1041.3(b)(3)-3.ii. To illustrate, a lender may extend an open-end credit plan with monthly payments and a leveraged payment mechanism. At consummation and again at the end of the first billing cycle, the plan is not covered because the cost of credit is below 36 percent. At the end of the second billing cycle, the plan’s cost of credit is 45 percent. Beginning on the first day of the third billing cycle and thereafter for the duration of the plan, the lender must comply with the Payday Lending Rule. Comment 1041.3(b)(3)-3.ii.

For more information on providing the first payment withdrawal notice for a loan that becomes a covered loan during its term, see 12 CFR §1041.3(b)(3); comment 1041.3(b)(3)-3.

Updated August 11, 2020