At our AILA Committee Day Meeting on October 9, 2024, we had a spirited discussion of the upcoming CFPB Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule. More specifically, we focused on “leveraged payment mechanisms” and just what that entails. My primary focus for the years that I have been talking about this Rule has been to explain to traditional installment lenders how not to become subject to it even if their loans exceed 36% APR. Certainly, the final version of the Rule is simpler for those subject to it. If an installment lender or credit seller decides to use a “leveraged payment mechanism” in connection with a traditional credit loan/sale in excess of 36% APR, then the creditor is subject to the regulation. So, the definition of “leveraged payment mechanism” becomes exceedingly important to this discussion.
A leveraged payment mechanism in a consumer transaction exists if a 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. There has been considerable discussion over the meaning of the last phrase—”initiating a single immediate payment transfer at the consumer’s request.” My understanding is that if a creditor can “pull” funds—e.g. transfer from a consumer’s account by means of a check, an ACH, or a remotely created check without the consumer taking further action—then the creditor enjoys a leveraged payment mechanism. However, if the consumer must “push” funds by using his or her bank’s online banking services or by giving a single, immediate instruction to the creditor to “pull” funds, then that is not a leveraged payment mechanism. “Immediate” is defined to mean within one business day of receipt of a consumer’s authorization for a one-time transfer.
Examples of situations in which a lender obtains a leveraged payment mechanism include:
1. Future authorization—the loan agreement provides that the consumer, at some future date,
must authorize the lender or service provider to debit the consumer’s account on a recurring
basis.
2. Delinquency or default provisions. The loan agreement provides that the consumer must authorize the lender or service provider to debit the consumer’s account on a one-time or a recurring basis if the consumer becomes delinquent or defaults on the loan.
3. When a lender has the current ability to initiate a transfer of money from a consumer’s account whether by a check, draft, EFT or remotely created check.
Clearly, it is incumbent on lenders to check their documents carefully to make certain that the language used in the forms do not inadvertently create your right to a leveraged payment, unless that is indeed, what you intend. And, if so, then you must be prepared to comply with the “covered loan” requirements.
Respectfully submitted,
Maury Shevin