On October 5, 2017, the Consumer Financial Protection Bureau (CFPB) issued its final rule on Payday, Vehicle Title and Certain High-Cost Installment Loans (the “Small Dollar Rule” or “Rule”). Although the Small Dollar Rule is targeted at short-term, high-interest rate loans (e.g., payday loans), the Rule has potential consequences for the auto financing industry. In February 2019, the CFPB issued a notice of proposed rulemaking with regards to mandatory underwriting provisions. On June 6, 2019, they issued a final rule to delay compliance date for the mandatory underwriting provisions to November 19, 2020.
Recently, in July 2020, the CFPB issued the 2020 Final Rule. As currently written, the Rule applies to three types of consumer loans: (i) loans with a term of 45 days or less called “short-term loans,” (ii) balloon‐payment loans, and (iii) loans charging an annual percentage rate over 36% that include a “leveraged payment mechanism,” such as a debit authorization. Covered short-term loans and balloon payment loans are subject to extensive and burdensome underwriting rules and a new type of credit reporting requirement. Covered leveraged payment loans are not subject to the underwriting and credit reporting requirements, but they are subject – along with covered short-term loans and balloon loans – to new disclosures that must be given before processing certain payments and limits on the number of payment attempts.
Note that, although the Rule is written in terms of “loans,” the term loan is defined to include any extension of credit and would, therefore, include retail installment sales.
The CFPB provided an exemption from the Small Dollar Rule for “certain purchase money security loans.” Specifically, the Rule does not apply to credit extended for the “sole and express purpose of financing a consumer’s initial purchase of a good, when the credit is secured by the property being purchased, whether or not the security interest is perfected or recorded.” In other words, if a consumer receives credit for the express purpose of purchasing a car, the car secures the transaction, and the amount financed is approximately equal to, or less than the cost of acquiring the car, then the transaction is excluded from the Rule.
However, there are two important limitations on this exemption: financing ancillary products, and refinancing a purchase money transaction. Concerning ancillary products, the CFPB noted that the purchase money exemption does not encompass “ancillary products that are being sold along with a vehicle,” but “are not themselves the good in which the lender takes a security interest as a condition of the credit.” Therefore, financing an ancillary product along with a car could mean that there’s no purchase money exemption for the transaction, if the transaction otherwise meets the definition of a “covered loan.”
Additionally, the CFPB expressly states in the commentary accompanying the Rule that the purchase money exemption does not extend to refinances of purchase money credit.
Therefore, if an auto finance transaction involves ancillary products or refinancing, then it could be covered by the Rule if the (i) term is 45 days or less, (ii) transaction has a balloon payment, or (iii) APR is over 36% and the transaction includes a leveraged payment mechanism.
Note that, besides the purchase money exemption, the Rule also contains an “accommodation” exemption for loans made by a lender who makes 2,500 or fewer covered short‐term or balloon payment loans per year and derives no more than 10% of its receipts from such loans. As a result, some sellers of motor vehicles may be permitted to engage in a “de minimis” volume of covered loans, without application of the Rule’s requirements to such loans.
You should seek advice of counsel to determine whether the Rule applies to your transactions.