Incorporating Regulatory Nuances, Compliance Strategies, and Risk
Mitigation
1. Audit Your Loan Portfolio and Systems
Identify Covered Loans: Determine which loans fall under the SDLR’s scope:
- Short-term loans (≤45 days).
- Balloon-payment loans (terms >45 days with one payment ≥2x smaller payments).
- Longer-term loans (>45 days) with APRs >36% and automatic withdrawal access.
Upgrade Payment Systems: Ensure systems can:
- Track consecutive failed payment attempts across all channels (ACH, debit cards, etc.) and block further attempts after two failures.
- Automate real-time alerts for failed payments to trigger borrower notifications and authorization workflows.
- Securely retain records (payment
histories, notices, authorizations) for 36 months.
2. Overhaul Borrower Communications
Revise Notifications:
- First Withdrawal Notice: Sent ≥3 days before the first payment attempt.
- Unusual Withdrawal Notice: For deviations in amount, date, or payment channel.
- Consumer Rights
Notice: Sent within 3 days of the second failed attempt, explaining reauthorization requirements.
- Use CFPB Model Templates: Adhere to safe harbor language for notices to avoid penalties.
- Leverage Multi-Channel Delivery: Combine email/SMS with long-form notices (mail or in-person) to meet SDLR standards.
3. Implement Compliance-First Technology
Adopt Automated Tools:
- Payment Attempt Tracking: Systems like REPAY’s Declined Payment Tracker or Payliance’s Real-Time Monitoring to enforce the “two-strike rule.”
- E-Sign Compliance: Ensure electronic consent aligns with SDLR-specific requirements, not just E-Sign Act standards.
- Open Banking Integration: Use solutions like Chirp.Digital to verify borrower account balances pre-withdrawal, reducing NSF risks.
- Test Systems Before March 30: Conduct dry runs to identify gaps in tracking, notifications, or authorization workflows.
4. Train Teams and Refine Processes
Staff Training: Focus on:
- SDLR’s “two-strike” rule and authorization protocols.
- Handling borrower inquiries about failed payments or reauthorization.
- Escalation paths for compliance exceptions.
Update Payment Authorization Workflows:
- Require explicit borrower
consent (written or electronic) after two failed attempts.
- Document all reauthorizations and link them to specific loans/accounts.
5. Mitigate Financial and Legal Risks
Explore Alternative Products:
- Payroll-Deducted Loans: Bypass SDLR rules by structuring repayments via employer partnerships.
- Longer-Term
Loans with APR ≤36%: Adjust pricing to avoid SDLR coverage.
Prepare for Litigation Scenarios:
- Monitor lawsuits challenging the CFPB’s funding structure or SDLR validity.
- Build flexibility into compliance plans to adapt if courts delay/enjoin the rule.
Engage Legal
Counsel:
- Conduct a compliance audit to address gray areas (e.g., retail installment contracts).
- Review payment authorizations to align with NACHA rules and SDLR limits.
6. Proactive Regulatory Engagement
Join Industry Coalitions: Advocate for balanced implementation through groups like CFSA or state associations.
Submit Feedback to the CFPB: Highlight operational challenges (e.g., debit card exclusion requests) during open comment periods.
Additional Resources
CFPB’s Small Entity Compliance Guide.
Webinars/Events: Attend the LendSuite Conference 2025 (March 10–12) for SDLR strategies.
Legal Advisors: Partner with firms specializing in consumer finance litigation (e.g., Hudson Cook LLP).
Key Assumptions to Revisit
“Potential Delays”: While litigation risks exist, the CFPB has ratified the SDLR post-Seila Law, making March 30, 2025, the firm start date unless courts intervene.
“Alternative Products”: We have not addressed SDLR-exempt options (e.g., wage advances, no-cost loans).
“Stay Informed”: We emphasize monitoring the CFPB v. CFSA litigation and state-level regulations, which may impose stricter rules.
