What Should a Subprime Lender Do to Prepare for the Small Dollar Loan Rule (SDLR)?

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 in Our Draft to Revisit

1. “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.

2. “Alternative Products”: We have not addressed SDLR-exempt options (e.g., wage advances, no-cost loans).

3. “Stay Informed”: We emphasize monitoring the CFPB v. CFSA litigation and state-level regulations, which may impose stricter rules.