CFPB Should Respect NACHA Standards
The Consumer Financial Protection Bureau (CFPB) should respect NACHA standards and rescind the Payment Provisions of its 2017 Final Rule entitled, “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (i.e. Small-Dollar Rule). The data used to justify the Payment Provisions are not sufficiently robust nor reliable, and thus should not be used to defend a rule that would increase the cost of regulatory compliance without guaranteeing additional protections for consumers.
For background, on February 6, the CFPB proposed rescinding the Mandatory Underwriting Provisions of its Small-Dollar Rule because the data used to justify the rule was “not sufficiently robust and reliable.” At the time, the agency argued that it may “commence a separate rulemaking initiative” on the Payment Provisions of the rule, but only after it re-examined the issue.
The Small-Dollar Rule’s Payment Provisions restrict lenders from making more than two unsuccessful attempts to withdraw payment from a consumer’s account unless a consumer provides new and specific authorization to make more withdrawals. The CFPB issued the rule with the singular goal of reducing the amount of non-sufficient funds fees (NSF) that a borrower could incur if a lender makes repeated unsuccessful attempts to debit a borrower’s account for payment.
Currently, lenders using the Automatic Clearing House (ACH) Network – a system that facilitates the electronic movement of money – for payments must adhere to a set of Operating Rules governed by NACHA. NACHA’s current Operating Rules limit lenders to three attempts to collect on a single payment.
The CFPB’s payments provision would therefore lower the number of unsuccessful attempts to debit an account from three to two. The CFPB justified these tighter standards in 2017 by relying on an old CFPB study that used 2012 data. This is highly problematic as the CFPB has admitted that “NACHA has revised some of its rules, and provided more explicit guidance on others” since 2012.
In fact, NACHA’s Operating Rules were substantially updated as a result of a long-term project aimed at disincentivizing “inappropriate origination activities, providing NACHA with additional enforcement authority, and creating new tools to facilitate the detection of and response to inappropriate origination activities.”
- A 15 percent total return rate;
- A 3 percent rate of administrative returns; and
- A 0.5 percent rate of unauthorized transaction returns.
Failure to comply with the updated rules trigger an investigation of the originating bank, with the potential of a financial institution being barred from the ACH Network (the Native American Financial Services Association, or NAFSA, strongly encourages all lenders and borrowers to report any violations of NACHA’s operating rules via NACHA’s online portal).
NACHA’s updates to its Operating Rules have led to impressive improvements. The return rate for ACH debits dropped from 2.44 percent in 2004 to 1.28 percent in 2015, and the rate of unauthorized debits dropped from 0.065 percent to 0.030 percent over the same period. Even more importantly, the “NSF return rate for ACH debits fell by 21 percent, and fell by 31 percent for online payments” since 2012.
The improvements have come despite there being a “26 percent increase in overall ACH Network volume through 2015, and a 38 percent increase in online payment activity” since 2012. According to NACHA, “All of these successes are due to the strong and continued support of financial institutions to ensuring the ongoing integrity of the ACH Network.”
Because NACHA rules and enforcement capabilities have been updated substantially since 2012, the CFPB should conduct a new study on presentments using robust, reliable, and current data. In the meantime, the CFPB should rescind the Payment Provisions of the Small-Dollar Rule since the data used to justify the rule is not sufficiently robust nor reliable.