The Payday Lending Rule, also known as the Small Dollar Lending Rule, was expected to reshape short-term lending across the United States.
Introduced by the Consumer Financial Protection Bureau (CFPB), it aimed to reduce failed payment attempts, protect borrowers from excessive fees, and impose stricter oversight on lenders. But in a significant policy shift, the CFPB announced in early 2025 that it will not enforce the rule at the federal level.
That doesn’t mean lenders can ignore it though. Several states have signaled plans to enforce the rule locally, and many of its core provisions are already mirrored in existing NACHA requirements, and broader consumer protection laws. Borrowers still have legal avenues to challenge what courts may consider unfair or abusive payment practices.
This article unpacks the rule’s origin, its intended impact, and why it still matters to your small lending business, despite not being federally enforced. We’ll also look at how you can stay aligned with best regulatory practices using real-time borrower data, automation, and compliance-ready infrastructure.
Genesis of the Payday Lending Rule
Payday lending emerged in the 1990s as a quick solution for borrowers with limited access to traditional credit. It emerged in a context of deregulation and the widespread lack of small loans.
Put bluntly, payday lending met a market need, but often came with high fees, triple-digit APRs, and repayment structures that left many borrowers caught in cycles of debt. For lenders, the model offered high returns, but increasing public pressure triggered calls for reform.
By 2011, the U.S. Congress had established the Consumer Financial Protection Bureau (CFPB) to regulate financial services and protect consumers—payday lending became one of its earliest priorities.
In 2017, the CFPB issued a sweeping rule requiring lenders to verify borrowers’ ability to repay. It then rescinded its mandatory underwriting provisions in 2020, viewing them too burdensome for lenders.
The Payday Lending Rule contains primarily the payments provisions of the 2017 rule:
- Restrictions on automatic payment withdrawals after two failed attempts.
- Mandatory borrower notifications before trying to debit a payment.
As the CFPB outlined in its 2024 update, it intends to curb account closures and reduce excessive non-sufficient funds (NSFs) fees.
Key Provisions of the Payday Lending Rule
While the Payday Lending Rule will not be enforced at the federal level, its core provisions remain highly relevant. Many align with existing industry practices, borrower protections, and NACHA rules governing ACH transactions.
Several states are also considering local enforcement. As a small lender, understanding these provisions is essential, first and foremost, to ensure you stay compliant. But it’s also crucial because borrowers may still bring legal claims against you under general consumer protection laws for what courts deem “unfair” practices.
Here’s what the rule was designed to do:
- Loan types covered: The rule applies to payday loans, vehicle title loans, and certain high-cost installment loans, regardless of whether payments are handled in-house or through third-party processors.
- Failed payment restriction: Lenders may not initiate more than two consecutive failed withdrawal attempts. A third attempt requires new, documented borrower authorization.
- Advance withdrawal notice: Borrowers must receive written notice at least three business days before a withdrawal, including the amount, timing, and payment method.
- Revised terms require new notice: If any loan terms change, borrowers must receive updated notice within the same timeframe.
- Delivery and recordkeeping: Notices should be delivered through trackable, reliable channels and retained for audit purposes.
- Anti-evasion clause: Lenders are prohibited from structuring payment systems or using vendors in a way that bypasses these provisions.
Even without federal enforcement, these principles serve as best-practice benchmarks. Ignoring them may still expose lenders to legal, financial, and reputational risk.
As a small lending business, investment in systems that can monitor payment attempts, issue timely notices, pause debits, and document authorizations will position you better to stay compliant and reduce disputes.
Tools like Bankuity’s advanced banking verification (ABV) platform is designed for small lenders with lean teams, offering real-time account visibility and automated workflows to support operational efficiency and compliance readiness.
The Impact on Small Dollar Lending Institutions and Borrowers
Though the CFPB will not enforce the Payday Lending Rule at the federal level, its intent to improve the borrower experience remains a key talking point across the industry.
Rather than simply disappear, these ideas have influenced ongoing discussions around fairness and transparency, and are already reflected in existing rules from organizations like NACHA.
For borrowers, the heightened visibility and awareness around these practices means they’re more likely to understand their rights and challenge payment activity they view as abusive or deceptive.
The conversation has moved from federal enforcement to state-level actions, industry best practices, and reputational risk. Many lenders had already begun updating systems and communication workflows in anticipation of the rule.
While the rule won’t be enforced nationally, the momentum it created around borrower protections is real. Lenders who stay proactive by tightening oversight, improving borrower communication, and aligning with the spirit of the rule can gain an operational and competitive edge.
In addition to helping reduce your risk, doing so can build trust, boost retention, and position your business to lead in a more transparent lending environment.
What Small Lending Institutions Need To Know
The operational implications for lenders, especially those offering small dollar lending products, require focused attention and decisive action.
Regulators Expect Detailed Compliance Records
State regulators and other legal authorities may assess your policies and your documentation. To ensure compliance, track every payment attempt, borrower notice, and reauthorization with time-stamped precision.
Weak audit trails increase your exposure. The CFPB’s supervisory highlights show that inadequate documentation is one of the most common violations cited during exams.
Third-Party Vendors Won’t Shield You From Liability
Even without federal enforcement of the Payday Lending Rule, third-party oversight remains critical. Under the CFPB’s broader guidance, your institution would still be fully accountable for the actions of vendors, including payment processors and lending software partners.
If borrowers face issues related to failed payments or unclear communication, a state regulator or other legal authority won’t distinguish between your business and your vendors. Review contracts, test integrations thoroughly, and actively monitor third-party performance to ensure alignment with existing consumer protection standards and industry best practices.
Legacy Systems Can’t Meet Real-Time Compliance Demands
Many outdated tools can’t detect failed withdrawals, trigger mandatory notices, or pause debit attempts.
If your current tech stack lacks automation and dynamic tracking, you risk violating core provisions of the payday lending rule. Regulators likely won’t accept technical limitations as an excuse.
Delaying Implementation Increases Risk and Cost
Postponing upgrades compresses timelines, raises vendor pricing, and increases the chance of rushed, error-prone rollouts. Implementing without delay gives you time to train staff, test systems, and audit readiness.
Pre-Withdrawal Communication Reduces Disputes and Defaults
The rule requires clear borrower notices, but proactive communication is also good business in general. Timely, accurate updates reduce chargebacks, improve repayment rates, and support borrower trust.
A well-informed borrower is less likely to miss payments or file complaints, which directly protects your bottom line.
Modern Compliance Infrastructure Fuels Growth
Building systems with the Payday Lending Rule rule front of mind creates downstream advantages.
Stronger workflows, better data, and automated oversight will position your small lending business to scale, enter new markets, and serve underbanked segments with confidence. Small dollar lending is evolving, representing an opportunity for the proactive small lenders to modernize and lead the space.
These shifts raise the bar for operational discipline, but they also open the door for lenders to build stronger foundations.
Best Practices for Lenders to Navigate the Rule
Meeting the stipulations of the Payday Lending Rule is an opportunity to modernize how your lending business operates.
Here’s how to align with the rule while improving long-term performance and compliance.
Clarify Loan Terms and Engage Borrowers Proactively
Transparency reduces your risk.
Ensure your loan agreements and pre-withdrawal notices are clear, consistent, and timely. Communicate payment amounts, dates, and methods in plain language, and confirm delivery through reliable, trackable channels. Proactive engagement limits defaults, disputes, and compliance gaps.
Reevaluate Your Product Structures
Revisit the long-term viability of traditional payday models under the new restrictions. While the rule won’t come into effect yet, it may do so in the future.
Now is a good time to evaluate your product suite to assess their medium and long-term viability—not just because of regulation, but also because of changing consumer awareness and demands.
Explore longer-term installment products, employer-linked advances, or tiered offerings that balance flexibility with repayment capacity.
The goal is to stay competitive while offering more sustainable credit solutions. This can also help you to reposition your strategy to focus on fostering long-term relationships with your customers too.
Use Lending Technology To Automate and Streamline Compliance
Manual oversight isn’t scalable.
Deploy lending technology that automatically monitors payment attempts, issues compliant notices to state regulators or other legal authorities, and documents borrower authorizations.
Bankuity equips lenders with real-time banking data, automated workflows, and audit-ready reporting, helping you to significantly reduce compliance risk and operational strain.
Make Your Lending Software Stack Flexible
Regulations will continue to evolve and the CPFB may revisit the rule at a later date. In the meantime, it may be enforced at your state level.
As a small lender, choosing lending software that can adapt with you will empower you to stay up to date in a timely manner.
To stay in the loop and ensure you don’t get caught out, consider assigning ownership for tracking updates, subscribing to trusted compliance channels, and identifying trusted partners like Bankuity to stay ahead of new developments and respond quickly.
Build a Stronger, Compliant Lending Operation
The Payday Lending Rule may not be federally enforced, but it still raises the bar for transparency and borrower protection. Its core principles reflect a growing expectation, among states, industry bodies, and borrowers, that lenders operate with clearer terms, stronger oversight, and better communication.
For your small lending business, it’s still a clear signal to strengthen internal systems, improve communication, and ensure every process aligns with evolving regulatory expectations.
With the right tools and strategy, you can meet these requirements while improving efficiency and borrower trust. More precise terms, better data, and more reliable automation reduce risk and position your business to grow in a more competitive, compliance-driven market.
Bankuity helps lenders comply with regulation and stay ahead of future compliance updates.
Our advanced banking verification platform delivers real-time financial insights, automates key compliance workflows, and provides the clarity you need to make faster, more informed credit decisions.
Schedule a demo today to see how Bankuity can support your lending operations.
