Earned Wage Access Products would be “Credit” under CFPB Proposed Interpretive Rule

On July 18, 2024, the Consumer Financial Protection Bureau (CFPB) issued a proposed interpretive rule on earned wage access (EWA) products (“Proposed Interpretive Rule”) that, if finalized, would clarify that EWA products are “credit” subject to the requirements of the Truth in Lending Act (TILA) and implementing Regulation Z. The Proposed Interpretive Rule would also interpret “finance charge” to include tips (or gratuities) and expedited delivery fees associated with EWA.

In prepared remarks, CFPB Director Rohit Chopra said this action “will help to ensure that paycheck advance products can remain a viable option for workers and their families, ideally by giving them a cheaper way to access credit compared to the alternatives.” He added, “We also plan to take additional steps to spur competition and increase transparency.” The CFPB concurrently released new research it conducted on the EWA issue, entitled “Data Spotlight: Developments in the Paycheck Advance Market” (“EWA Report”).

The CFPB’s Evolving View on EWA Products

In December 2020, the CFPB published an advisory opinion indicating that an EWA program incorporating specified features would “not involve the offering or extension of ‘credit’” under either Regulation Z or TILA. The CFPB also issued an approval order granting an EWA provider’s application for a safe harbor from TILA liability, concluding that the program does not offer or extend credit; rather, it “facilitates employees’ access to wages they have already earned, and to which they are already entitled, and thus functionally operates like an employer that pays its employees earlier than the scheduled payday.”

In June 2022, the CFPB terminated the approval order, reportedly at the company’s request. In addition, the CFPB expressed interest in revisiting the 2020 advisory opinion and, in 2023, announced its plan to issue further guidance on the application of Regulation Z to EWA products.

The Proposed Interpretive Rule

EWA Products as “Credit”

The Proposed Interpretive Rule, if finalized, would replace the 2020 advisory opinion. Unlike the 2020 advisory opinion, the Proposed Interpretive Rule would classify as “credit,” for purposes of TILA and Regulation Z, EWA products involving both (1) the provision of funds to the consumer in an amount based on the wages that the consumer has accrued in a given pay cycle; and (2) repayment to the third-party provider via an automatic means, such as a scheduled payroll deduction or a preauthorized account debit, at or after the end of the pay cycle. According to the CFPB, earned wage transactions are covered under Regulation Z because consumers incur a debt when they obtain money with an obligation to repay via bank account debit authorization or by payroll deduction. Moreover, TILA has been understood to cover contingent obligations, like earned wage transactions, because the consumer incurs an obligation to pay a specific amount of money to the EWA provider at a future date, even if the obligation to pay may be limited.

Tips and Expedited Delivery Fees as Finance Charges

The Proposed Interpretive Rule would further clarify that tips and expedited delivery fees are considered a finance charge imposed in connection with extension of an EWA product to consumers. Under Regulation Z, a finance charge includes “any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.” The Proposed Interpretive Rule would construe expedited delivery fees as falling squarely within this construct even if the consumer is able to obtain the credit without making such payment. The same would be true for tips, gratuities, or voluntary payments paid by the consumer because there is a “substantial connection” between the tip and the associated extension of credit.

On this basis, the Proposed Interpretive Rule would expressly require EWA providers to consider tips and expedited funds delivery fees as finance charges. Fees charged for expedited delivery of earned wages would still be considered finance charges, and would have to be disclosed, even if the EWA provider also offers a slower delivery option without a fee.

State Regulation of EWA

The number of states seeking to regulate EWA products within their jurisdictions continues to grow. States continue to take varied approaches on the regulatory treatment of EWA products: some have taken a head-on approach by enacting laws designed to specifically define and regulate EWA activity, while others have grappled with whether EWA products are loans or credit under the applicable state lending law. There also have been multi-state efforts to coalesce around an EWA model law.

California, as an example, has proposed regulations that generally would treat EWA products as loans subject to the California Financing Law. In contrast, Nevada, Missouri and a few other states recently enacted laws which specify that EWA products are not loans or credit under applicable state law. Those laws outline the treatment of EWA products and generally require that EWA providers: (i) prohibit discrimination; (ii) have a dispute policy; (iii) allow the consumer to cancel at any time; (iv) not engage in collections activities against consumers; and (vi) offer a free option. Some states also require a license or registration.

Most states have yet to take a formal stance or issue extensive guidance on EWA products. This patchwork approach, and the further complexity introduced by the CFPB’s evolving view on the treatment of EWA products under TILA, creates risk of consumer confusion and necessitates vigilance on the part of EWA providers and other market stakeholders.

Key Takeaways

• Timing. If the Proposed Interpretive Rule is finalized as proposed, EWA providers will be required to provide consumers with finance charge disclosures related to tips and expedited delivery fees. The CFPB is accepting comments on the Proposed Interpretive Rule until August 30, 2024, but, notably, offers no timeline for compliance with any finalized interpretation. This could leave EWA providers with little time to come into compliance.
• Industry Challenges. In the wake of the demise of the Chevron doctrine, the Proposed Interpretive Rule could present an early test case for limits on the CFPB’s rule-writing authority. The dramatic change in the CFPB’s view on the EWA issue also creates a higher burden on the CFPB to show its work. It has been reported that EWA providers are considering challenging a finalized version of the Proposed Interpretive Rule.
• Emerging State Law. EWA providers will also need to monitor the impact of the Proposed Interpretive Rule on state level regulation for changes in their treatment of EWA products. For example, the Proposed Interpretive Rule’s finding that EWA products are “credit” under Regulation Z may encourage certain states to consider EWA products as loans under the applicable state lending law.
• Other Considerations. In his prepared remarks, Director Chopra said the CFPB “will be looking for more ways that workers can gain access rights to their payroll and financial records.” He noted that many payroll providers are developing data-sharing capabilities, and that the agency’s open banking proposed rule, which he said would be finalized in October 2024, could lead to new options for consumers to access funds.

We will continue to follow developments in the EWA market, including as they relate to the Proposed Interpretive Rule. Please contact the authors with questions.