On July 18, 2024, the Consumer Financial Protection Bureau (CFPB) issued a proposed interpretive rule to regulate offerings in the paycheck advance marketplace. The proposed interpretive rule would deem many paycheck advance products, sometimes marketed as “earned wage advances” or "earned wage access" (EWA) products, as consumer loans subject to the Truth in Lending Act (TILA), which would, among other obligations, require market participants to provide consumers with certain disclosures regarding finance charges. When the paycheck advance product is no-fee and truly free to the consumer many requirements would not apply. According to the CFPB, the purpose of this proposed interpretive rule is “to help market participants determine when certain existing requirements under Federal law are triggered.”
Background
Similar to how Buy Now, Pay Later (BNPL) products and services have become increasingly popular, consumers also have significantly expanded their use of products sometimes marketed as “earned wage access” or “earned wage advance” in recent years. As a result, the CFPB has sought to further scrutinize and understand these and other products, particularly those offered online, by engaging in ongoing monitoring of the market, including, for example, collecting and analyzing data, engaging with stakeholders (such as market participants, consumer groups and states), tracking and studying market developments and conducting market research. According to the CFPB, while “many of these products have similarities to payday loans, there are important distinctions.”
The CFPB has found that the two primary models of earned wage products are employer-partnered and direct-to-consumer. For “employer-partnered” products, providers contract with employers to offer funds in amounts not exceeding accrued wages, and such funds are repaid via one or more payroll deductions, with other recourse options generally unavailable to the third-party provider. “Direct-to-consumer” products provide funds to employees in amounts that they estimate to be below accrued wages; funds are then repaid via automated withdrawal from the consumer’s bank account, and generally without limit to the provider’s ability to seek further recourse as necessary. Notably, the CFPB notes that some of the key differences between these two types of earned wage products are starting to disappear (some direct-to-consumer providers are now connecting directly to payroll records and recovering funds from payroll deductions, and ongoing state legal developments may limit recourse options).
The CFPB previously issued an advisory opinion in November 2020 that described how one particular type of earned wage product does not involve the offering or extension of “credit” as that term is defined in Regulation Z and TILA if it meets all of several identified conditions. However, the 2020 advisory opinion did not address: (i) whether earned wage products that do not satisfy all of these conditions are credit under TILA and Regulation Z; and (ii) what counts under TILA and Regulation Z as a finance charge with respect to any such product that is credit.
To provide greater clarity, the CFPB is proposing to replace the 2020 advisory opinion with this new interpretive rule and is soliciting public comment on any aspect of this proposed interpretive rule. Comments must be received by August 30, 2024. The CFPB intends to issue a final interpretive rule after considering comments received.
Coinciding with the release of the proposed interpretive rule, the CFPB also published a report examining employer-sponsored paycheck advance loans, which found that more consumers are paying fees to get wages early; the market for employer-partnered paycheck advance products is rapidly expanding; consumers using employer-sponsored products take out an average of 27 such loans per year; and that the typical employer-sponsored loan carries an annual percentage rate (APR) over 100 percent.
Coverage
The scope of the proposed interpretive rule includes products that involve both: (1) the provision of funds to the consumer in an amount that is based, by estimate or otherwise, on the wages that the consumer has accrued in a given pay cycle; and (2) repayment to the third-party provider via some automatic means, like a scheduled payroll deduction or a preauthorized account debit (which includes repayment via ACH, check, or any other preauthorized repayment) at or after the end of the pay cycle. Additionally, as the CFPB notes, many payday loans may also fall within scope, in cases where the lender or state law restricts the amount of the loan based on accrued wages.
Analysis
First, the proposed interpretative rule deems earned wage products as consumer credit for purposes of TILA and Regulation Z, based on the CFPB’s conclusion that TILA and Regulation Z cover products where there is an obligation to repay debt. The CFPB adopts a very broad view of “debt” in TILA and Regulation Z to include “any obligation by a consumer to pay another party,” which the CFPB states is in alignment with the definitions of “debt” in state laws and the Fair Debt Collection Practices Act (FDCPA), along with certain aspects of bankruptcy law. According to the CFPB, a consumer incurs an obligation to pay money at a future date in an earned wage transaction, even if the specific amount of money that the consumer is obligated to repay at a future date has an element of contingency. Furthermore, the CFPB finds that earned wage products provide consumers with “the right to defer payment of debt or to incur debt and defer its payment” because they incur a “debt” when they obtain money with an obligation to repay via an authorization to debit a bank account or using one or more payroll deductions.
Second, the proposed interpretive rule clarifies that the TILA and Regulation Z finance charge disclosures include consumer payments that are made incident to the extension of credit and imposed by the creditor directly or indirectly on the consumer, so long as any payment exacted by the creditor is substantially connected to the extension of credit, and even if the credit can be obtained without making such payment. The proposed interpretive rule determines that the two costs that consumers may incur in connection with particular extensions of earned wage credit – namely “tips” (and other similarly labeled payments, like “gratuities,” “donations,” “voluntary contributions” or the like) and expedited funds delivery or “instant funds” fee – are “imposed directly or indirectly by the creditor” such that they are a part of the finance charge. Additionally, the proposed interpretive rule provides that expedited funds delivery or “instant funds” fees would be a “condition” of the extension of credit, and therefore covered by Regulation Z, when an earned wage product provider offers a slower and faster loan, and the faster loan requires payment of an expedited delivery fee.
The CFPB’s characterization of expedite fees also marks a break from prior regulator interpretation. The Federal Reserve Board, in rulemaking quite some time ago, in discussing how to disclose such fees, addressed when they were not finance charges. The CFPB does not ignore this prior interpretation, but instead references and distinguishes it. According to the CFPB, “[t]he expedite fee at issue here differs in kind from the two types of expedite fees previously considered by the Board of Governors of the Federal Reserve System in the context of credit cards accessing home equity lines of credit: a fee for expediting delivery of the physical card, and a fee for expediting a consumer’s payment. See 12 CFR part 1026, comments 6(a)(2)-2(ix) and (x). The Board determined that fees for those services did not need to be included in account opening disclosures as ‘other charges’ or ‘finance charges.’ See 68 FR 16185, 16186-87 (Apr. 3, 2003). Neither of those services—faster possession of a physical card or faster payments of amounts outstanding—are as closely and integrally connected to the extension of credit as faster funds access is to obtaining an earned wage product.”
The CFPB also warns providers about the “tipping” mechanism commonly found in these products, stating “[s]uch payments are not tips or gratuities in any traditional sense,” and that ‘[c]onsumers generally pay tips to individual workers in the service industry, not to firms (whether partnered with the employer or otherwise) for lending them money.” Accordingly, the CFPB cautions providers to “exercise care in ensuring that the language they use here is not deceptive.”
Notably, the proposed interpretive rule only addresses the application of certain Regulation Z and TILA provisions, and does not address the application of any other laws that concern “credit.” That said, as the CFPB highlights, the rule may be instructive to and informative for the design and development of other financial products, including those relying on “tips” and other related payment mechanisms.
Implications and compliance considerations
The issuance of this proposed interpretive rule was expected, as the CFPB signaled in late 2023 in its comment on the California Department of Financial Protection and Innovation (DFPI)’s proposal to undertake registration and examinations of providers of what DFPI refers to as “income-based advances” that the CFPB would issue further guidance “to provide greater clarity concerning the application of the Truth in Lending Act in this market.” That said, the rule marks a significant step forward in getting paycheck advance marketplace regulation in place in the United States.
Perhaps most importantly, this proposed interpretive rule will likely pose some difficult and challenging operational and compliance challenges for the industry, especially given how various regulatory efforts concerning the paycheck advance marketplace have already been adopted, particularly at the state level:
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For example, earlier this year the House Financial Services Committee passed H.R. 7428, the Earned Wage Access Consumer Protection Act, which would define earned wage access as a non-credit product and establish specific consumer disclosures and protections for the first time at the federal level.
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South Carolina recently joined Kansas, Missouri, Nevada and Wisconsin, in adopting legislation that establishes a financial services oversight regime for earned wage access services. These laws generally clarify that with respect to earned wage access services provided by a provider in compliance with the new laws, proceeds are not loans or consumer loans, providers are not lenders with respect to such services, fees (including expedited delivery fees and subscription or membership fees) and tips for such services are not considered loan finance charges. A number of other states have introduced similar types of legislation, many of which remain under active consideration.
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For its part, California has issued proposed regulations to clarify that income-based advances are “loans” under the California Financing Law and that “charges” under that law include “gratuities” as well as “expedite fees.” By treating these products as loans and including a variety of charges that accompany the advance, California’s proposal takes a similar approach to the CFPB’s proposed interpretive rule.
Navigating this increasingly cumbersome state and federal legislative and regulatory patchwork may pose burdensome and operational challenges for many, and may cause at least some to reconsider their business and financial models.
Various earned wage access providers have opposed efforts to characterize their products as traditional credit, and have argued that tips and expedited fees are voluntary rather than mandatory, and therefore should not be considered finance charges. As a result, the CFPB may face some significant industry pushback during the comment period. So far, industry reaction has been negative. One leading FinTech trade association expressed its deep disappointment with the proposed interpretive rule, commenting that the rule reverses [the CFPB’s] previous guidance and is contrary to the established language and interpretation of the Truth in Lending Act (TILA).” This trade association further argued that “EWA is not a loan nor an ‘advance’ and should not be regulated as such…Unlike the provision of credit or a loan, EWA is non-recourse and does not require a credit check, underwriting, base fees on creditworthiness; charge a fee in installments, charge interest, late fees, or penalties; or impact a user’s credit score.” Finally, this trade association objected to the CFPB’s issuance of a proposed interpretive rule as opposed to a formal rulemaking process. It remains possible that industry opposition to this interpretive rule will rise to the level of a formal litigation challenge.
Taking efforts to ensure consumers are protected when using employment-related financial products and services has been a CFPB priority. Going forward, we expect to see the CFPB use a number of tools to oversee the paycheck advance marketplace sector, including the authority to bring claims of unfair, deceptive or abusive practices (UDAAP). Along with analyzing options for consumers to more easily access and permission their payroll data, the CFPB states that it will also work with employers “to ensure they are not inadvertently spawning predatory lending through their paycheck advance partners,” including advising them about accepting kickbacks that paycheck advance providers may someday offer. The CFPB also is expanding its work with the US Department of Labor “on all aspects of employer-driven debt, the future of payments and retirement savings.” As these products continue to grow in popularity and the industry continues to add products and services to meet consumer need, market participants should ensure they understand their regulatory obligations and licensing requirements, know how to navigate the processes and procedures to achieve compliance with the evolving regulatory regimes and develop structures to address regulatory risks, including possible CFPB supervision.
Finally, this proposed interpretive rule is a great example of a rule that may be more vulnerable in the wake of the recent US Supreme Court decision overruling the Chevron doctrine.
