On November 30, 2020, the Consumer Financial Protection Bureau (“CFPB”) released an advisory opinion concerning earned wage access (“EWA”) products. The Bureau addressed whether EWA providers are offering or extending “credit” as that term is defined by Regulation Z and concluded that the “Covered EWA Programs” do not involve the offering or extension of credit under Reg. Z. On December 30, the CFPB issued a compliance assistance sandbox (“CAS”) approval order to PayActiv related to certain aspects of its EWA products.
What are Earned Wage Access Programs?
EWA programs typically enable employers to advance a certain amount of accrued wages to employees before the employees receive their regular paychecks. The employer settles-up the amount advanced through payroll deductions or bank account debits from the employee’s subsequent paycheck. In many cases third-party “EWA providers” work with the employer, the employee, or both assist in streamlining this type of wage advance.
What is the Uncertainty Around EWA Programs that the CFPB Was Asked to Address in its Advisory Opinion?
EWA providers—and the CFPB itself—identified uncertainty over whether the Truth in Lending Act (“TILA”) and its implementing regulation, Regulation Z, apply to EWA programs. Regulation Z generally applies to extensions of “credit” when four conditions are met:
- the credit is offered or extended to consumers;
- the offering or extending of credit is done regularly;
- the credit is subject to a finance charge or is payable by a written agreement in more than four installments; and
- the credit is primarily for personal, family, or household purposes.
12 C.F.R. § 1026.1(c)(1).
Regulation Z defines “credit” to mean the right to defer payment of debt or to incur debt and defer its payment. 12 C.F.R. § 1026.2(14).
What Does the Advisory Opinion Do to Resolve the Uncertainty?
The CFPB concluded that a “Covered EWA Program” is not an extension of credit and thus not subject to Regulation Z. A Covered EWA Program must meet the following criteria:
- The EWA program provider contracts with the employer to offer and provide EWA services.
- The amount of each advance does not exceed the accrued cash value of the wages the employee has earned up to the date and time of the transaction, as determined by the employer.
- The employee pays no fee – voluntary or otherwise – to access EWA funds or otherwise use the EWA program. The advance must be sent to an account of the employee’s choice. If the account receiving the advance is a prepaid account as defined under Regulation E and that account is offered by the provider, then additional fee restrictions apply.
- The provider recovers the advance only through an employer-facilitated payroll deduction from the employee’s next paycheck. One additional deduction may be attempted in the event of a failed or partial payroll deduction due to administrative or technical errors.
- In the event of a failed or partial payroll deduction, the provider maintains no legal or contractual remedy against the employee. This does not, however, prevent the provider from declining to offer the employee additional EWA transactions.
- The provider must clearly and conspicuously make certain warranties to the employee, including:
- that there will be no fees,
- that the provider has no recourse against the employee, and
- that the provider will not engage in any debt collection activities.
- The provider may not directly or indirectly assess the credit risk of the employee.
The CFPB concluded that a Covered EWA Program does not provide consumers with “credit” for the following reasons:
- EWA transactions do not provide employees with the right to defer payment of debt or to incur debt and defer its payment because Covered EWA Programs do not implicate a “debt.”
- EWA transactions operate like advances on accrued cash value of an insurance policy (or a pension account), where there is no independent obligation to repay. Advances on accrued cash value of insurance policies and pension accounts are not considered credit under Regulation Z.
- The aspects of a Covered EWA Program differ in kind from products the CFPB would generally consider to be credit.
- This treatment of Covered EWA Programs is consistent with the CFPB’s discussion of EWA products in the 2017 Payday Lending Rule.
The CFPB’s guidance is consistent with the Regulation Z definition of “credit.” A transaction that does not create “debt” cannot constitute “credit.” Accordingly, a transaction that does not impose a “legal or contractual remedy” for non-payment, is arguably not a credit transaction under Regulation Z. The CFPB has invited feedback to evaluate whether to provide additional guidance about programs that differ from those addressed in the advisory opinion.
What is the Bureau’s CAS Policy?
The Bureau’s CAS Policy offers certain limited safe harbors to approved programs, subject to good faith compliance with the Bureau’s approval order. PayActiv’s approval order protects the company from liability under TILA. Provisions of the order include:
- PayActiv contracts with employers to offer and provide EWA services.
- PayActiv warrants to the employee as part of the contract between the parties that:
- PayActiv will not impose fees, aside from the fee charged under one of the models;
- PayActiv has no recourse against the employee, including no right to take payment from any consumer account; and
- PayActiv will not engage in any debt collection activities.
- PayActiv does not directly or indirectly assess the credit risk of individual employees.
- The advance amount is capped at the accrued cash value of the wages the employee has earned at the time of the transaction, as verified by information from the employer.
- PayActiv offers two programs to consumers, one of which does not require the employee to pay any fee, voluntary or otherwise, to use the EWA program. The other program is explained in more detail below.
- PayActiv recovers the advance through an employer’s payroll deduction from the employee’s next paycheck. If a payroll deduction is unsuccessful due to administrative or technical errors, then PayActiv attempts one additional deduction.
- If a payroll deduction is not successful, PayActiv has no remedy against the employee, although PayActiv may refrain from offering the employee additional advances.
Does the CAS Approval Differ at All from the CFPB’s Advisory Opinion?
Though PayActiv’s program specifications are nearly identical to the criteria for a Covered EWA Program under the CFPB’s advisory opinion, there is a key difference. The November advisory opinion forecasted that some EWA programs may be charging nominal processing fees that do not involve the extension of “credit.” While the advisory opinion does not cover such programs, it offered providers the opportunity to “request clarification from the Bureau about a specific fee structure” by applying for an approval “under the Policy on the Compliance Assistance Sandbox.” PayActiv did just that.
While PayActiv offers a no-fee program, it also offers its “PayActiv Access Choice” program that charges a $1 non-recurring fee to employees who do not have a PayActiv-facilitated account. That fee provides access to an unlimited number of transactions during a one-day access window. If the employee accesses funds on multiple days during a single pay period, then fees are capped at $3 for a one-week period and $5 for a bi-weekly period. PayActiv does not charge fees to open a PayActiv-facilitated account.
What Does the Approval Order Mean Going Forward for Fees in EWA Transactions?
While the CFPB has clarified that an EWA provider can charge fees in some circumstances without the program being considered credit, it is not clear how the CFPB (and other regulators) will distinguish credit and non-credit programs. It’s clear that to qualify as non-credit, there cannot be a debt (i.e., there cannot be a legal claim to repayment against the employee). When an employee accesses accrued cash value of earned wages, and the wages are then routed to the EWA provider by employer-facilitated payroll deductions, rather than a contractual obligation imposed on the consumer, it seems there is no consumer debt or claim. This is especially the case when the fee charged:
- is comparable to expedited transfer fee for non-credit products,
- does not vary based on the amount of the transaction or repayment period, and
- isn’t based on the employee’s creditworthiness.
To further support characterization of EWA as non-credit, EWA providers agree to refrain from collections activity, negative credit reporting, and imposing late fees.
Despite the factors identified above, there are some aspects of some EWA programs that may give pause to some regulators or consumer advocates. While the CFPB called PayActiv’s fee “nominal,” in an EWA, in an actual credit transaction, a $5 finance charge for a two-week period on a $100 wage advance would yield a triple-digit annual percentage rate. While this rate of return is 1/3 of the rate of return on a typical payday loan, if an EWA were considered credit, then that type of rate of return would be triple the 36% APR limitation supported by consumer advocates. Of course, there are numerous types of non-credit cash advances that would have high APRs if they were deemed “credit.” For example, an ATM machine advancing $20 for a $2 fee yields an annualized rate of return that is 10 times as much as a typical payday lender’s APR.
Since EWAs involve a cash advance of earned wages to an employee and a hope of future settlement on the employee’s payday, some regulators may be taking the position that EWA is credit. In August of 2019, numerous state regulators announced an action alleging that certain organizations advancing wages were engaged in unlawful lending, in part because they charged tips, monthly membership fees, or other fees. In January of 2021, the California Department of Financial Protection and Innovation (“DFPI”) released five separate memoranda of understanding with EWA providers that outline certain “rules of the road” for providing EWA products in California while allowing the DFPI to collect additional information on how EWA products are offered and used.
Of course, the CFPB’s approval order applies only to PayActiv and the specific product it outlined in its CAS application. Other companies are not authorized to rely on the same safe harbors for protection from the CFPB, let alone other regulators who are not part of the CAS process. Even so, the CFPB’s introduction of “nominal fees” into its regulatory calculus regarding EWA creates a potential disconnect between the CFPB and other regulators, and until a company unwittingly falls in the middle, we may not know the resolution of this disconnect.