The CFPB is expected to reconsider Trump-era guidance that exempted some earned wage access products from federal lending laws, as states consider their own protective measures for the fast-growing industry.
Consumer advocates have been pushing for the Consumer Financial Protection Bureau to rescind a November 2020 advisory opinion that states Earned Wage Access (EWA) products (wage advances) are not loans or products. loans subject to the Truth in Lending Act if they come without user fees and other features.
The CFPB opinion only addressed a small part of the industry. However, industry lobbyists and some New Jersey lawmakers have been using the opinion to push for legislation exempting some products that charge fees directly from consumers from the state’s usury laws.
The office has responded, raising expectations that it will likely look into the issue a second time. CFPB Acting General Counsel Seth Frotman sent a letter to consumer advocates in January regarding the New Jersey bill (S3611/A3450), saying he wants the bureau to revisit the 2020 guidance and assess whether EWA products should be treated as credit.
“It’s a foregone conclusion that they’re going to revise this guidance,” said James Kim, a partner at Ballard Spahr LLP.
The earned wage access industry essentially comes in two models. In one, companies like PayActiv Inc., DailyPay Inc. and Even Responsible Finance Inc. team up with companies like McDonald’s Corp. to let employees get cash advances before the pay period ends. At the other, financial app providers like Earnin and Dave market payday loan products directly to consumers.
Lawmakers in states that ban payday loans and have other strong consumer protections are likely to take notice of the CFPB’s possible new stance as they consider how to treat payday loan products, said Yasmin Farahi, an adviser Policy Officer at the Center for Responsible Lending.
“In some ways, those existing state consumer laws, which we think are how they should be regulated, could be seen by these providers as a threat,” he said.
Earned wages access products started to go mainstream around 2018. Consumers used earned wages access products nearly 56 million times in 2020, up from 18.6 million times in 2018, according to research by the Aite-Novarica Group. .
The market is expected to grow in the coming years. Walmart Inc. announced plans in January to buy EWA provider Even as part of an expansion of the retailer’s financial services app.
Payroll service provider Automatic Data Processing Inc. also plans to introduce its own earned wage access service.
Product offerings can vary widely, making it difficult to determine how to regulate the product.
The typical employer-supported model allows people to access a portion of their paychecks early and pay the advance in later pay periods. Companies that offer earned wages products directly to consumers get a refund by accessing users’ bank accounts.
Fee structures may also vary by provider.
Many employers choose to cover fees when partnering with an EWA provider, while other employer-provider options allow employees to pay voluntary “tips” for advance pay. Some other employer-based products charge user fees.
Direct-to-consumer providers generally charge fees and may also ask users to provide tips for advance payments.
Credit or salary earned?
Consumer advocates say the models in which consumers pay fees are the same as those for credit. High fees can translate to the same high interest rates as payday loans, which can have APRs as high as 450%.
“We are really concerned about where people are getting into the money that is coming in the future,” said Beverly Brown Ruggia, director of New Jersey Citizen Action’s financial justice program.
An April 2021 report of Financial Health Network found that the typical fee charged on earned wage access products was 5% of the advance amount, which is lower than fees charged on payday loans. Consumers successfully paid back those EWA advances 97% of the time, far higher than payday loan repayment rates.
So far, the industry has been supported by the CFPB in its assertion that many EWA offerings are not credit.
“EWA provides extensive benefits to the tens of millions of Americans who use it each year. It’s your earned wages, not a loan,” said Brian Tate, president and CEO of the Innovative Payments Association, an industry group that includes several earned wage access companies.
The CFPB, under former Obama-appointed director Richard Cordray, specifically exempted earned wage access products from a 2016 rule on payday loans.
CFPB Director Kathleen Kraninger, a Trump appointee, followed up with the advisory opinion in November 2020. Under the CFPB’s interpretation, no-fee EWA products offer no credit because people access their earned money and pay it back through future earnings without accruing any debt beyond the initial amount advanced.
Shortly after, the CFPB issued a no action letter to PayActiv, one of the leading companies in the market. The move protected PayActiv’s no-fee products from potential enforcement actions under the Truth in Lending Act.
New Jersey lawmakers used the 2020 advisory opinion to try to push through legislation exempting some employer-based earned wage access products from the state’s 30% criminal usury limit. The legislation was withdrawn in December just before the 2021 legislative session expired and did not receive a vote.
The CFPB advisory opinion “muddied the water” in discussions of the legislation, Brown Ruggia said.
Industry lobbyists claimed the CFPB advisory opinion blessed industry models that charged fees despite the letter’s plain language, he said.
Lawmakers from New Jersey, New York, North Carolina, South Carolina, Georgia, Nevada and Utah introduced legislation to regulate access to earned wages in 2021, and are expected to do so again in upcoming sessions, Farahi said.
The CFPB’s influence could have an impact on state legislative battles, said Catherine Brennan, a partner at Hudson Cook LLP.
“This card indicates where there are some sticking points, where there are some points for defenders to push,” he said of Frotman’s letter.
That’s more likely to be true in states like Georgia, New Jersey, New York and North Carolina, where payday loans are already banned, Farahi said.
California could provide a viable model for some states to follow.
In January 2021, the state Department of Financial Protection and Innovation signed memorandums of understanding with six of the largest earned wage access companies, including PayActiv and Even.
The memorandum allows the state financial watchdog to collect information from earned wage access companies and determine whether to implement industry-specific regulations.
Industry representatives pointed to the California agreement as the best way forward.
“It is vitally important that any public debate focusing on EWA is thoughtful, thoughtful and inclusive of all stakeholders,” said Tate.