As we previously explained, the Consumer Financial Protection Bureau's ("CFPB") recently finalized Advisory Opinion Policy allows any person or entity to request an advisory opinion from the agency. When the CFPB finalized that Policy on November 30, 2020, it concurrently issued its first two advisory opinions: one addressing earned wage access ("EWA") programs, and one concerning private education loan products. This article specifically comments on the important EWA advisory opinion.
EWA programs generally allow employees to access wages they have already worked for and accrued, but have not yet been paid. In its EWA advisory opinion, the CFPB stated that EWA programs incorporating several specific features do "not involve the offering or extension of 'credit,'" and thus, do not fall under the purview of Regulation Z, which implements the Truth In Lending Act ("TILA").
The CFPB identified seven requirements for a CFPB-compliant EWA program, some of which will pose more challenges to EWA providers than others. In particular, to fall within the scope of the advisory opinion, an EWA program must (i) be employer-based, (ii) involve employer-verified wages, (iii) utilize a fee-free model (although the CFPB signaled that "nominal processing fees" may be permissible), (iv) only allow employer-based payroll deductions, (v) restrict the EWA provider's legal and contractual claims for failed or partial payroll deductions, (vi) refrain from directly or indirectly assessing or reporting on an employee's credit, and (vii) provide certain conspicuous EWA disclosures.
The CFPB reasoned that an EWA program with these features does not provide "credit" as defined under Regulation Z because it does not implicate a "debt," and instead merely "facilitates employees' access to wages they have already earned, and to which they are already entitled." The CFPB further likened these EWA transactions to borrowing against the accrued cash value of an insurance policy or pension account, which is not considered credit under commentary to Regulation Z. The CFPB also relied on a "totality of the circumstances" assessment, noting that EWA transactions generally are substantively unlike traditional credit transactions (e.g., providers have no rights against the employee in the event of nonpayment, do not charge for participation in EWA programs in any way, and do not pull credit reports). Finally, the CFPB cited specific statements from its 2017 Payday Lending Rule, in which it had observed that "some efforts to give consumers access to accrued wages may not be credit at all."
EWA programs are one of many innovative fintech products aimed at improving the financial wellness of, and providing monetary flexibility to, employees. While it is unclear what current EWA offerings in the marketplace would comply with the CFPB's specific requirements and the CFPB stops short of giving blanket approval of all EWA programs, the CFPB's advisory opinion expresses significant policy preferences in favor of these EWA financial products. For example, the advisory opinion favorably describes EWA products "as an innovative way for employees to meet short-term liquidity needs that arise between paychecks without turning to more costly alternatives like traditional payday loans." At minimum, the CFPB's generally positive outlook on EWA programs may signal to other state and federal regulators that there is a viable path for EWA products to exist outside of the highly regulated consumer lending legal framework for the benefit of consumers.
The opinion will likely provide some measure of reassurance to many EWA providers who faced years of uncertainty about regulators' perceptions of their business models and whether they would ultimately have to comply with onerous statutory requirements applicable to traditional lenders. Current and prospective EWA providers should carefully review the CFPB's criteria set forth in its advisory opinion to determine whether it makes business sense to conform their EWA programs to the criteria, thereby avoiding the requirements of Regulation Z and TILA; and, most likely, state-law licensing regimes that are also keyed to the TILA definition of "credit."
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