Last week, we reported that on December 30, 2020, the Consumer Financial Protection Bureau ("CFPB" or "Bureau") issued compliance assistance sandbox ("CAS") approval to Payactiv, Inc. ("Payactiv") regarding specific aspects of its earned wage access ("EWA") product.
Payactiv's Chief Legal Officer, David Reidy, expressed Payactiv's reaction to the Approval Order this way – "We are grateful for the hard work and commitment the Bureau showed through this whole process. Everyone involved believes in EWA as an important and innovative benefit for workers. I couldn't be more proud that Payactiv is the first and only EWA provider to be granted this approval."
Payactiv's approval was among the first issued by the CFPB under its CAS Policy. The primary purpose of the CAS Policy is to promote compliance with federal consumer financial laws by resolving regulatory uncertainties, which often arise with innovative consumer products, like EWA products. Approvals issued under the Policy provide a regulated entity with the binding assurance that the specific aspects of its product or service reviewed are compliant with specified legal provisions. The approvals are typically valid for two years, after which the regulated entity may seek an extension.
Payactiv submitted a CAS application in December 2020 seeking confirmation from the Bureau that its EWA program does not involve an extension of "credit" under Section 1026.2(a)(14) of Regulation Z, the implementing regulation of the Truth In Lending Act ("TILA"). Section 1026.2(a)(14) defines "credit" as "the right to defer payment of debt or to incur debt and defer its payment."
Payactiv asserted in its application that its EWA program, wherein it partners with employers to provide employees access to their earned but unpaid wages prior to the scheduled payday and recovers those funds through employer-facilitated payroll deduction, is not credit because the EWA transactions are non-recourse and Payactiv does not charge interest, impose late fees, engage in debt collection activity or report the transactions to the credit reporting agencies, among other factors. Payactiv further asserted that its ability to re-present a deduction of payroll funds when the initial deduction on a payday is unsuccessful does not mean that Payactiv has recourse. Payactiv still bears the risk of loss if it is unable to complete a payroll deduction even if it takes steps to minimize its loss through re-presentments.
As evidenced by its November 30, 2020 advisory opinion, the CFPB has been focused on EWA products for some time. In that advisory opinion, the CFPB distinguished certain EWA products from "credit." The Bureau continued in its effort to provide certainty in the EWA industry as to the applicability of TILA to EWA products with certain features in its Approval Order for Payactiv. While the Approval Order is expressly limited to the "particularized determinations based on the application of existing law to specific factual scenarios" reviewed in connection with Payactiv's application, the order is certainly a positive sign for other EWA providers. See 84 FR 48246, 48251 and 48253. In short, the CFPB "confirm[ed] that credit is not offered or extended in the particular circumstances described by Payactiv." In other words, the Bureau determined Payactiv EWA transactions do not provide employees with "the right to defer payment of debt or to incur debt and defer its payment" because the Payactiv program does not implicate "debt" as that term is defined in the Black's Law Dictionary.
In reaching its conclusion, the CFPB highlighted the following aspects of Payactiv's EWA program, which Payactiv (1) does not base its EWA offerings on the creditworthiness of the employee; (2) obtains timely information from the employer regarding the employees' earned wage and caps the amount of each EWA transaction at 60% of such wages, (3) only is repaid through employer-facilitated deductions; (4) at most, charges a non-recurring $1 fee for providing early access to earned wages for one day, and also offers the program for free if the employee opts to open a Payactiv account; (5) charges no interest or other fees against the EWA transaction; (6) charges no late fees or prepayment penalties; (7) does not report information regarding the transactions to credit reporting agencies; (8) has no right to collect against the employee if the payroll deduction is insufficient; and (9) does not engage in debt collection, or place or sell the transactions as debt to a third party.
The CFPB went on to explain how its interpretation of credit in the Approval Order is consistent both with a comment to Section 1026.2(a)(14), which clarifies that borrowing against the accrued cash value of a pension account without an obligation to repay is not considered credit under Regulation Z and with its prior discussion on these types of products in the Bureau's 2017 Payday Lending Rule.
In addition to the above considerations, the Bureau made clear that in issuing the Approval Order, it considered other factors, including the innovative way Payactiv's EWA program allows consumers to "bridge the gap between paychecks," thus avoiding more costly alternatives, and the program's potential reach to consumers who are underserved by traditional banking products or have poor or limited credit history.
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