In March 2023, the California Department of Financial Protection and Innovation (DFPI) proposed new regulations under the California Financing Law that would update the definition of loan to include what it dubs as “income-based advances” also known as earned wage access (EWA) products, except for those offered by employers. After considering written comments to the proposed regulations, on November 6, the DFPI issued modifications to the proposed regulations and announced comments on the modifications would be accepted until November 27. Under the modifications, direct-to-consumer (i.e., non-employer offered) EWA products would still be defined as loans.
On November 27, the Consumer Financial Protection Bureau (CFPB) submitted a comment letter to the DFPI agreeing with its proposal to classify income-based advanced as loans and require providers of such products to register with the state. “The CFPB believes that it is consistent with this longstanding practice to subject providers of income-based advances marketed as ‘earned wage access’ to state oversight — as providers of other income-based advance products, such as payday loans that have long been offered in some states, are. Rigorous supervision of all income-based advance products helps to ensure that the label of a product does not determine how providers are held accountable, or the extent to which consumers are protected, under the law.”
The CFPB also agreed with the DFPI’s proposal to define “charges” under the California Financing Law to include “gratuities” and “expedite fees” because it would supposedly align with the Truth in Lending Act (TILA). “[TILA] and its implementing Regulation Z, which generally applies to extensions of consumer credit and provides that a finance charge ‘includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit,’ with certain limited exceptions.”
Notably, the CFPB concluded its letter by forecasting its intent to issue further “guidance” regarding the application of TILA to EWA products.
Our Take:
The CFPB’s apparent position on EWA products is significant for EWA providers, especially if the CFPB issues its own guidance. First, it strongly suggests that the CFPB will treat EWA providers like payday lenders — providing the CFPB with the authority to supervise EWA providers without first promulgating a larger market participant rule. Second, it implies that the DFPI’s treatment of fees, including voluntary gratuities and expedited payment fees, is consistent with TILA’s definition of finance charges, even though optional fees can be excluded from TILA’s definition because they are not “imposed directly or indirectly by the creditor.”
