On July 18, 2024, the Consumer Financial Protection Bureau (the “CFPB” or “Bureau”) proposed an interpretive rule that states (1) EWA products fall under the definition of “credit” under the Truth in Lending Act (“TILA”) and Regulation Z and (2) fees for certain tips and for expedited funding are finance charges. This follows the CFPB’s interpretive rule deeming digital user accounts associated with buy-now, pay-later products to be credit cards under Regulation Z and appears to signal a new trend of the Bureau to use “interpretive rules,” rather than the formal rulemaking process, to create seemingly new regulatory requirements. While the interpretive rule only addresses the application of certain TILA and Regulation Z provisions to EWA products, it should be noted that other federal laws and regulations (such as the Equal Credit Opportunity Act and Regulation B) have similar definitions of “credit.”
The advisory opinion on EWAs that the CFPB released in November 2020—and the subsequent silence from the Bureau that followed—has created a great deal of confusion for providers of EWAs, some of which we have previously discussed here and here. The Bureau acknowledges that this confusion created a need for this new interpretive rule, stating that the advisory opinion was limited in scope and “addressed a very specific paycheck advance product that is not common in the real market.” The new interpretive rule replaces that advisory opinion completely.
“Credit”
The interpretive rule defines EWAs as “products that involve both: (1) the provision of funds to the consumer in an amount that is based, by estimate or otherwise, on the wages that the consumer has accrued in a given pay cycle; and (2) repayment to the third-party provider via some automatic means, like a scheduled payroll deduction or a preauthorized account debit, or after the end of the pay cycle.” The Bureau states that EWAs are credit under TILA and Regulation Z because they create a “right to defer payment of debt or to incur debt and defer its payment.” The Bureau notes that Regulation Z does not define “debt” and its “ordinary usage means simply ‘something owed,’ without any obvious limitation.” It then turns to dictionaries, as it did in the BNPL interpretive rule, to support its argument that non-recourse EWAs create “debt” because the consumer is incurring an obligation to pay money at a future date, even if contingent. The Bureau provides examples of contingent obligations that have been found to be credit. It is noteworthy that the Bureau does not address its Official Staff Interpretation of Regulation Z in which it expressly excludes from the definition of credit a product with similar features, the borrowing against the accrued cash value of an insurance policy or pension account where there is no independent obligation to repay (Comment 1026.2(a)(14)-1.v).
The Bureau then goes on to criticize its 2020 advisory opinion, which stated that there must be a “liability” in order for there to be a “debt,” for failing to “consider the full scope of available precedent and definitions in common legal usage when reaching its narrow conclusion” that certain EWA products were not “credit” because they did not constitute a “debt.” The Bureau states:
Many credit products are used to gain liquidity in advance of receipt of a paycheck and thus will have some de facto resemblance to early payment of wages, but that does not take them outside the definition of credit. Earned wage products as distinct from an employer’s actual payment of wages, are no exception.
While the Bureau emphasizes the limited scope of the earlier advisory opinion, it does not appear to provide much room for the structuring of products that provide consumers with early access to their earned wages without such products being deemed “credit” under Regulation Z.
Tips and Expedited Funding Fees as Finance Charges
The Bureau then goes on to state that expedited funding fees and most tips are finance charges under Regulation Z because they are “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.” The Bureau cites dicta from Household Credit Servs., Inc. v. Pfennig, 541 U.S. 232, 240–41 (2004) to state that there need not necessarily be a “substantial connection” between a charge and the extension of credit in order for the charge to be deemed a finance charge. Notwithstanding, the Bureau states expedited funding fees and tips are substantially connected to the extension of credit and are finance charges noting that each charge “happens because of the associated extension of credit, and the connection between each type of [charge] and that extension is close and clear.”
A charge must also be “imposed directly or indirectly by the creditor” in order for it to be deemed a finance charge. This required the Bureau to take a more nuanced view of tips.In evaluating this prong of the definition, the Bureau provides a non-exhaustive list of relevant considerations that would weigh in favor of determining tips or similarly styled consumer payments are “imposed” by the creditor such that they should become part of the finance charge:
- Soliciting a “tip” before or at the time of a credit extension (rather than some significant time after it);
- Labeling the solicited payment with a term (such as “tip”) that carries an expectation that the consumer will make such a payment in the normal course;
- Setting default “tip” amounts or otherwise making it practically more difficult for the consumer to avoid leaving a “tip;”
- Suggesting “tip” amounts or percentages to the consumer;
- Repeatedly soliciting “tips,” even in the course of a single transaction; and
- Stating or otherwise implying, directly or indirectly, truthfully or otherwise, that “tipping” may impact subsequent access to or use of the product.
Many in the EWA industry have argued that expedited funding fees, which allow customers to receive their EWA funds more quickly by paying a small fee, should not be considered part of the finance charge because they are entirely optional – they are avoidable by a customer who declines expedited funding. The Bureau spends little time refuting this and makes no effort to distinguish the provisions of the Official Staff Interpretation advising that expedited credit card delivery fees are not finance charges (Comment 1026.6(a)(2)-2.ix), stating instead that when consumers choose expedited funding “the resulting speed is a feature of the credit extended, so the resulting fee is part of the cost of credit.” In other words, the Bureau asserts that there are two distinct credit products here, one that funds more slowly and which does not have such a fee, and a more expensive product that funds more quickly.
The ramifications of the proposed interpretive rule are significant, and they likely represent only the beginning of the Bureau’s attempts to apply laws and regulations intended for traditional extensions of credit to EWAs. EWAs are very popular with consumers, but this proposed interpretive rule could change how they are viewed and offered. Unlike in its advisory opinion, the Bureau does not make any meaningful distinction between EWAs offered through employer-sponsored programs and EWAs that are offered directly to consumers, stating that the significant differences between the two types of products are “starting to erode.” The Bureau acknowledges the need that the product fills (the “mismatch in the timing of [consumer] income and expenses”) and the popularity of the product with employers and consumers but does not acknowledge that this interpretive rule, were it to become final, could have the effect of reducing the availability and accessibility of EWAs to those who sometimes rely on them and may be using them to address cash flow issues that could create other, more costly, outcomes. This is another example of the Bureau using outsized and ambiguous efforts to attack innovative and consumer-friendly products. It is also likely that this interpretive rule will embolden states to pass similar laws and regulations.
As it did with the BNPL interpretive rule, the Bureau will be accepting comments through August 30, 2024. However, in a notable difference, the CFPB refers to this as a “proposed interpretive rule” and states its intent to publish a “final interpretive rule” after considering the comments that it receives. The BNPL interpretive rule, on the other hand, was not described as a “proposed interpretive rule,” and the Bureau only stated that it “may make revisions as appropriate after reviewing feedback received.”
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