Paycheck advance products that are deemed consumer loans under the CFPB’s new proposal would be subject to increased disclosure and regulatory protections.

The Consumer Financial Protection Bureau (CFPB) recently proposed an interpretive rule titled “Consumer Credit Offered to Borrowers in Advance of Expected Receipt of Compensation for Work” (the Proposal). If finalized, the Proposal would designate “earned wage access” or “earned wage advance” products (EWAs) that require a fee as consumer loans (“credit”), making them subject to the Truth in Lending Act (TILA) and implementing Regulation Z (Reg Z). It would also designate certain EWA-related fees such as tips, expedited fund delivery service, and subscriptions as a “finance charge” under TILA. Such designations would trigger the same disclosures and regulatory protections as consumer loans.

The July 2024 Proposal would replace a November 2020 advisory opinion, “Truth in Lending (Regulation Z); Earned Wage Access Programs,” which the CFPB acknowledges has “caused significant regulatory uncertainty.”

EWA Report

Along with the Proposal, the CFPB released a new research report on the EWA market, “Data Spotlight: Developments in the Paycheck Advance Market.” EWA products, whether offered via employers or directly to users via fintech apps, allow employees with short-term liquidity needs to obtain access to earned (but as yet unpaid) wages earlier than the employer’s payment cycle, typically to pay expenses in advance of a payday. The CFPB noted that consumers are accessing EWA products more frequently and repeatedly, and estimated that the number of transactions that EWA providers process grew by over 90% from 2021 to 2022, with more than 7 million workers accessing approximately $22 billion in 2022. The APR for a typical employer-partnered earned wage cash advance is 109.5%, according to CFPB analysis of the data.

Scope and Applicability

Unless the EWA is no-fee and truly free to the consumer, EWA products would be classified as “credit” under TILA (defined as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment”) if they involve:

• the provision of funds to the consumer in an amount based on the wages that the consumer has accrued in a given pay cycle; and
• repayment to the third-party provider via an automatic means, such as a scheduled payroll deduction or a preauthorized account debit, at or after the end of the pay cycle.

The Proposal would also clarify that tips (also known as gratuities, donations, or voluntary contributions) and expedited delivery fees (or “instant fund” fees) that are imposed on consumers in connection with an EWA are finance charges under TILA and Reg Z.

• Tips and similarly styled consumer payments solicited by EWA service providers, and imposed directly or indirectly, would still be considered part of the finance charge, even if the credit can be obtained without making such a payment.
• Fees charged for expedited delivery of earned wages would still be considered finance charges and would require disclosure even if the EWA service provider also offers a non-expedited no-fee delivery option.

Ramifications

If the Proposal is finalized and an EWA product is deemed a consumer loan, EWA service providers would be required to provide consumers with certain disclosures regarding costs, finance charges, interest rates, solicited tips, and expedited delivery fees. Recordkeeping requirements under TILA and Reg Z would also apply.

Conclusion

The Proposal continues the CFPB’s campaign against what it deems junk fees, late fees, predatory lending, and high rates on financial products (for more information, see this Latham blog post and this post). CFPB Director Rohit Chopra said in a statement that the CFPB will “take additional steps to spur competition and increase transparency.”

The CFPB noted in a statement that “clear disclosures help borrowers understand and compare loan options, sharpens [sic] price competition, and ultimately benefits [sic] companies that offer competitive products.” It remains to be seen whether the CFPB’s efforts achieve their stated goals, or if they actually reduce competition and consumer accessibility to credit and innovative products. Industry advocates have criticized the Proposal for mischaracterizing EWAs as loans, and said they will challenge the Proposal (if finalized) in federal court. In light of the US Supreme Court’s recent ruling that overturned Chevron deference, such agency challenges may become par for the course (for more information, see this Latham blog post).

The CFPB received public comments on the Proposal but has not specified when the Proposal, if finalized, would become effective.

Latham & Watkins will continue to monitor developments in this area.