Proposal would significantly alter the EWA industry, with potential to reduce competition and consumer choice
The Consumer Financial Protection Bureau (CFPB) proposed an interpretive rule that would extend Truth in Lending Act (TILA) and Regulation Z (Reg Z) compliance requirements to many existing earned wage access (EWA) products. The proposal is significant for at least two reasons:
- It materially deviates from the CFPB's 2020 advisory opinion that allowed an EWA product to be exempt from TILA and Reg Z, guidance on which EWA providers have for years relied to build and run their businesses; and
- If adopted, the new rules would require EWA providers to substantially alter how they market and service their products on a regulated basis.
Much has already been written about what the proposal says – including the declaration that EWA products are consumer credit for purposes of TILA and Reg Z and the expansion of the definition of finance charges, with limited exception.
More importantly, however, are the questions and concerns about the proposal that the EWA industry must consider and address during the comment period (scheduled to close August 30, 2024), including those that we discuss below.
1. The CFPB hangs its credit determination on an obligation to repay regardless of form of payment and whether payment is contingent on the availability of payroll funds.
In a reversal from the 2020 advisory opinion, the proposed interpretive rule provides that EWA products are "credit" because they constitute a "debt." The CFPB states that consumers "incur a 'debt' when they obtain money with an obligation to repay via an authorization to debit a bank account or using one or more payroll deductions." TILA and Reg Z define "credit" similarly as the right to defer payment of debt or to incur debt and defer its payment. See 15 USC § 1602(f); 12 CFR § 1026.2(a)(14). While TILA and Reg Z do not define "debt," the proposed interpretive rule concludes that based upon ordinary usage, legal dictionaries, and available state and federal precedent, a worker incurs a debt if they have "any obligation … to pay another party," even where they only obtain advance access to any portion of wages they have earned at an employer.
Even where the advance is a non-recourse "debt" and repayment is limited by the availability of funds from the next payroll event, the CFPB holds that EWA products are credit because there is an act of repayment. The approach taken by the CFPB in the proposed interpretive rule has the potential effect of expanding the scope of the definition of "credit" that conflicts with prior guidance for both EWA and other small-dollar products.
2. The CFPB also proposes to expand the definition of "finance charge" to include voluntary fees and optional products.
A "finance charge" is "the cost of consumer credit as a dollar amount," including "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." 12 CFR § 1026.4(a). The proposed rule broadly interprets charges "incident to the extension of credit," to include "any payment exacted by the creditor." The proposal identifies payments as finance charges even if the credit can be obtained without making such payment.
The proposal singles out expedited funds delivery fees and voluntary tips or donations. The proposed interpretive rule provides that even though consumers are not required to opt for faster funds and are not required to tip, when they do so, the resulting fee is "incidental" to the extension of credit and a "cost of credit." Based upon this broad interpretation, the proposed interpretive rule calls into question how other voluntary or optional convenience fees will be treated in other financial services products.
3. The proposed rule may not achieve the CFPB's goals of increased competition and regulatory clarity.
With the proposed interpretive rule, the CFPB released a Data Spotlight on the EWA industry. While the CFPB makes reference to marketing, fees, and costs to consumers, it fails to identify any significant consumer harm animating the proposed interpretive rule. Instead, the CFPB supplants its 2020 guidance, citing goals of promoting competition and increased regulatory clarity.
Whether the proposal will increase competition remains uncertain. As with most new compliance obligations, if adopted as proposed, the interpretive rule will impose significant changes to EWA products. It is unclear whether Annual Percentage Rate disclosures will be more informative than current fee disclosures to consumers and allow them to more accurately choose between products. In addition, the costs of implementing a TILA compliance regime may become cost prohibitive to providers who provide a generally low cost or free product to end users. Based upon these factors, increased competition between EWA providers is far from an inevitable result of these regulatory changes. Industry participants have already noted that the compliance burden may significantly decrease the number of providers and increase costs to workers. In the absence of available EWA options, competition may be fostered more broadly across small dollar loan products, potentially increasing payday loan volume.
The CFPB's second goal may similarly be out of reach. Instead of simply clarifying some of the guidance provided in 2020, the proposed interpretive rule directly conflicts with the positions that helped guide current EWA providers in the last four years. Notably, the EWA provider that was the basis of the 2020 guidance was exempted from TILA when the CFPB took a very different approach to "debt" than the position set forth in the proposed rule. That product also offered several options for funds availability, including free funds transfers to a branded account and ACH, as well as an expedited funds availability option for $1.99. [1] By contrast, the proposed interpretive rule's expansion of the definition of "finance charge" would include any optional expedited funds fees even where free options are available. This change could both increase the price and decrease the availability of EWA products. In today's increasingly digital economy optional convenience fees are a routine part of a financial services ecosystem where consumers often demand and choose different delivery timing options for funds, goods, and services. Taking an inflexible or overly proscriptive approach to optional service fees may have broader ripple effects outside EWA products and services. These potential broader impacts indicate that greater regulatory clarity is still a work in progress. We expect a robust set of comments in the next few weeks as providers, regulators, and advocates consider how to promote a system that helps workers smooth out the cash flow challenges of our increasingly digitized gig economy.
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