On July 18, 2024, the Consumer Financial Protection Bureau (CFPB) issued notice of a proposed interpretive rule (Rule) that walks back a prior 2020 Advisory Opinion on the manner in which Regulation Z defines “credit.” The Rule also declares certain types of optional consumer payments to be “incident to or a condition of the extension of credit” such that the fee is a finance charge for purposes of Regulation Z.

Review of 2020 Advisory Opinion

The CFPB framed the Rule by acknowledging its 2020 Advisory Opinion but contending that the 2020 Advisory Opinion interpreted the term “credit” in a very narrow and limited manner. While it is true that the Advisory Opinion clarified only whether a “Covered EWA Program” involved the extension of credit under Regulation Z, the CFPB’s analysis went into a detailed analysis of the term “debt” with regard to how the term should be viewed. In general, Regulation Z applies when there is an extension of “credit” if four conditions are met:

1. The credit is offered or extended to consumers.

2. The offering or extension of credit is done regularly.

3. The credit is subject to a finance charge.

4. The credit is primarily for personal, family, or household purposes.

The term “credit” is then defined as the right to defer payment of debt or to incur debt and defer its payment. Both the Advisory Opinion and the Rule acknowledge that Regulation Z does not define the term “debt.”

Defining Debt in CFPB’s Proposed Rule

The Advisory Opinion relied on Black’s Law Dictionary definition of debt, which they say is the “common” meaning of the term “debt,” defining it as a liability on a claim, a specific sum of money due by agreement or otherwise. The Rule explores the definition of “debt” under different sources, including Merriam-Webster, in support of its conclusion that the term is essentially an obligation to pay. The Rule states, “(T)his commonsense understanding of debt is reflected in State laws defining the term debt as an obligation to pay” and goes on to cite a number of state statutes defining the term debt. A common thread within these definitions is the idea of an “obligation” to repay an advance of funds. In reaching its conclusion, the CFPB again ties “ordinary usage” of the term debt to an obligation to pay another.

Debt Obligations in Earned Wage Access

The CFPB also sweeps with a broad brush, stating that “in an earned wage transaction, the consumer incurs an obligation to pay money at a future date.” While they do not address the fact-specific nature of such an inquiry, the CFPB asserts that the future obligation may rest on an element of contingency. The CFPB does not address authority under state law regarding when those elements, and the absence of recourse, impact court decisions regarding whether a product is a loan. They also assert that an obligation exists because the entity advancing funds obtains authorization to debit a bank account. The CFPB does not address the fact that authorizations can be canceled by a consumer with no repercussion, leaving open significant ambiguity regarding whether common earned wage access (EWA) products would even meet the CFPB’s standards as articulated.

The Rule reflects an interesting position given that it is making a factual determination as it relates to whether a transaction constitutes an obligation for a varied industry, and without regard to state law analysis on those issues (despite citing state laws in other portions of the analysis). The Rule attempts to create broad definitions of debt, drawing heavily on the term obligation but then dismisses obligation in just a couple of sentences and without reference to any authority. Courts have grappled with whether an obligation to repay exists for centuries, with many decisions concluding that non-recourse transactions are not loans or credit under applicable law. Yet, the CFPB seeks to sweep away those fact determinations through a proposed “Interpretative” Rule.

Finance Charges: Tips and Fees

The CFPB then turns to whether there is a finance charge when a product has no interest but contemplates optional additional payments. The CFPB focuses on two types of payments: “tips” and “expedited transfer fees.” The CFPB concludes that each is incurred as an “incident to the extension of credit” and thus should be treated as finance charges. In footnote 31, the CFPB also states that finance charges are not a necessary precondition for the obligations of Regulation Z to apply, implying that even those EWA providers that do not impose finance charges could be subject to Regulation Z. While neither the Truth in Lending Act (TILA) nor Regulation Z explains the meaning of “incident to the extension of credit,” the Rule states that “any payment exacted by the creditor that is substantially connected must be part of the finance charge.”

Voluntary Payments

The Rule also clarifies that even voluntary payments not required to obtain the credit can be finance charges because they may be “imposed directly or indirectly by the creditor.” However, the Rule “does not seek to establish the degree of connection required beyond interpreting ‘incident to’ to cover charges that are substantially connected to a particular extension of credit.” The Rule positions tips and expedited funds delivery payments as two costs consumers may incur in connection with particular extensions of credit, stating that the CFPB views these payments as substantially connected to the extension of credit.

Expedited Transfers and Tips as Finance Charges

With respect to expedited funds delivery payments, the CFPB determined these to be part of the finance charge because they consider the speed of access to funds to be an integral and defining aspect of EWA products. The Rule states that the speed is a feature of the credit extended, so when the consumer pays for the faster delivery, the CFPB’s view is that the associated fee is immediately and directly connected to the extension of credit such that it must be disclosed as part of the finance charge.

The Rule indicates that tips are part of the finance charge when solicited and paid in connection with the extension of credit and imposed directly and indirectly by the creditor, even if the credit can be obtained without making the payment. Tips are considered to be “imposed directly and indirectly by the creditor” when an EWA provider uses its real or implied authority to exact a tip from a consumer. The Rule states that “[a] consumer’s reasonable understanding that a provider expects a ‘tip’ in connection with a transaction is evidence that the provider exacts it as if by authority.” The Rule also lists relevant considerations in determining whether a “tip” or similar payment is part of the finance charge, such as the time the payment is solicited, the labeled term used for the payment, setting default “tip” amounts, suggesting “tip” amounts, repeatedly soliciting “tips,” and implying that “tipping” may impact subsequent access to or use of the product.

Public Comment

The CFPB is encouraging and will accept comments until August 30, 2024.