On November 30, 2020, the Consumer Financial Protection Bureau (“CFPB”) published an opinion on products with access to earned wages (“EWA”). The Presidium dealt with the question of whether EWA providers offer or extend “loans”, as this term is defined in Regulation Z, and came to the conclusion that the “covered EWA programs” do not offer or extend loans in accordance with Reg. Z. On December 30th, CFPB PayActiv issued an approval order for the Compliance Support Sandbox (“CAS”) relating to certain aspects of its EWA products.
What are Earned Wage Access Programs?
EWA programs typically allow employers to transfer workers a certain amount of accrued wages before workers receive their regular paychecks. The employer pays the amount that was brought forward from the employee’s subsequent paycheck through wage deductions or bank account debits. In many cases, third party “EWA” providers work with the employer, the employee, or both to streamline this type of advance pay.
What is the uncertainty regarding EWA programs that the CFPB should address in its opinion?
EWA providers – and the CFPB itself – have identified uncertainties as to whether the Truth in Lending Act (“TILA”) and its Executive Order, Regulation Z, apply to EWA programs. Rule Z generally applies to extensions of “credits” when four conditions are met:
- The credit is offered or granted to consumers.
- Loans are offered or renewed regularly.
- The credit is subject to a financing fee or is payable in more than four installments by written agreement. and
- The loan is primarily intended for personal, family, or household purposes.
12 CFR § 1026.1 (c) (1).
In Regulation Z, “credit” means the right to postpone payment of debts or to incur debts and postpone payment. 12 CFR § 1026.2 (14).
What does the report do to remove the uncertainty?
The CFPB came to the conclusion that a “Covered EWA Program” does not constitute a loan extension and is therefore not subject to Regulation Z. A Covered EWA program must meet the following criteria:
- The EWA program provider concludes a contract with the employer for the offering and provision of EWA services.
- The amount of each advance payment will not exceed the accrued present value of wages earned by the employee up to the date and time of the transaction set by the employer.
- The employee does not pay any voluntary or other fee to access EWA funds or otherwise use the EWA program. The advance payment must be transferred to an account of the employee’s choice. If the account that receives the advance is a prepaid account within the meaning of Rule E and this account is offered by the provider, additional fee restrictions apply.
- The provider only retrieves the advance payment from the employee’s next paycheck through a wage deduction made easier by the employer. An additional deduction can be attempted in the event of a failed or partial wage deduction due to administrative or technical errors.
- In the event of a failed or partial wage deduction, the provider does not maintain any legal or contractual remedies against the employee. However, this does not prevent the provider from offering the employee additional EWA transactions.
- The provider must clearly state certain guarantees to the employee, including:
- that there will be no fees
- that the provider has no recourse against the employee, and
- that the provider does not carry out any collection activities.
- The provider may not assess the credit risk of the employee directly or indirectly.
The CFPB concluded that a Covered EWA program does not provide “credit” to consumers for the following reasons:
- EWA transactions do not provide employees with the right to defer payment of debts or to incur debts and defer payment because covered EWA programs do not imply “debt”.
- EWA transactions function like advances on the accrued present value of an insurance policy (or pension account) that have no independent obligation to repay. Advances on the accrued cash value of insurance policies and pension accounts do not count as a credit in accordance with provision Z.
- The aspects of a covered EWA program differ in their type from what the CFPB would generally consider credit.
- This treatment of the covered EWA programs is in line with the CFPB’s discussion of EWA products in the 2017 Payday Loan Rule.
The CFPB guidelines are consistent with the definition of “credit” in Regulation Z. A transaction that does not incur “debt” cannot constitute a “credit”. Accordingly, a transaction that does not constitute a “legal or contractual remedy” for non-payment is unlikely to be a credit transaction under Regulation Z. The CFPB has requested feedback to assess whether additional guidance should be provided on programs that of those in the report.
What is the office’s CAS policy?
The Bureau’s CAS policy provides certain limited safe havens to approved programs provided that the Bureau’s Licensing Ordinance is followed in good faith. The approval order from PayActiv protects the company from liability under TILA. The terms of the order include:
- PayActiv enters into contracts with employers to offer and provide EWA services.
- PayActiv guarantees the employee under the contract between the parties that:
- PayActiv does not charge any fees other than the fee charged for one of the models.
- PayActiv has no recourse to the employee, including the right to receive payments from a consumer account. and
- PayActiv will not carry out any collection activities.
- PayActiv does not assess the credit risk of individual employees either directly or indirectly.
- The advance amount is limited to the accrued present value of wages earned by the employee at the time of the transaction, which is confirmed by information from the employer.
- PayActiv offers consumers two programs in which the employee does not have to pay any voluntary or other fee for using the EWA program. The other program is explained in more detail below.
- PayActiv reclaims the advance payment through an employer’s wage deduction from the employee’s next paycheck. If a wage deduction is unsuccessful due to administrative or technical errors, PayActiv will attempt an additional deduction.
- If a wage deduction is unsuccessful, PayActiv has no remedy against the employee, although PayActiv may not offer the employee additional advances.
Does the CAS approval differ from the CFPB’s opinion at all?
Although PayActiv’s program specifications are nearly identical to the criteria for a covered EWA program as per the CFPB’s opinion, there is one key difference. The November opinion predicted that some EWA programs may have nominal processing fees that do not include an extension of the “loan”. While the opinion does not cover such programs, it did give providers the option of “requesting clarification on a specific fee structure from the Executive Committee” by applying for approval “in accordance with the Compliance Support Sandbox Policy”. PayActiv did just that.
While PayActiv offers a no-fee program, they also offer the PayActiv Access Choice program, which charges employees who do not have a PayActiv-supported account a one-time fee of $ 1. This fee allows access to an unlimited number of transactions during a one-day access window. If the employee accesses funds on multiple days during a single payment period, charges are capped at $ 3 for a week and to $ 5 for a two-week period. PayActiv does not charge any fees for opening an account supported by PayActiv.
What does the approval order mean for fees for EWA transactions?
While the CFPB has made it clear that under certain circumstances an EWA provider may charge fees without the program being considered credit, it is not clear how the CFPB (and other regulators) will distinguish between credit and non-credit programs. It is clear that there can be no debt to be considered uncreditworthy (i.e. there can be no legal right to repayment against the employee). When an employee accesses the accrued present value of wages earned and the wages are then passed on to the EWA provider through employer-based wage deductions rather than a contractual obligation imposed on the consumer, there does not appear to be any debt or entitlement on the part of the consumer. This is especially the case if the fee is charged:
- is comparable to an accelerated transfer fee for non-credit products,
- does not vary depending on the size of the transaction or the repayment period and
- is not based on the employee’s creditworthiness.
In order to further support the characterization of EWA as not creditworthy, the EWA providers undertake not to charge any collection activities, no negative credit reports and no late fees.
Despite the above factors, there are some aspects of some EWA programs that can give some regulators or consumer advocates a break. While the CFPB in an EWA described PayActiv’s fee in an actual loan transaction as “nominal”, a financing fee of USD 5 for a period of two weeks would result in a three-digit annual percentage for a wage advance of USD 100. While this rate of return is 1/3 the rate of return on a typical payday loan, if an EWA were viewed as a loan, this type of rate of return would be three times the consumer advocate-backed APR limit of 36%. Of course, there are numerous types of non-credit cash advances that would have high APRs if classified as “loan”. For example, an ATM advancing $ 20 for a $ 2 fee gives an annualized return ten times the APR of a typical payday lender.
Because EWAs involve an upfront payment of earned wages to an employee and the hope of future settlement on the employee’s payday, some regulators may take the position that EWA is a credit. In August 2019, numerous state regulators announced a lawsuit alleging that certain organizations that raise wages were involved in illicit loans, including for collecting tips, monthly membership fees or other fees. In January 2021, the California Department of Finance and Innovation (“DFPI”) issued five separate letters of intent with EWA vendors setting specific “traffic rules” for the provision of EWA products in California, while DFPI may collect additional information about them how EWA products are offered and used.
Of course, the CFPB’s approval order only applies to PayActiv and the specific product described in its CAS application. Other companies are not allowed to rely on the same safe havens for protection from the CFPB, let alone other regulators that are not part of the CAS process. Even so, the introduction of “nominal fees” by the CFPB in their regulatory calculus regarding EWA leads to a possible separation between the CFPB and other regulators, and until a company inadvertently falls in the middle we may not know how to resolve that separation can.