On November 30, 2020, the US Consumer Financial Protection Bureau (CFPB) issued its final Advisory Opinion Policy, along with two Advisory Opinions (AOs) addressing the applicability of the Truth in Lending Act (TILA) to certain earned wage access (EWA) programs and private education loans. The CFPB first proposed a pilot AO program in June 2020, and the AO program is designed to address regulatory and statutory ambiguities on topics that are not currently subject to enforcement investigations or planned rulemaking. AOs are issued as interpretive rules and exempt from notice-and-comment rulemaking under the Administrative Procedure Act.
In this Legal Update, we analyze the EWA AO, including: (1) the regulatory landscape for EWA programs prior to the AO; (2) application of TILA and consumer credit laws to EWA programs based on the AO; and (3) the practical implications of the AO on EWA programs more generally.
Introduction to EWA Programs and Existing Regulatory Landscape
In recent years, EWA programs have gained in popularity, offering wage workers an option to tap into earned wages ahead of their normal payday. For example, an EWA program could allow an employee whose pay period is every two weeks, but is paid a week after the pay period ends, to access wages earlier than his or her normal payday. The provider would then reduce the employee’s next paycheck by the amount previously accessed (and, in some cases, a fee or a tip).
Providers sell EWA programs either directly to employees or to employers as a no- or lower-cost alternative to payday loans; consumers are simply accessing their already-earned wages in advance of the payday (as opposed to borrowing “new” money) at no or little cost. Such programs are typically structured either directly through the worker’s employer or through a third-party provider. As the impact of the COVID-19 pandemic continues to take its toll on wage workers, EWA programs will only become more popular.
Despite a seemingly straightforward model, EWA programs arguably are in a regulatory grey zone under certain federal and state consumer finance laws. The AO addresses whether certain EWA programs are considered “credit” under TILA. TILA requires “creditors” to provide disclosures and follow certain procedures when extending consumer credit. Under TILA, a “creditor” is a person “who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments [ ].”1 “Credit” is defined as “the right to defer payment of debt or to incur debt and defer its payment.”2 The term “debt” is not defined under TILA or its implementing regulations. Several federal courts have concluded that the term “debt” refers to an absolute, enforceable obligation to repay.3 However, this view is not uniform among federal courts, further fueling regulatory uncertainty of EWA programs.4
Separately, the Equal Credit Opportunity Act (ECOA), which requires companies that extend “credit” to adhere to certain non-discrimination requirements and follow strict procedures when gathering information, evaluating credit applications and extending credit, follows a broader definition of “credit.” ECOA applies to a “creditor,” which means “a person who, in the ordinary course of business, regularly participates in a credit decision, including setting the terms of credit.”5 In turn, “credit” is defined as “the right granted by a creditor to an applicant to defer payment of a debt, incur debt and defer its payment, or purchase property or services and defer payment therefor.”6 There are also questions about whether other federal consumer financial protection laws apply to EWA programs.7
State laws further complicate the regulatory environment for EWA programs. There, the primary issue is whether the EWA program constitutes a loan or credit for the purpose of state consumer lending and usury laws. The definition of “credit” under such laws varies; some states use TILA’s definition of credit, while others exclude the purchase and sale of obligations, arrangements involving no recourse, and programs with no finance charges. However, some state consumer lending laws contain “anti-evasion” provisions, such as California’s Financing Law, which considers “the payment by any person in money, credit, goods, or things in action as consideration for any sale or assignment of, or order for, the payment of wages, salary, commissions, or other compensation for services, whether earned or to be earned” as, “a loan secured by the assignment” for the purposes of regulation under California law.8 Other states have similar provisions.9
In addition to state consumer finance laws, state employment laws may restrict assignment or deduction of wages, again depending on how the EWA program is structured.
CFPB’s EWA AO
The AO clarifies that a “Covered EWA Program” meeting seven specific criteria is not an extension of “credit” for purposes of Regulation Z. Although some EWA programs do not meet each and every criteria set forth by the AO, the AO also suggests that such programs may also not be considered credit under TILA. The AO notably does not conclude that programs that are not a “Covered EWA Program” are per se credit. As a result, the AO might be best read as providing a safe harbor for EWA programs that meet the standard of a “Covered EWA Program.” The seven specific requirements for a Covered EWA Program are:
- The EWA provider contracts with employers to offer the program to the employers’ employees. This requirement excludes third-party “direct to consumer” EWA providers that do not integrate with employers.
- The amount of the EWA does not exceed the accrued cash value of the wages the employee has earned up to the date and time of the EWA transaction (i.e., there is no debt), based on information provided by the employer. The AO makes clear that a provider may not rely on information provided by an employee or an estimate of the employee’s earned wages.
- The employee makes no payment, voluntary or otherwise, for access to the transaction or the EWA program, and the provider does not accept “tips” or other payments from the employee. To meet this criterion, an EWA provider must provide funds to an account of the employee’s choice and cannot charge fees for the delivery of funds to that account. If the EWA transaction involves a prepaid card managed, issued or facilitated by the provider, as some programs do, then the provider must allow “reasonable use” of the account free of charge. The AO defines “reasonable use” to mean that (i) the card must be issued on a major network that permits use at multiple unaffiliated merchants, (ii) the card not charge fees for use of an associated card to buy goods or services, (iii) the card must not impose any periodic fees, and (iv) the employee must have some free and reasonably accessible means to obtain cash from the account.
The Bureau acknowledged, however, that some programs that charge nominal processing fees nonetheless are structured to not involve “credit” under Regulation Z, even though those programs are not a “Covered EWA Program.” Accordingly, the mere fact that an EWA program requires or includes payment of a fee should not be determinative as to whether the program is “credit” if it meets some or all of the other criteria as well.
- The provider recovers the amount of each EWA transaction only through an employer-facilitated payroll deduction from the employee’s next paycheck.
- The provider retains no legal or contractual recourse against the employee in the event of a failed deduction, although the provider may choose to refrain from offering that employee additional EWA transactions.
- Before entering into the EWA transaction, the provider conspicuously explains and warrants to the employee that it (i) will not require the employee to pay any fees or charges in connection with the transaction, (ii) has no legal or contractual claim or remedy, direct or indirect, against the employee in the event the payroll deduction is insufficient to cover the full amount of the EWA transaction, including that it has no right to take payment from any consumer account, and (iii) that it will not engage in any debt collection activities related to the EWA transaction, place the transaction as a debt or sell it to a third party, or report the EWA transaction to a consumer reporting agency.
- The provider will not directly or indirectly assess the credit risk of individual employees, including through obtaining and reviewing credit reports or credit scores about the individual employees. The AO clarifies that the only eligibility criteria that may be imposed is whether the partner employer provides employees access to the program (although the AO also states, in connection with the non-recourse requirement, that a Covered EWA Program provider may refrain from providing an individual employee additional transactions if the provider is unable to recover an existing transaction).
The AO adopts a “totality of the circumstances” analysis to conclude that a Covered EWA Program is not “credit” under Regulation Z. The CFPB noted that, in effect, a Covered EWA Program provides the equivalent of an employee’s paycheck, which is clearly not a credit transaction. The CFPB stated, for example, that receiving a paycheck consists only of wages the employee has earned, costs nothing, does not involve underwriting or assessment of credit risk, and that a provider does not “tak[e] on the type of credit risk characteristic of a typical credit transaction.”
The AO also noted the similarity between a Covered EWA Program and a product in which the consumer borrows against the accrued cash value of an insurance policy or pension amount without an independent obligation to repay, which the Official Staff Commentary to Regulation Z states is not credit.10 The Commentary concludes that such a transaction is not credit “because the consumer is, in effect, only using the consumer’s own money.” Similarly, an EWA transaction under a Covered EWA Program accesses only earned wages, in which the user has a natural property right and is effectively the user’s own money.
Impact of the AO on Future EWA Programs
The AO may be helpful to EWA providers because it suggests that the CFPB supports such products in concept. Although the AO applies to a narrow fact pattern, it does illuminate certain important factors that regulators will consider when evaluating programs that are structured differently, including fees, recourse, and credit assessments. However, programs that operate separate from employers, assess any types of fees, etc. will not necessarily be afforded the same interpretation under TILA. Notably, in issuing the AO, the CFPB encouraged providers of EWA programs that do not meet the AO’s EWA program characteristics to apply for an approval under the Compliance Assistance Sandbox (including, for example, EWA programs that charge nominal processing fees).
The AO also does not address whether the covered EWA programs under the AO would meet the definition of “credit” or “lending” under other consumer financial protection laws, such as ECOA and GLBA. Of course, it also does not address state consumer lending, labor or employment laws.
Despite some of these pitfalls, the AO does provide some additional insights into the factors the CFPB will use when evaluating whether a product is “credit” under TILA in the future, including the provider’s rights against the consumer, fees associated with various aspects of the transaction (including transaction fees and late fees), and credit reporting and debt collection practices in the event of non-payment. However, for providers designing future EWA programs, these factors represent just one regulator’s perspective. State regulators may also weigh in and provide clarity on these and other similar programs.
3 See, e.g., Odier v. Hoffmann Sch. Of Martial Arts, Inc., 619 F. Supp. 2d 571, 577 (N.D. Ind. 2008) (for TILA purposes, “the term ‘debt’ likely refers to a legally enforceable obligation to pay money.”); Capela v. J.G. Wentworth, LLC, 2009 WL 3128003, at *10 (E.D.N.Y. Sept. 24, 2009) (noting with respect to sale of structured settlement rights that the consumer “did not incur any debt or potential debt as a result of the transaction and it was not a loan or credit transaction governed by TILA … .”); Reed v. Val-Chris Investments, Inc., 2011 WL 6028001, at *2 (“Plaintiff incurred no debt and AI had no recourse against Plaintiff if his potential inheritance was not sufficient to cover his assignment. Accordingly, Plaintiff's TILA claim against AI cannot succeed because it was not a credit transaction subject to TILA's requirements.”).
4 See, e.g., Pollice v. Nat’l Tax Funding, L.P., 225 F.3d 379, 410 (3d Cir. 2000) (holding that that “debt,” for TILA purposes, should be construed in accordance with the definition of “debt” in the federal Fair Debt Collection Practices Act).
7 The Gramm-Leach-Bliley Act (GLBA) applies, in relevant part, to entities that are “lending,” “exchanging” or “transferring” money for personal, family or household purposes. 15 U.S.C. § 6801, 12 C.F.R. § 1016.3. The Electronic Fund Transfer Act (EFTA) applies to electronic fund transfers from a consumer’s bank account. 12 C.F.R. § 1005.1 et seq. Additionally, the CFPB’s unfair, deceptive or abusive acts or practices (UDAAP) authority applies to entities offering “consumer financial products and services,” which includes, in some circumstances, “extending credit.” See generally 12 U.S.C. § 5517.