The California Consumer Financial Protection Law (CCFPL) went into effect on January 1. The CCFPL requires the Department of Financial Protection & Innovation (DFPI), formerly the Department of Business Oversight, to establish an Office of Financial Technology Innovation (OFTI). The DFPI stated in its recent monthly bulletin that OFTI would allow it to “work proactively with entrepreneurs and create a regulatory framework for responsible, emerging financial products.” DFPI wasted no time in shifting its focus to emerging financial products in the fintech industry when it recently announced that it had signed memoranda of understanding (MOUs) with five companies offering earned wage access (EWA) products, allowing them to continue operating in California under certain conditions. This is a significant event for two reasons: First, it shows that the OFTI plans to be active in working with fintech companies that want to offer new products to California consumers; and second, because it will be one of the first instances of a state financial regulator directly addressing EWA products
EWA products can provide an alternative to high-cost payday loans, where a fintech company enters into an agreement with employers and employees to offer employees early access to wages they have earned, but not yet received because it is prior to their pay date. The EWA companies often provide a line of credit to the employee that they can access up to a portion of the wages they have earned but not yet received. The EWA companies enter into an agreement with either the employer, where the employer will pay them a fee for providing this service, or the employee is charged a small fee to obtain the advance.
A key issue in these types of arrangements is whether the advance provided to an employee is a loan subject to state licensing and usury laws. For purposes of the federal Truth in Lending Act, the CFPB issued an advisory opinion in late 2020 determining that, if these arrangements contain certain characteristics, they do not involve a “credit” subject to Regulation Z. At least one company has obtained a CFPB approval order for its EWA offering. However, the application of state usury laws and licensing statutes remains unclear.
In the MOUs, DFPI stated that under the CCFPL, the companies are “covered persons” or “service providers” that allow DFPI to request certain types of information from the companies. Acknowledging the companies’ sale of EWA products in California, DFPI stated its intent to obtain reports from the companies to (1) help it better understand the benefits and risks the companies’ EWA products may pose to California consumers; (2) determine whether DFPI should consider the EWA products loans; and (3) determine whether the EWA products should be subject to other financial laws.
The companies agreed to, among other things:
- Provide quarterly reports to DFPI related to, among other things, EWA product payment volume, fees, delinquency rates, and ratios of money advanced to paycheck;
- Allow DFPI to examine its books and records upon 10 business days prior written notice to them; and
- Insert language into their EWA product agreements making it clear that their EWA products are not licensed or regulated by DFPI, but that may change in the future.
It is not clear from the MOUs why these companies voluntarily agreed to these terms. DFPI’s press release stated that the “MOUs pave a path so earned wage access companies can continue operating in California, in advance of possible registration under the [CCFPL], which took effect this year and defines the companies as newly covered financial services.” Therefore, these companies may have agreed to the MOUs with DFPI to reduce the risk of enforcement action for providing their services to California consumers.
Ultimately, the MOUs express DFPI’s intent to learn more about EWA products, which may lead in the near future to new California state regulations and may eliminate some of the uncertainties under state law that EWA products present. It remains to be seen whether other states will follow California’s lead.