Yesterday, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a proposed interpretive rule opining that earned wage access (EWA) products — whether provided through employer partnerships or marketed directly to borrowers — are subject to Truth in Lending Act (TILA) and Regulation Z requirements. The proposed rule’s broad definitions and aggressive stance on fees and tips as finance charges conflict with many state laws and could lead to litigation.
Notably, yesterday’s proposed interpretive rule abruptly reverses the Bureau’s earlier stance on EWA products. In November 2020, the CFPB issued an advisory opinion stating that EWA products do not involve the offering or extension of “credit” as that term is defined in Regulation Z and TILA. The 2020 opinion explained that an EWA product is not an extension of credit if it meets several conditions, including: providing the consumer with no more than the amount of accrued wages earned; provision by a third party fully integrated with the employer; no consumer payment, voluntary or otherwise, beyond recovery of paid amounts via a payroll deduction from the next paycheck, and no other recourse or collection activity of any kind; and no underwriting or credit reporting.
The proposed interpretive rule takes the opposite approach. The interpretive rule broadly defines the scope of products it covers. Specifically, it applies to any product that involves both “the provision of funds to the consumer in an amount that is based, by estimate or otherwise, on the wages that the consumer has accrued in a given pay cycle” and “repayment to the third-party provider via some automatic means, like a scheduled payroll deduction or a preauthorized account debit, at or after the end of the pay cycle.”
The CFPB’s proposed rule takes a broad view of what constitutes “credit” under TILA. TILA defines “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.” According to the Bureau, EWA products are consumer credit for purposes of TILA. Specifically, the CFPB defines “debt” to include any obligation to pay money at a future date, even if the amount is contingent on future events, such as the availability of funds from the next payroll event.
One of the most contentious aspects of the proposed rule is its treatment of optional tips and expedited funds fees as “finance charges.” According to the Bureau, these optional fees are conditions of the extension of credit and must be disclosed as part of the finance charge. “Regulation Z also covers expedited delivery fees as finance charges because such a fee is a ‘condition’ of an extension of credit. As noted above, when an earned wage product provider offers a slower and faster loan, and the faster loan requires payment of an expedited delivery fee, the expedited delivery fee is a ‘condition’ of the extension of that type of credit.”
Similarly, according to the CFPB, a “provider using its authority — real or implied — to exact a ‘tip’ from a consumer in connection with an earned wage transaction has ‘imposed’ the resulting consumer payment.” The proposed rule outlines several factors to consider when determining whether a tip is imposed by the creditor as part of the finance charge, including:
- Soliciting a tip before or at the time of a credit extension;
- Labeling the solicited payment with a term (such as tip) that carries an expectation of payment;
- Setting default tip amounts or making it difficult for the consumer to avoid tipping;
- Suggesting tip amounts or percentages;
- Repeatedly soliciting tips during a single transaction; and
- Implying that tipping may impact future access to the product.
The CFPB is accepting comments on the proposed rule until August 30, 2024. The Bureau is also analyzing options for employees to more easily access and permission their payroll data. According to the Bureau, this could facilitate more competition for EWA products, since employees would not be locked into the provider that has a financial relationship with their employer.