On July 18, 2024, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) issued a proposed interpretive rule (the “Proposed Rule”) purporting to clarify the application of the Truth in Lending Act (“TILA”) and Regulation Z to earned wage access (“EWA”) programs. Unlike other interpretive rules issued by the Bureau, including the interpretive rule on the application of certain TILA and Regulation Z “credit card” provisions to buy now, pay later products, the Proposed Rule is styled as a proposal and request for comment that will not become effective until after the CFPB considers comments and issues a final interpretive rule. In this blog post, we discuss the important features of the Proposed Rule.
Structure of EWA Programs
Before diving into the Proposed Rule, we briefly remind readers of the basic structure of EWA programs. Earned wage access is a service that allows workers to obtain wages that they have earned, but have not yet been paid, prior to the worker’s regularly scheduled payday. EWA programs have grown in popularity in recent years, and many large employers now partner with EWA providers to offer the providers’ programs as an employee benefit, with the goal of promoting employees’ financial well-being and offering employees access to a lower-cost alternative to payday loans or short-term loans. EWA programs typically do not charge interest, and many do not require the payment of any mandatory fees. Instead, it is common for EWA programs to allow consumers to voluntarily pay a fee for expedited delivery of the proceeds of an advance (although the consumer always may elect to receive an advance for free that is delivered at “regular” speed), and some programs allow consumers to leave a “tip” or gratuity if the consumer so chooses.
As an emerging product, EWA programs present novel financial regulatory issues. The most significant of these issues is the status of an EWA transaction as a non-credit transaction. Regardless of the model, EWA programs typically restrict the amount that can be advanced to a user to the amount of wages that the user has actually earned and has a property right to, and the transaction carries no recourse to the user if the provider cannot recoup the advance. These features differentiate an EWA transaction from a traditional consumer loan. In fact, several states have recently enacted legislation which provides, as a matter of law, that EWAs which are offered in compliance with state law are presumptively not credit for purposes of state lender licensing and usury laws.
The Proposed Rule
The Proposed Rule appears to be a significant step toward the Biden administration CFPB’s efforts to regulate EWA programs as consumer credit. Prior to the issuance of the Proposed Rule, the CFPB had taken the position that certain EWA programs likely were not “credit.” First, the CFPB’s 2017 payday lending rule contained an express exemption for certain “wage advance” or “no cost advance” products. In the preamble to the payday lending rule, the CFPB noted that instances when “an employer allows an employee to draw accrued wages ahead of a scheduled payday and then later reduces the employee’s paycheck by the amount drawn” “may not be credit at all.” The CFPB specifically noted that “[t]his is especially likely where the employer does not reserve any recourse upon the payment made to the employee other than the corresponding reduction in the employee’s paycheck.” Next, in December 2020, the CFPB issued an Advisory Opinion which concluded that certain “covered” EWA transactions that met specific criteria set forth in the advisory opinion were not “credit” under TILA and Regulation Z. While the Advisory Opinion, by its terms, did not provide that EWA programs that did not meet the specific criteria were likewise not “credit,” it also did not provide that such programs were credit per se. Since then, CFPB officials have stated that they believed the advisory opinion resulted in regulatory uncertainty and noted that the CFPB intended to “clarify” the advisory opinion. The Proposed Rule appears to function as this “clarification”; in the preamble to the Proposed Rule, the CFPB stated that the Proposed Rule is intended to “overturn and replace” the 2020 Advisory Opinion.
TILA applies to a “creditor” that extends “consumer credit.” The first issue the Proposed Rule addresses is whether an EWA involves “credit” for purposes of 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.” The Proposed Rule sets forth the CFPB’s view that EWA programs are “credit” under TILA, notwithstanding that a typical EWA does not, by its terms, create an absolute and unconditional obligation to repay, because “the consumer incurs an obligation to pay money at a future date.” In the CFPB’s view, the fact that an EWA transaction is subject to one or more contingencies does not necessarily mean that a transaction is not subject to TILA.
Even if a transaction is “credit” for purposes of TILA, the transaction does not subject a person to regulation under TILA as a “creditor” unless (i) the transaction is repayable by a written agreement in more than four installments; (ii) the “consumer credit” is subject to a “finance charge;” or (iii) the transaction involves use of a “credit card” (broadly defined by TILA to include cards and other physical or virtual access devices that permit a consumer to obtain credit from time to time).
EWA products currently in-market typically do not establish, by written agreement, a schedule of required payments, let alone a schedule involving more than four installments. Additionally, they typically do not involve use of any access device to obtain advances that might reasonably be considered a “credit card.” Each of these is a fact-based determination for any given program, but the key trigger for EWAs to be subject to TILA requirements under the [Proposed Rule] would, for most programs, be whether any fee or other monetization of the program would be treated as a “finance charge.”
Under TILA, a “finance charge” is defined as “any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.” The Proposed Rule sets forth the CFPB’s view that whether a fee or payment is a “finance charge” is not based solely on a determination of whether payment of the fee was voluntary, but whether a payment that is exacted by the creditor is “substantially connected” to the extension of credit. Although the CFPB appears to acknowledge that voluntary expedited payment fees or “tips” are not charges that are imposed “as a condition” of credit, the Proposed Rule sets forth the CFPB’s view that expedited payment fees and “tips” are “substantially connected to the extension of credit,” notwithstanding that these payments are voluntary and an EWA may be obtained on the same terms without payment of these amounts, they are nevertheless “imposed” as an “incident to” credit and are therefore “finance charges” under TILA and Regulation Z. The CFPB stated in a footnote to the Proposed Rule that it believes that a cost may be “imposed” on a consumer even if the cost is not required for the extension of credit.
That being said, the Proposed Rule appears to leave open the possibility that some “tips” nevertheless are not “finance charges” even under the Proposed Rule’s broad interpretation of a “finance charge.” Instead, the Proposed Rule suggests that the determination of whether a “tip” is imposed as an “incident to” the extension of credit requires a nuanced analysis that can include consideration of whether the provider (i) solicits a “tip” before or at the time of a credit extension (rather than some significant time after it); (ii) labels the solicited payment with a term (such as “tip”) that carries an expectation that the consumer will make such a payment in the normal course; (iii) sets default “tip” amounts or otherwise making it practically more difficult for the consumer to avoid leaving a “tip”; (iv) suggests “tip” amounts or percentages to the consumer; (v) repeatedly solicits “tips,” even in the course of a single transaction; and (vi) states or otherwise implies, directly or indirectly, that tipping may impact subsequent access to or use of the product.
The scope of the Proposed Rule is limited to interpreting TILA and Regulation Z’s application to EWA programs. It does not address whether EWA programs are “credit” under any other federal or state consumer financial regulatory laws, though various federal consumer financial laws and regulations (including the Equal Credit Opportunity Act, for example) incorporate definitions of “credit” reasonably similar to the TILA definition; and it also does not address the treatment of any other products under TILA and Regulation Z, though courts or the CFPB itself could pursue similar treatment of other products involving contingent payment obligation as an extension of the Proposed Rule through additional rulemakings or enforcement activity. The CFPB is also analyzing options for workers to more easily access and permission their payroll data separately from the Proposed Rule, as part of what the CFPB states is an effort to “facilitate more competition for paycheck advance products and other loans.”
The application of state and federal consumer financial laws to EWA programs also may be addressed through legislation. The Earned Wage Access Consumer Protection Act, introduced in the U.S. House of Representatives in February 2024, would, if enacted, would exclude EWA transactions offered in compliance with the law from the definition of “credit” (and exclude any voluntary fees, tips, or gratuities paid by the consumer from the definition of a “finance charge”) under TILA and Regulation Z. A number of states, including Kansas, Missouri, Nevada, South Carolina, and Wisconsin have recently enacted legislation which offer EWA programs offered in compliance with state law a presumption that the programs do not involve the extension of credit for purposes of state lender licensing and usury laws.
The CFPB will be receiving comments on the Proposed Rule through August 30, 2024. The CFPB intends to publish a final interpretive rule after considering comments received.