NEWS: The CFPB has proposed an interpretive rule that would treat certain “earned wage access” (EWA) products as consumer loans, subject to Truth in Lending and Reg. Z. EWA providers would have to clearly disclose costs and fees to workers.
What are EWAs?
Fintech-powered EWA apps have become increasingly popular in recent years. They give workers early access to a portion (or at least an approximate portion) of wages that they have earned before payday.
EWAs come in two basic varieties:
- Employer-partnered, where a third-party firm contracts with employers, typically provides the funding, integrates with the employer’s time and attendance records to determine actual unpaid wages, and is repaid by payroll deduction. Companies like Walmart, Amazon, and McDonald’s offer EWA as part of their benefits.
- Direct-to-consumer, where EWA firms do not typically have access to employers’ time and attendance records. Instead, they estimate the amount of a consumer’s earned but unpaid wages (based on pay stubs or deposit account activity, for example). Repayment is typically made by debiting the consumer’s deposit account, which could result in consumers paying overdraft or NSF fees. Dave and Brigit are examples of direct-to-consumer EWA apps.
Wisconsin’s new “earned wage access” law
The CFPB’s proposal comes on the heels of Wisconsin enacting its own EWA requirements.
As The League reported in this Compliance Courier, 2023 Wisconsin Act 131 was signed into law in March, creating a regulatory framework for EWA services. Found in new Chap. 203 of the Wisconsin Statutes, the law requires EWA providers (whether physically located in Wisconsin or not) to be DFI-licensed before serving workers who live here. The law also establishes many consumer protection requirements.
The new law will take effect Sept. 1, 2024.
Credit unions and banks are not subject to the state’s new EWA requirements. That’s because the law exempts them from having to be licensed as EWA providers. (See Wis. Stats. §203.03(1)(b).) Since the rest of the law’s requirements and limitations apply only to “a provider required to be licensed,” the statute does not cover credit unions.
In passing the legislation, Wisconsin became just the third state (behind Nevada and Missouri) to establish a regulatory framework for EWAs.
The state law applies to both employer-partnered EWA providers (which our statutes call “employer-integrated wage access services”) and direct-to-consumer EWA providers (which our statutes call “consumer-directed wage access services”).
One national law firm summarized the new law’s key provisions:
- Licensing. As part of the state’s licensing framework, EWA providers must make disclosures about their business and products, comply with applicable privacy laws, and submit an annual report to the DFI. They must also register through the Nationwide Multistate Licensing System (NMLS).
- One free option. EWA providers must offer at least one reasonable option for a consumer to obtain the EWA product at no cost.
- Fee disclosures. A provider must inform the consumer of their rights under the agreement and fully and clearly disclose all fees associated with the EWA product.
- Tipping disclosures. Tipping is not banned. However, providers who solicit or receive tips must (i) disclose that tipping is voluntary, both prior to each transaction, and in the service contract; (ii) refrain from misleading or deceiving consumers about the voluntary nature of tips; and (iii) refrain from making representations that tipping will benefit any specific individuals.
- No tip or fee sharing. EWA providers may not share with a consumer’s employer any fees or tips received from or charged to a consumer for EWA services.
- No credit scores. EWA providers will be barred from requiring credit reports for users.
- No fees. EWA providers may not charge late fees, deferral fees, interest, or other penalties or charges for a consumer’s failure to pay outstanding proceeds, fees, or tips.
- Debt reporting and collection limits. EWA providers may not (i) report a consumer’s non-payment to a consumer reporting agency or debt collector, or (ii) attempt to collect on a consumer’s EWA debt, either by itself or through a third party.
The new CFPB proposal
The CFPB’s proposal would do three important things:
It would treat EWAs as “credit” subject to Truth in Lending
The rule would reverse and replace a 2020 CFPB advisory opinion, which concluded that a particular type of EWA product did not involve an extension of “credit” and thus was not subject to Reg. Z – if that product met certain conditions.
According to the CFPB, that 2020 opinion only addressed free, employer-based EWA products, a narrow subset that the Bureau said are “not common in the real market.” CFPB Director Rohit Chopra described that 2020 Advisory Opinion as creating confusion about what rules apply to EWA products, causing “significant regulatory uncertainty.”
The new proposal would take the opposite approach. It would broadly apply 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.”
It would treat certain fees and “tips” as finance charges
While employers can make EWAs fee-free, some products come with fees. Employer models may charge per transaction, or they may charge for “expedited” delivery where workers get their money faster – maybe $2 for receipt within a day or $10 within an hour, instead of for free within a few days.
Direct-to-consumer models may also charge subscription fees, which can range from perhaps $5 to $10 a month. Users can also tip. While tips are voluntary, EWA apps may default workers to tip a certain percentage per transaction.
The CFPB’s proposal would treat both “tips” and “expedited funds delivery fees” as finance charges in many cases. An EWA “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 CFPB wrote. The proposal lists several factors to be considered in deciding whether a tip is imposed by the creditor as part of the finance charge.
It would require EWA providers to give Reg. Z disclosures
The proposal would force EWA providers to make the disclosures required for unsecured credit under Reg. Z. However, employer-sponsored programs that are provided at no cost to employees (i.e., without what the CFPB has deemed a “finance charge”) would not need such disclosures.
CFPB data analysis
Along with its proposal, the CFPB published a report examining employer-sponsored EWAs. It analyzed 2021-2022 data from eight companies that partner with employers to offer EWAs. According to the report, on average, workers take out 27 such loans each year, and these loans often have an APR exceeding 100%. The report also said that a significant number of workers pay fees for EWAs, mostly for expedited transfer services.
Make your voice heard
The League plans to comment on the CFPB’s EWA proposal, and we’d like to know what you think. Would Truth in Lending disclosures benefit your members who use EWAs, and should The League support these rules? Or do some aspects of the proposal concern you? Please reach out to Paul Guttormsson by Aug. 23 so that our comment letter (which is due Aug. 30) can reflect your position.