The CFPB should reconsider Trump-era guidelines that exempted certain earned wage access products from federal lending laws, as states consider their own safeguards for the rapidly growing industry.
Consumer advocates have lobbied for the Consumer Financial Protection Bureau to rescind a November 2020 advisory opinion stating Earned Wage Access (EWA) products – cash advances from wages – are not loans or credit products subject to the Truth in Lending Act if they come with no user fees and other features.
The CFPB’s opinion only concerned part of the industry. But industry lobbyists and some New Jersey lawmakers have nonetheless used the opinion to push for legislation that would exempt certain products that collect fees directly from consumers from state usury laws. .
The bureau responded, raising expectations that it will likely revisit the issue. Acting CFPB General Counsel Seth Frotman sent a letter to consumer advocates in January regarding the New Jersey bill (S3611/A3450), indicating that he wants the bureau to revisit the 2020 guidance and assess whether EWA products should be treated as a credit.
“Obviously they will be reviewing these guidelines,” said James Kim, partner at Ballard Spahr LLP.
The earned wage access industry essentially comes in two models. In one, companies like PayActiv Inc., DailyPay Inc., and Even Responsible Finance Inc. are partnering with companies like McDonald’s Corp. to allow employees to obtain cash advances before the end of a pay period. In the other, financial app providers such as Earnin and Dave market payday advance products directly to consumers.
Lawmakers in states that ban payday loans and have other strong consumer protections are likely to take note of the CFPB’s potential new stance when considering dealing with payday advance products, Yasmin Farahi said. , Senior Policy Advisor at the Center for Responsible Lending.
“In some ways, these existing state consumer laws, which we believe should be regulated, could be seen by these providers as a threat,” she said.
Earnings access products began to become mainstream around 2018. Consumers used earned earnings access products nearly 56 million times in 2020, up from 18.6 million times in 2018, research finds of the Aite-Novarica group.
The market is expected to grow in the coming years. Walmart Inc. announced plans in January to buy supplier EWA Even as part of an expansion of the retailer’s financial services app.
Payroll service provider Automatic Data Processing Inc. also plans to introduce its own Earned Salary Access service.
Product offerings can vary widely, making it difficult to determine exactly how to regulate the product.
The typical employer-backed model allows people to access a portion of their paychecks sooner and repay the advance on subsequent pay periods. Companies that provide paid products directly to consumers are reimbursed by accessing users’ bank accounts.
Fee structures may also vary by provider.
Many employers choose to cover costs when partnering with an EWA provider, while other employer-provider options allow employees to pay voluntary “tips” for salary advances. A few other employer products charge user fees.
Direct-to-consumer providers typically charge a fee and may also require users to tip for payday advances.
Credit or earned salary?
Consumer advocates say the models where consumers pay fees are the same as credit. High fees can result in the same high interest rates as payday loans, which can carry annual percentage rates as high as 450%.
“We’re really concerned that people are dipping into the money that’s coming in,” said Beverly Brown Ruggia, director of New Jersey Citizen Action’s financial justice program.
One April 2021 report from the Financial Health Network found that the typical fee charged on earned payday access products was 5% of the advance amount, which is lower than the fee charged on payday loans. Consumers were able to repay these EWA advances 97% of the time, which is well above payday loan repayment rates.
The industry has so far received support from the CFPB in its assertion that many EWA offers are uncredited.
“EWA provides significant benefits to the tens of millions of Americans who use it each year. It’s their earned wages, not a loan,” said Brian Tate, president and CEO of the Innovative Payments Association, an industry group that includes several earned wage access companies.
The CFPB, under former Obama-appointed director Richard Cordray, specifically exempted earned wage access products from a 2016 rule on payday loans.
CFPB Director Kathleen Kraninger, a Trump appointee, followed up with the advisory in November 2020. Under the CFPB’s interpretation, no-fee EWA products do not offer credit because people are accessing their money earned and repay it through future income without accumulating any debt beyond the original amount advanced.
Shortly thereafter, the CFPB issued a no-action letter to PayActiv, one of the market’s leading companies. This ruling protected PayActiv’s no-fee products from potential enforcement action under the Truth in Lending Act.
New Jersey lawmakers used the 2020 advisory opinion to try to pass legislation exempting certain employer-based earned wage access products from the state’s 30% criminal usury cap. The legislation was withdrawn in December just before the 2021 legislative session expired and did not receive a vote.
The CFPB’s advisory opinion “has muddied the waters” in discussions of the legislation, Brown Ruggia said.
Industry lobbyists claimed the CFPB’s advisory opinion blessed paid industry models despite the plain language of the letter, she said.
Lawmakers in New Jersey, New York, North Carolina, South Carolina, Georgia, Nevada and Utah have introduced legislation to regulate access to earned wages in 2021, and they should do it again in future sessions, Farahi said.
The CFPB’s influence could impact state legislative battles, said Catherine Brennan, partner at Hudson Cook LLP.
“This letter signals where there are sticking points, where there are points that defenders need to be emphasizing,” she said of Frotman’s letter.
That’s likely true in states like Georgia, New Jersey, New York and North Carolina, where payday loans are already banned, Farahi said.
California could provide a viable model for some states to follow.
The state Department of Financial Protection and Innovation in January 2021 entered into memorandums of understanding with six of the largest payroll access companies, including PayActiv and Even.
The memorandum allows the state’s financial watchdog to collect information from earned wage access companies and determine whether any industry-specific regulations need to be put in place.
Industry representatives have indicated that the California agreement is the best way forward.
“It is extremely important that any public debate focused on the EWA be careful, thoughtful and inclusive of all stakeholders,” Tate said.