CFPB Provides an Opinion on Earned Wage Access, Raising More Questions
On Nov. 30, 2020 the Consumer Financial Protection Bureau (CFPB) issued an Advisory Opinion on whether or not an Earned Wage Access (EWA) program is an extension of credit to the participating workers, and as a result must comply with the protections and requirements of Regulation Z.
I will save you the suspense, these programs don't have to comply with Regulation Z as long as they meet the criteria that the opinion outlines.
While this opinion helps to provide clarity for employers, EWA providers and state legislators who are considering their own set of rules, a host of new questions arise with the issuance of this document.
This blog will consider the implications of the Bureau's comments from a payments business perspective. (I need to mention here that I am not a lawyer nor a compliance expert.)
What is an Advisory Opinion, anyway?
The CFPB launched the Advisory Opinion program earlier in 2020 with the goal of providing clarity around a particular regulatory topic that has been identified by a requestor--likely an individual or entity regulated by the Bureau. The goal is to provide an understanding of the application of certain regulations to a particular circumstance, not to create new regulation or a binding statue. Here's a summary from the CFPB's procedural rule on why they established the Advisory Opinion program:
"…the Bureau is establishing the Pilot AO Program to provide guidance with interpretive content that is: focused on regulatory uncertainty identified by requestors; reliable for the requestor and all similarly situated parties as the Bureau's authoritative interpretation of the law; and publicly released for the awareness of all affected persons."
The market for EWA
EWA has seen rapid growth in the last two years. There are two predominant models; one is an employer-based solution whereby the employer contracts with a provider and offers workers the option to receive a portion of their wages that they have earned, but haven't yet received, through a regularly scheduled payroll deposit. Under the terms of the other model, often referred to as "pay advance," employees enroll directly with a provider and receive an advance on their wages that they self-report through a digital app.
The ability for workers to receive earned pay before payday has been widely recognized to improve individuals' financial stability and allow them to steer clear of payday lenders, account overdrafts and other expensive means of financing. Mercator Advisory Group published the report: On Demand Earned Wage Access: U.S. Vendor Comparison providing an understanding of this growing market and the solution providers.
The number of workers who struggle to pay their bills on a regular basis and those who exist on the edge where a single unexpected expense or loss of income would send them into financial distress is significant in the U.S. As data from the Bureau of Labor Statistic finds and as summarized below, these two constituencies combined represent 45 million working Americans.
Addressable market for Earned Wage Access and wage advance solutions
As with any new payment solution, there is bound to be regulatory scrutiny. EWA has been the topic for legislative activity in California, New Jersey and New York already, so it's not unexpected that clarification at the Federal level has been requested to answer some of the legal questions. Here are five key points from the Advisory Opinion and some resulting questions.
What the CFPB said
The CFPB concludes that EWA is not a credit product as long as the following are in place:
- The EWA program is offered by a provider through an employer as an employee benefit.
- By omission then, does that mean that direct-to-consumer solutions like Earnin and Dave are loans, must comply with Regulation Z (the "truth in lending" reg), and the providers must become lenders? Where does that leave those consumers who rely on these solutions?
- The amount provided through EWA does not exceed the amount of earned wages as verified by the employer.
- Presumably those programs that operate by having the employee upload their time cards or otherwise self-verify their employment are also now deemed to be a credit solution and fall under Regulation Z. Are these programs in jeopardy also?
- The EWA provider recovers the advance through a payroll deduction only. One additional deduction may be attempted if the first deduction fails for technical reasons.
- This makes sense to me, but the "one additional deduction" seems really prescriptive. Enforcement of that will be difficult.
- The employee must be offered a choice of accounts where the funds can be deposited.
- Several of the existing solutions, such as DailyPay, FlexWage and PayActiv, offer a choice of accounts. Yet other providers offer only deposits to prepaid cards. Cards are used to insure instant deposits and access to funds as soon as the employee requests them. Also, the provider earns interchange on purchases made on the card, meaning it can avoid charging employee fees for the EWA service. These types of program are going to need a new business model to comply with the opinion.
This last point is crucial.
- The Advisory Opinion states that in order for a program to not be considered an extension of credit, "The employee makes no payment, voluntary or otherwise to access EWA funds or otherwise use the Covered EWA Program and the Provider or its agents do not solicit or accept tips or any other payments from the employee."
- Most EWA programs' business models charge a fee each time an employee requests to receive funds before payday. That is how the providers pay for the funds that they advance at the request of the employee; that is how they support the product technology, payment processing, security, customer service, and other support staff. If fees are prohibited, this likely means that providers will need to:
- - Become a lender and support Regulation Z compliance requirements so they can charge fees,
- - Charge employers, not employees, for the service
- - Close the business down and leave employees without access to earned pay
But here's the kicker
The opinion also states; "The Bureau notes that there may be EWA programs that charge nominal processing fees that nonetheless do not involve the offering or extension of "credit…" This statement by the CFPB creates a great ambiguity.
Every EWA provider has to be asking itself, is my fee schedule permitted and just how much is "nominal"? And the Bureau actually acknowledges that their opinion is unclear as it parenthetically offers providers the opportunity to request clarification about their specific fee structure by applying for an Approval under the Policy on the Compliance Assistance Sandbox.
Now there's a double edged sword.
Providers need to consider if they simply assume their programs are compliant; the way the Advisory Opinion is expressed provides enough of a loophole that they can operate their programs without making changes. Alternatively they could reach out to the Bureau to get clarification but risk a result that could be detrimental to their business and the broader EWA industry.
The impact of this opinion, despite the many additional questions that it raises, will shake up the EWA industry.
I believe the likely outcomes will see employee direct programs sell their businesses to an existing lender and thus become Regulation Z compliant.
Employer-based programs will continue to charge fees to employees assuming that they meet the Bureaus' requirement that they are in fact nominal. They also will be working on new, flexible fee alternatives that have the employers foot the bill for EWA. This will slow the industry growth, but these programs do benefit employers by helping to attract and retain employees saving considerable recruiting and on-boarding expenses, so this just might work.