CFPB Issues Advisory Opinion on Earned Wage Access

The Consumer Financial Protection Bureau (CFPB) recently published an advisory opinion regarding Earned Wage Access (EWA) products. EWA products allow employees to access their earned wages before their scheduled payday. The CFPB notes that EWA "has emerged as an innovative way for workers to meet short-term liquidity needs that arise between paychecks without turning to potentially more costly alternatives."

The advisory opinion was issued to provide clarity surrounding:

• The applicability of the definition of "credit" under the Truth in Lending Act (TILA) and its implementing regulation, Regulation Z, to EWA products; and
• The applicability of the definition of "finance charge" under Regulation Z with respect to charges related to EWA products, such as expedited delivery fees and tips, if an EWA product meets the definition of credit under Regulation Z.

While the advisory opinion does not have the force or effect of law, it provides meaningful insight into the CFPB's policy position and offers clear guidance to providers and employers, reducing regulatory uncertainty.

Covered EWA Products

The CFPB emphasizes that Covered EWA "is not credit under Regulation Z." Under Regulation Z, section 1026.2(a)(14), "credit" is defined as "the right to defer payment of debt or to incur debt and defer its payment." In its advisory opinion, the CFPB points out that Regulation Z doesn't define what the term "debt" means and that Covered EWA is not credit because it does not provide workers with "the right to defer payment of debt or to incur debt and defer its payment." Essentially, Covered EWA products offer workers access to money that they are already owed by doing work that they have already performed.

So, what exactly is "Covered EWA"? According to the advisory opinion, "Covered EWA" is EWA that meets the following criteria:

• EWA transactions are limited to the "accrued cash value of the wages the worker has earned up to the date and time of the transaction" which is "determined based upon payroll data that evidence this amount" (i.e., access is limited to wages already earned).
• A payroll process deduction is used by the EWA provider "in connection with the worker's next payroll event".
  • In a payroll process deduction, the EWA provider receives instructions from the payroll processor/employer and is paid by the payroll processor/employer.
  • To be covered, the EWA provider cannot debit the consumer's regular transaction account after the consumer is paid.
• Before providing Covered EWA, the provider must "clearly and conspicuously" explain the following to the worker:
  • That the provider has no legal or contractual claim against the worker if the payroll deduction is insufficient ("including no right to take payment from any of the consumer's regular transaction accounts"); and
  • That the provider will not engage in debt collection activities or report to a consumer reporting agency.
• Lastly, the provider must not assess creditworthiness.

Please note that the CFPB's advisory opinion does not declare that EWA products outside the Covered EWA definition automatically constitute credit under Regulation Z. The CFPB is just discussing programs it believes are not credit.

Overall, the CFPB highlights that Covered EWA products are not considered lending but are more akin to early wage delivery. This is important to note because traditionally these programs are not treated like loans and do not trigger obligations under Regulation Z.

Expedited Delivery Fees and Tips

As we've discussed, Covered EWA is not credit, and as such, fees associated with it cannot be finance charges. However, the other point being clarified in the opinion is that, to the extent that any EWA product is credit under Regulation Z, "expedited delivery fees and tips are not, in the normal course, finance charges under Regulation Z."

The CFPB clarifies that determining whether a fee is considered a "finance charge" is determined on a case-by-case basis. The advisory opinion includes the following helpful discussion:

"In general, the obligations of Regulation Z apply to any credit provider that regularly offers or extends consumer credit subject to a finance charge. The finance charge is "the cost of consumer credit as a dollar amount." Unless specifically excluded by the regulation, this includes "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." Thus, to qualify as a finance charge, a charge must be either "an incident to" or "a condition of" an extension of credit and be "imposed directly or indirectly" by the creditor."

The CFPB goes on to note that key terms such as "imposed by", "incident to", and "condition of" are not defined by Regulation Z. However, the advisory opinion states that the key issue is whether or not such fees are "directly or indirectly imposed" on the consumer. For example, an expedited delivery fee that was opted into by a consumer would not be considered "directly or indirectly imposed" because the service is optional (e.g., the consumer could have chosen free delivery). That said, fees and tips that are coercive or difficult for consumers to avoid (such as making it difficult for consumers to select the un-expedited delivery of funds or making it difficult to avoid/decline tipping), may "effectively be imposed" and could qualify as finance charges.

Relatedly, it's also important to briefly mention that optional fees such as expedited delivery fees or tips can raise UDAP/UDAAP concerns when they function like interest or are presented in a way that misleads consumers. Recent state enforcement activity has highlighted concerns with companies that market their products as fee-free (with fees buried in the fine print) and not as loans, even though the products may effectively operate as high-cost payday loans with charges functioning as interest well above applicable state rate caps. Credit unions may want to consult with legal counsel when issues surrounding UDAP/UDAAP arise.

Going back to the advisory opinion, the CFPB notes that "[p]roviders seeking clarification from the CFPB about whether their practices concerning expedited delivery fees do not amount to the imposition of a finance charge may request clarification from the CFPB by, for instance, applying for an Approval under the Policy on the Compliance Assistance Sandbox." In a footnote in the advisory opinion, the CFPB states that it anticipates reviving the Compliance Assistance Sandbox "shortly after this advisory opinion is published."

Please note, credit unions may also want to consult with qualified legal counsel regarding any state laws on the matter of EWA for further guidance.