CFPB issued an advisory opinion on Earned Wage Access (EWA) on Monday afternoon.  We’ve written about earned wage access products before as well as state legislative initiatives to regulate them.  The new federal guidance primarily addresses the question of if/when an EWA program is covered by the Truth in Lending Act (TILA) and Regulation Z.  It concludes that EWA programs that meet certain requirements are not an extension of credit and are not subject to TILA or Reg. Z.

The advisory opinion builds upon commentary included in the Payday Lending regulations issued way back in 2017.  That rule suggested that an EWA product that allows an employee to draw accrued wages ahead of a scheduled payday, recoups the advance through payroll deduction and does not provide recourse against the employee might not be a form of lending.  The advisory opinion expands on that analysis and lays out a detailed set of criteria for an EWA program that is not an extension of credit for Reg. Z purposes.  Oddly enough, CFPB calls such a service a “Covered EWA Program” even though the whole point of the opinion is that the program is not covered by Reg. Z.  

The commentary to Reg. Z notes that borrowing against the “accrued cash value of an insurance policy or a pension account if there is no independent obligation to repay” is “not considered credit for purposes of the regulation.”  Credit is not being extended because the consumer is using his or her own money.  CFPB reasons that a wage advance which accesses funds already earned by the employee, is recovered through payroll deduction and is not subject to an independent obligation to repay would similarly not be an extension of credit for Reg. Z purposes.  

Under CFPB’s advisory opinion, an EWA program is not an extension of credit and not subject to Reg. Z if it meets all of the following criteria: 

1. The provider contracts with the employer.

2. The advance does not exceed the amount of earned wages verified by the employer.

3. The employee pays no fee, voluntary or otherwise, for the service.  The advance must be sent to account of the employee’s choice.  If the account receiving the advance is a prepaid account offered by the provider, then certain additional fee restrictions apply to the prepaid account.

4. Provider recovers the advance only through payroll deduction from the next paycheck. One additional deduction may be attempted if the first deduction fails for technical reasons.

5. If the advance can’t be collected through the payroll deduction, the provider can’t otherwise collect from the employee.

6. The provider must make certain warranties to employee, including that there will be no fees, no recourse against the employee, and no debt collection activities.

7. The provider may not conduct a credit assessment or credit reporting.

This list of criteria tracks the 2017 commentary but adds a few new wrinkles.  For example, to qualify as a Covered EWA Program, the employee cannot make a payment, voluntary or otherwise, “to access EWA funds or otherwise use the Covered EWA Program,” and the provider cannot “solicit or accept tips or any other payments from the employee.”  This provision makes it clear that assessing fees or accepting tips turns the EWA service into an extension of credit.  The 2017 commentary, however, had left open the possibility that a charge for participating in the program designed to cover processing costs would be permissible.  The advisory opinion notes that some EWA programs may charge “nominal processing fees” but still not involve the offering of credit.  Such programs are not covered by the advisory opinion, but CFPB invites providers of such programs to request additional clarification about their specific fee structure.  We take this to mean that monthly participation fees or charges for enhanced services like real-time payments might be permissible in a “not credit” EWA program, but that CFPB wants to see specifics before opining. 

The advisory opinion also requires the provider of a Covered EWA Program to “provide EWA funds to an account of the employee’s choice” which might be problematic for providers who don’t offer a choice of where the advance is deposited.   Some providers may only offer to transfer advances to accounts or prepaid cards offered by the provider.  Under the new guidance, this may turn the EWA service into a credit product.  

In addition to those restrictions, CFPB says that if an employee chooses to have an advance deposited in a prepaid account offered by the provider (a “Provider Account”), the provider cannot assess a fee for opening that account and must allow the employee “reasonable use” of the account at no charge.  The opinion goes on to explain that “reasonable use” means the prepaid account must be accessible on a major card network, not assess a fee for point-of-sale transactions and offer “some free and reasonably accessible means to obtain cash.” The provider “may charge the employee, at cost, for non-standard uses of the Provider Account” such as foreign ATM usage, ACH withdrawals or checks.  Unfortunately, CFPB provides no explanation about how fees in the so-called Provider Account impact the analysis of whether a wage advance is or isn’t an extension of credit nor why this rule would apply to prepaid accounts but not other types of accounts.

It’s interesting that CFPB ties the safe harbor in part to recouping the wage advance through payroll deduction without acknowledging that not all states permit payroll deductions for this purpose.  Collecting an advance through a wage deduction would be problematic in New York, New Jersey and several other states.  There is a bill in New Jersey which would fix this problem, but it is still winding its way through the legislature.

Speaking of states, there is still a pending investigation into the wage advance industry being conducted by the New York Department of Financial Services in coordination with a large group of regulators from other states.  One of the things that the state regulators are looking at is whether some EWA providers are engaged in lending without a state license.  While the primary purpose of CFPB’s advisory opinion is to provide a safe harbor for certain EWA programs, it also suggests that certain business models or practices that don’t meet the criteria do involve an extension of credit.  State officials will likely find CFPB’s advisory opinion to be persuasive and may use it provide cover for any enforcement actions they choose to take against providers deemed to be engaged in lending without a license. 

We expect more legislative and regulatory activity focused on EWA products in the near future.