Since 2022, the Consumer Financial Protection Bureau (CFPB) has a stated priority of “protecting employees and their rights through conducting reports, inquiries, and issuing requirements for employers.” In July 2024, the CFPB proposed an Interpretive Rule ( “Interpretive Rule”) governing Earned Wage Access (EWA) programs.

EWA programs have traditionally operated outside of the federal Truth in Lending Act (TILA) and its implementing regulation, Regulation Z (Reg Z). As noted by the CFPB in a 2020 Advisory Opinion, EWA products are a relatively recent creation that allow a worker to obtain access to the worker’s pay earlier than the typical employer’s payment cycle. The CFPB noted that EWA products “emerged in the marketplace as an innovative way for employees to meet short-term liquidity needs that arise between paychecks without turning to more costly alternatives like traditional payday loans.” Unlike a traditional loan whereby a lender advances funds to a borrower along with a corresponding obligation to repay, EWA products facilitate access to “earned but as yet unpaid wages.” In its 2020 Advisory Opinion, the CFPB defined a “Covered EWA Transaction” as exempt from TILA and Reg Z if it met the following criteria:

1. The EWA Provider (the “Provider”) must contract with employers to offer and provide Covered EWA Transactions to the employer’s employees.
2. The amount of each Covered EWA Transaction does not exceed the accrued cash value of the wages the employee has earned up to the date and time of the transaction, which amount is determined based upon timely information provided by the employer to the Provider. The Provider may not rely upon information provided by the employee, or on estimates or predictions of hours worked or hourly wage rates.
3. 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. The Provider must provide EWA funds to an account of the employee’s choice, and the Provider cannot charge fees for the delivery of EWA funds to that account.
4. The Provider recovers the amount of each Covered EWA Transaction only through an employer-facilitated payroll deduction from the employee’s next paycheck.
5. In the event of a failed or partial payroll deduction, the Provider retains no legal or contractual claim or remedy, direct or indirect, against the employee, although the Provider may choose to refrain from offering the employee additional EWA transactions.
6. Before entering into a Covered EWA Transaction, the Provider clearly and conspicuously explains to the employee, and warrants to the employee as part of the contract that it:
   • Will not require the employee to pay any charges or fees in connection with the Covered EWA Transaction.
   • Has no legal or contractual claim or remedy, direct or indirect, against the employee in the event the payroll deduction is insufficient to cover the full amount of a Covered EWA Transaction, including no right to take payment from any consumer account.
   • Will not engage in any debt collection activities related to a Covered EWA Transaction, place a Covered EWA Transaction amount as a debt with or sell it to a third party, or report to a consumer reporting agency concerning a Covered EWA Transaction.
   • The Provider will not directly or indirectly assess the credit risk of individual employees, including through obtaining and reviewing credit reports or credit scores about the individual employees.

Though the 2020 Advisory Opinion created a regulatory exemption, many Providers employed other structures that were not expressly conforming to these criteria. These Providers asserted that TILA/Reg Z did not apply to transactions that involved “tips” paid by the consumer without any legal obligation to pay an additional fee as a finance charge – although consumer advocates claim there is social pressure to pay such tips. In addition, many Providers have created near real-time access to “earned but yet paid” wages such that the Provider is advancing funds already owed to the consumer.

In mid-July 2024, the CFPB proposed a new Interpretive Rule that would more broadly subject various EWA products to the TILA/Reg Z. The CFPB asserts that these products are often marketed as “earned wage” products but are, in fact, disguised consumer loans and should be treated with the same amount of disclosure and regulatory protections as traditional short-term consumer loans. The CFPB’s stated goal with the Interpretive Rule is to provide employees with transparency and inform them of the realities of this product in order to prevent further financial burden due to predatory lending practices at their place of employment. This would include informing employees of the costs and fees of using these products. In general, EWA products function under two primary models: (i) employer-partnered, where a third-party Provider contracts with the employer to provide the funding to the employer’s employees; and (ii) the direct-to-consumer model, where the Provider markets directly to the public without the involvement of the employer.

Providers assert that delays between when someone works and when the employee receives a payment pushes consumers into other forms of higher-interest debt like credit card debt, payday loans, or other costly credit. CFPB Director Chopra observed, “When delays in payments to workers get longer, it can exacerbate the problems people face and trap them in cycles of debt.” The CFPB Report notes that consumers take out an average of 27 paycheck advance loans a year, and paycheck advances charge annual percentage rates of 109.5%, on average. The majority of these costs are associated with Providers’ fees for early access to the funds. These figures do not include the discretionary “tips” that are requested by some Providers, despite the CFPB and other consumer advocates arguing that pressure sales tactics make these “tips” non-discretionary. The CFPB Report also notes the number of transactions processed by Providers grew 90% from 2021 to 2022, with about seven million workers accessing approximately $22 billion in 2022.

The proposed Interpretive Rule replaces the 2020 Advisory Opinion, which addressed a very specific paycheck advance product. The Interpretive Rule would broadly apply TILA and Reg Z to many variations of EWA programs, including those that function through “tips” and fees for expedited delivery services. The Interpretive Rule broadly defines the scope of products it covers. Specifically, TILA and Reg Z would 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.”

The Interpretive Rule would still exempt EWA programs that do not charge any fees and are completely free to the employee, which are generally subsidized by the employer as a form of employer benefit. Other programs, even if only advancing funds already earned by the employee (but not yet paid by the employer), would require full TILA/Reg Z compliance, just like a short-term loan program, including computation of the Annual Percentage Rate (APR).

Providers are likely to challenge the CFPB’s broad definition of a “finance charge” under TILA. The Interpretive Rule treats optional tips and expedited funds fees as “finance charges.” According to the CFPB, these optional fees are “imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit,” thus requiring disclosure as “finance charges” under Reg Z. (See 12 C.F.R. § 1026.4(a)). Providers assert that these are optional fees that could be chosen by the borrower but are not required to obtain the credit advance. The CFPB asserts that a “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.”

This latest action from the CFPB may hinder progress the Providers have made with state regulators. Several states have created specific, non-loan regimes that govern different forms of EWA products. This latest action by the CFPB, if implemented, will directly conflict with the legal treatment of the programs within these states and their associated state disclosure regimes.

Comments for the Interpretive Rule will be accepted until August 30, 2024.