CFPB's Proposed Interpretive Rule on Earned Wage Access Products

On Thursday, July 18, the Consumer Financial Protection Bureau (CFPB) proposed an interpretive rule (Rule) that would define Earned Wage Access (EWA) products as credit. Specifically, the Rule intends to regulate earned wage access products, including "earned wage advances" and "earned wage access," as loans subject to Regulation Z and the Truth in Lending Act (TILA).¹ The Rule would not impose any regulations or obligations separate from the provisions of Regulation Z and the TILA. The Rule is meant to replace an advisory opinion previously issued by the CFPB in November 2020 in which the CFPB found that some EWA products do not involve the offering of credit under Regulation Z and the TILA.²

Defining EWA Products

EWA products allow employees to access their earned wages before their scheduled pay date, providing liquidity and financial flexibility. The EWA market is primarily divided into two types of products: employer-provided and third-party provided.

Employer-Provided EWA Products:

• Employer-provided EWA products are offered directly by employers, often as a benefit to their employees. These products allow employees to access a portion of their earned wages before their regular pay day, and may be offered either for free or at a cost to the employee. Employers typically facilitate the repayment through payroll deductions on the subsequent payday.
• The CFPB, in its 2020 Advisory Opinion (noted below), stated that these types of programs are often structured to avoid traditional credit features, thereby not triggering credit regulations under TILA and Regulation Z.³ This category represents a substantial portion of the EWA market due to its direct integration with employer payroll systems.

Third-Party Provided EWA Products:

• Third-party provided EWA products are typically offered by financial technology companies and other third-party providers. Such products generally provide consumers with early access to their earned wages using a mobile app or online platform and often pay for these products via subscription fees, one-time fees, or voluntary tipping. Although EWA providers that partner with employers often offer both free and fee-based options, the CFPB found that 82% of transactions had fees, including expedited transfer fees or periodic fees for using the services.⁴ When consumers use one of these EWA products, their paycheck’s direct deposit account is debited on payday.

The unusual terms of these products, including how they are financed, has elicited scrutiny from the CFPB and others. The Rule seems intended to treat these products as extensions of credit under TILA and Regulation Z, necessitating compliance with relevant disclosure and certain other requirements.

The CFPB’s 2020 Advisory Opinion

The Rule appears to reverse certain guidance that the CFPB issued in November 2020. Its advisory opinion held that certain "covered EWA programs" are not credit and not subject to Regulation Z and the TILA.⁵ The CFPB seemed concerned that employer-sponsored programs would be overly burdened by compliance with Regulation Z and TILA and, accordingly, concluded that those rules would not apply to employer EWA programs meeting certain enumerated characteristics.

The 2020 advisory opinion did not address whether Regulation Z and TILA would apply to other EWA products.

Key Takeaways from the Interpretive Rule

In the Rule, the CFPB acknowledged that the 2020 advisory opinion "appears to have caused significant regulatory uncertainty."⁶ If finalized as proposed, the Rule would intentionally "overrule" the 2020 guidance and deem all EWA products to be consumer credit because EWA product consumers obtain money with an obligation to repay, even if that repayment is satisfied via payroll deduction, and thus incur debt.⁷ The Rule classifies EWA products as extensions of credit (i.e., closed-end loans) under TILA and Regulation Z, and asserts that voluntary fees, such as tips and expedited funds transfers, should be considered finance charges. This classification suggests that EWA providers must comply with TILA's disclosure requirements and that other tipping-based and expedited transfer fee models outside the EWA context are likely subject to TILA's requirements too, such as additional obligations under Regulation Z like advertising rules and the right of recession.

Under Regulation Z, "credit" means "the right to defer payment of debt or to incur debt and defer its payment."⁸ Meanwhile, a "finance charge is the cost of consumer credit as a dollar amount" which “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."⁹ The application of these two definitions is the core of the proposed Rule.

The proposed Rule identified two payments charged in connection with EWA products that constitute finance charges. First, when an EWA product provider offers different speeds for the delivery of funds and charges a fee for the faster option, that charge is an "expedited delivery fee" which constitutes a finance charge "because such a fee is a 'condition' of an extension of credit."¹⁰

Second, where an EWA product provider "solicits consumers for what they variously describe as 'tips,' 'gratuities,' 'donations,' 'voluntary contributions,' or the like," such payments may constitute a finance charge if they are imposed by the creditor.¹¹

The Rule lists a number of factors that may determine whether a tip is "imposed" by the creditor, including:

• Soliciting the tip before or at the time of credit extension;
• Labeling the solicited payment with a term carrying an expectation that the consumer would normally make that payment, like "tip";
• Setting "default" tip amounts or otherwise making it difficult for consumers to avoid paying a tip;
• Suggesting tip amounts;
• Repeatedly soliciting tips, even for a single transaction; and
• Stating or implying, even if falsely, that tipping may impact subsequent access or use of the earned wage product.¹²

The CFPB's approach has already raised concerns among industry stakeholders. Notably, the Rule draws no distinction between employer provided EWA products (a substantial part of the market) and third-party provided EWA products. Compliance with Regulation Z will also present certain challenges such as:

• Integration with Employer Payroll Systems. For employer provided EWA products, integrating payroll systems to ensure accurate tracking and repayment of advances can be technically complex. Ensuring compliance with the requirements of Regulation Z within these systems could require substantial technical resources and specialized staff.
• Monitoring and Auditing. Ongoing compliance with Regulation Z will require continuous monitoring and auditing of EWA transactions to ensure that all regulatory requirements are met. This includes responding to regulatory inquiries and conducting regular internal audits, which can be resource-intensive.

The CFPB Rule also asserts that requiring consumers to authorize repayment constitutes creating and deferring a "debt." This perspective has significant implications for how EWA products are regulated under TILA.

The CFPB’s Unreliable Dictionary Source

Of note is that the CFPB relies on the Black's Law Dictionary definition of "debt," cited by the CFPB, which requires that the amount to be repaid must be "fixed and specific." However, EWA products often involve amounts that are not predetermined, thereby conflicting with this definition. This inconsistency suggests that the CFPB’s interpretive approach may not align fully with established legal principles.

The Issue of Contingent Debt

A central question is when a debt is incurred. The CFPB's definition implies that debt is created upon the consumer's agreement to authorize repayment, even if the actual obligation is contingent upon future events, such as receiving a paycheck. This interpretation contrasts with the view that debt arises only when the contingency occurs, meaning no prior deferral of debt has occurred.

Regulatory Uncertainty

One of the Rule's explicit aims is to provide regulatory certainty, but the current proposal may create more confusion.  For example:

1.  Ambiguities in Classification:
• If an EWA provider creates an account for a customer, it is unclear whether they are considered a "card issuer" under the CFPB's recent interpretive rule regarding buy now, pay later (BNPL) providers. This interpretive rule classifies BNPL providers as card issuers when they issue closed-end credit that is not subject to a finance charge and is not payable by written agreement in more than four installments. Applying this definition to EWA providers could impose additional regulatory obligations, such as adherence to card issuer regulations, which were not initially intended for EWA products.
2. Finance Charges and Disclosure Requirements:
• The classification of post-transaction customer-authorized fees, such as expedited funds fees and voluntary tips, as finance charges introduces further ambiguity. If these fees are considered part of the original extension of credit, they should have been disclosed in the initial TILA disclosure. However, if they are seen as subsequent events that do not require new TILA disclosures, it suggests they were not integral to the initial transaction. This discrepancy creates uncertainty about what constitutes a finance charge and when it must be disclosed.
3. Differentiation of Loan Types:
• The CFPB's assertion that an expedited delivery fee is a 'condition' of the extension of that type of credit suggests that EWA providers are offering two different types of loans: one with faster disbursement and a second without. This classification appears to be a stretch and raises significant regulatory questions. For example, if otherwise identical loans are deemed different based solely on the speed (and cost) of loan disbursement, it complicates the regulatory landscape. The CFPB would need to evaluate whether these loan types should be treated separately for fair lending purposes, and how to apply existing regulations consistently across these distinctions.
4. Recurring Electronic Funds Transfers:
• Another area of potential confusion is the treatment of discounts for repayment via recurring electronic funds transfers. The CFPB staff commentary to Regulation E allows lenders to offer "discounts" for such repayment methods despite the express prohibition against conditioning an extension of credit on repayment by preauthorized electronic funds transfers. This raises the question of whether similar principles can be applied to EWA products and other contingent repayment arrangements, further muddying the regulatory waters.¹³
5. Impact on Other Contingent Repayment Products:
• The broad definition of credit could impact other products that rely on contingent repayment, such as income share agreements (ISAs). ISAs involve a student receiving funding for education in exchange for agreeing to pay a percentage of their future income once it exceeds a certain threshold. This model, while innovative, could now be considered an extension of credit under TILA and Regulation Z, subjecting it to stringent disclosure and compliance requirements. The implications extend to any financial product with contingent repayment features, potentially stifling innovation and creating significant compliance challenges.

Implications for EWA Providers

The Rule presents two primary paths for EWA providers:

1. Accepting the Loan Classification: Providers may choose to embrace the classification of EWA as a loan, thereby eliminating the non-recourse nature of the obligation and charging mandatory fees. This approach would ensure compliance with TILA, but could result in higher costs for consumers due to potentially increasing operation costs, which may be passed on to consumers in the form of higher fees or charges.
2. Altering the Product Structure: Alternatively, providers might consider modifying their products to remain outside the scope of the interpretive Rule. This could involve offering non-recourse advances or changing repayment methods. However, this strategy may not resolve regulatory uncertainties fully. Modifying product structures could help providers avoid some regulatory burdens, but it could also lead to confusion among consumers and require significant changes to existing business models, potentially disrupting service delivery.

Broader Impacts and Regulatory Ramifications

The proposed Rule has broader implications for the consumer credit ecosystem. It may lead to unforeseen consequences, such as reclassification of other non-credit products as extensions of credit. Products that were previously not considered credit may now fall under TILA and Regulation Z, subjecting them to new regulatory requirements. This reclassification could create compliance challenges for EWA providers which must now adapt to new regulatory standards and potentially redesign their products to meet these requirements.

The CFPB's approach of adapting existing regulatory frameworks to innovative financial products may also create more challenges than solutions, potentially causing more consumer harm than benefit. Increased regulatory scrutiny may lead to a chilling effect on innovation due to higher compliance costs and a reduced ability to offer flexible products that meet the needs of diverse consumer segments. This would ultimately harm consumers who rely on EWA products for financial stability and flexibility. The broad and stringent regulatory requirements could also deter new entrants into the market and stifle the development of innovative financial products, negatively impacting consumer choice and access to financial services.

Conclusion

Notably, the CFPB has bypassed the traditional notice-and-comment rulemaking process by issuing an interpretive rule. This move appears to be a calculated procedural strategy to avoid scrutiny of the Rule and expedite its implementation in advance of the November elections. By issuing an interpretive rule, the CFPB can quickly enforce new regulations without the comprehensive review typically required in the notice-and-comment process, raising questions about the thoroughness and transparency of this regulatory action.

Given the ambiguities and inconsistencies in the CFPB's approach, a challenge to this Rule is likely. The Supreme Court's recent decision in Relentless v. Department of Commerce and Loper Bright Enterprises v. Raimondo, striking down the Chevron Doctrine, which allowed federal agencies significant latitude in interpreting ambiguous statutes, makes this proposed Rule especially ripe for judicial scrutiny, particularly as to whether the CFPB's expansive interpretation of "debt" aligns with the statutory text and congressional intent of the TILA.

The CFPB's proposed Rule on EWA products represents a significant regulatory development with potentially far-reaching implications. EWA providers and other stakeholders should analyze the proposed Rule and consider its potential effects on their operations. Non-EWA providers, especially those offering credit-adjacent products payable upon contingent events, such as income share agreements along with those leveraging tipping models, should likewise read this Rule with an eye toward the broader positions the CFPB is taking.

The CFPB is accepting comments on the proposed Rule, which must be received by August 30, 2024.

¹ CFPB, Truth in Lending (Regulation Z); Consumer Credit Offered to Borrowers in Advance of Expected Receipt of Compensation for Work, CFPB No. CFPB-2024-0032, (proposed July 18, 2024), https://files.consumerfinance.gov/f/documents/cfpb_paycheck-advance-marketplace_proposed-interpretive-rule_2024-07.pdf.

² See id. at 6.

³ CFPB, Truth in Lending (Regulation Z); Earned Wage Access Programs at 7 (Nov. 2020), https://files.consumerfinance.gov/f/documents/cfpb_advisory-opinion_earned-wage-access_2020-11.pdf.

⁴ See, CFPB, Developments in the Paycheck Advance Market, at 11 (July 2024), (https://www.consumerfinance.gov/data-research/research-reports/data-spotlight-developments-in-the-paycheck-advance-market/)

⁵ CFPB, Supra n. 3 at 7 (Nov. 2020), https://files.consumerfinance.gov/f/documents/cfpb_advisory-opinion_earned-wage-access_2020-11.pdf.

⁶ CFPB, supra n.1 at 5.

⁷ See id. at 10–12.

⁸ 12 C.F.R. § 1026.2(a)(14).

⁹ Id.

¹⁰ Id. at 15–17

¹¹ Id.

¹² Id. at 18–19.

13 See Commentary to 12 CFR § 1005.10(e)(1)