As discussed here, in March 2023, the California Department of Financial Protection and Innovation (DFPI) proposed new regulations under the California Financing Law that would interpret the definition of “loan” to include “income-based advances” or earned wage access (EWA) products, except those offered by employers. The proposal also sought to require providers of such products to register with the state, and imposed requirements on debt settlement companies and education financing providers.
However, the Office of Administrative Law (OAL) has recently disapproved this regulatory action. The OAL found that the proposed regulations failed to comply with the clarity standard of the Administrative Procedure Act (APA) and that the DFPI did not follow the required APA procedures.
Background
The DFPI’s proposal was part of a broader effort to regulate EWA products, which are increasingly popular financial services that allow employees to access their earned wages before payday. The proposal aimed to classify these products as loans, which would subject them to additional regulatory oversight.
In November 2023, the Consumer Financial Protection Bureau (CFPB) submitted a comment letter to the DFPI supporting the proposal. The CFPB agreed with the DFPI’s classification of income-based advances as loans and the requirement for providers to register with the state. The CFPB stated that the DFPI’s proposal to define “charges” under the California Financing Law to include “gratuities” and “expedite fees,” would align with the Truth in Lending Act (TILA).
OAL Ruling
The OAL found that the proposed regulations did not meet the clarity standard of the APA, which requires that regulations be written so that they can be easily understood by those who must comply with them.
The OAL also found that the DFPI did not follow the required APA procedures in proposing the regulations. The APA sets out specific procedures that agencies must follow when proposing new regulations, including providing notice to the public and allowing for public comment.
Implications
The OAL’s disapproval means that, for now, EWA products in California will not be formally classified as loans and specific registration requirement expressly applicable to EWA providers will not exist. However, the DFPI may choose to revise and resubmit the proposal in compliance with the APA’s clarity standard and procedural requirements. As it has done in the past, the DFPI may also take enforcement action against providers who claim their products are not loans covered by the California Financing Law, where the DFPI disagrees with that position.
It’s also worth noting that the CFPB’s support for the DFPI’s proposal suggests that it may consider similar regulations at the federal level.
