The American Fintech Council (AFC), a trade group whose members include providers of earned wage access (EWA) products, has sent a letter to Director Chopra urging the CFPB to take steps towards development of a “pragmatic regulatory approach” for regulating EWA products.
In its letter, AFC discusses the “patchwork approach” to regulating EWA products that is emerging at the state level. While expressing its approval of the “bespoke regulatory framework for EWA” in Nevada and Missouri, AFC states that it “disagrees with the approach of shoehorning EWA products into existing lending laws, pursued by other states.” (The California Department of Financial Protection and Innovation (DFPI) has issued a proposal that would require providers of income-based advances such as EWA products to register with or obtain a license from the DFPI and comply with the fee and interest rate limits of the California Financing Law (CFL)). AFC indicates that regardless of the approach taken by states, “pragmatic federal engagement on this matter is necessary.”
AFC observes that the CFPB has to date “opted to pursue less comprehensive or binding guidance with regards to EWA,” citing to the CFPB’s November 2020 Advisory Opinion (AO), and that it initially agreed with this approach “as it allowed the industry to develop responsible options that fit the demands of consumers, without significant limitations to their business models.” AFC states that it now believes a “more substantive regulatory endeavor, such as a formal rulemaking” is necessary in light of market and state developments since the CFPB issued the AO. While expressing its preference for notice and comment rulemaking by the CFPB, AFC states that it “remains open to understanding and supporting the regulatory tool that will ultimately serve consumers and responsible industry participants best.” AFC asks the CFPB “to convene a meeting with relevant stakeholders” to facilitate a discussion regarding regulatory approach.
In the November 2020 AO, the CFPB addressed whether an EWA program with the characteristics set forth in the AO was covered by Regulation Z. Such characteristics included the absence of any requirement by the provider for an employee to pay any charges or fees in connection with the transactions associated with the EWA program and no assessment by the provider of the credit risk of individual employees. The AO set forth the Bureau’s legal analysis on which it based its conclusion that the EWA program did not involve the offering or extension of “credit” within the scope of Regulation Z. In the AO, the Bureau indicated that there may be EWA programs with nominal processing fees that nonetheless do not involve the offering or extension of “credit” under Regulation Z and advised that providers of such programs could request clarification about a specific fee structure by applying for an approval under the Compliance Assistance Sandbox Policy. (The CFPB announced in September 2022 that it was rescinding the Compliance Assistance Sandbox Policy.)
In January 2022, then CFPB Acting General Counsel (and now General Counsel) Seth Frotman indicated that due to “repeated reports of confusion” caused by the AO, he planned to recommend to Director Chopra “that the CFPB consider how to provide greater clarity on these types of issues.” While acknowledging that the AO had left open the possibility that an EWA product with nominal processing fees might not be “credit” under Regulation Z, Mr. Frotman suggested that possibility was remote. More specifically, he noted that the CFPB had expressly limited the AO’s application to EWA programs meeting all of the characteristics set forth in the AO and stated that “products that include the payment of any fee, voluntary or not, are excluded from the scope of the advisory opinion and may well be TILA credit.” Mr. Frotman also noted that the AO does not speak to whether EWA products would be “credit” under federal laws other than the TILA, such as the CFPA or the ECOA, or under state law. Mr. Frotman’s comments were made in a letter responding to a letter sent to him by consumer advocacy groups regarding proposed New Jersey legislation on EWA products.
In December 2023, the CFPB sent a letter to the DFPI commenting on the DFPI’s EWA proposal which would clarify that income-based advances are “loans” under the CFL. The CFPB noted that the DFPI’s proposed treatment of income-based advances as “loans” is similar to how “credit” and “finance charges” are treated under the Truth in Lending Act and Regulation Z. The CFPB indicated that it plans to issue further guidance “to provide greater clarity concerning the application of the Truth in Lending Act in this market,” that products “that do not fit within [the very narrow scope of the CFPB’s previous advisory opinion] are not excluded from existing laws,” and that it supports efforts to subject income-based advance products “to rigorous oversight for the full scope of existing state and federal consumer protection and lending laws.”
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