The law creating a new California mini-CFPB took effect on January 1, 2021, and a few weeks later, the California Department of Financial Protection and Innovation (DFPI) entered into “first-of-their kind” memoranda of understanding (MOUs), by which the DFPI will regulate earned wage access (EWA) products offered by five companies in California. These MOUs follow the CFPB’s issuance of an advisory opinion for EWA products, but they go much further in imposing pricing limitations and reporting and examination obligations for products that the DFPI gained authority to regulate under the new California Consumer Financial Protection Law (CCFPL). These MOUs, along with the CFPB’s advisory opinion, signal creation of regulatory guardrails for previously unregulated products. They also reflect the DFPI’s continued focus on capping interest rates for financial products offered in California.
The DFPI MOUs
EWA products allow employees to obtain access to earned wages prior to payday. Companies offering these products rely on different models and pricing structures. For example, some offer services through employers with agreements that the prepaid wages are deducted from the next paycheck. Others offer services directly to consumers in arrangements similar to payday loans. Pricing for EWA products range from flat fees per transaction to flat fees per month to no fees with the option for consumers to pay “tips.”
Companies offering EWA products have long touted the benefits of their products for underserved borrowers, and the MOUs with the DFPI follow industry support for failed California legislation that would have created a legal framework within which they could continue to offer these products in the state. Fast forward more than a year, and the DFPI now has authority over consumer financial services and products not otherwise subject to any specific regulatory scheme, like EWA products, and it exercised that authority by entering into the MOUs with five companies: Even Responsible Finance, Inc., d/b/a Even; Activehours, Inc., d/b/a Earnin; Bridge IT, Inc., d/b/a Brigit; Payactiv, Inc.; and Branch Messenger Inc., d/b/a Branch (collectively, the “Companies”).
In the MOUs, the Companies agreed to: 1) provide quarterly reporting, including on volume, delinquency and default rates, ratio of advance to paycheck amount, and fees assessed that are not included in the APR; 2) submit to regular DFPI examinations of their EWA programs; and 3) adhere to certain “best practices,” which include disclosure obligations and APR and fee caps.
Certain of the MOUs cap APRs at 36%, the same rate cap the California legislature mandated for loans of $2,500 or more but less than $10,000 made under the California Financing Law. Note, though, that certain of the MOUs specify that “tips” and subscription fees are not counted in the APR calculation.
The MOUs state that they are not to be viewed as DFPI endorsements or approvals of the business models of the Companies. In addition, the MOUs clarify that the DFPI has not alleged any legal violations by the Companies.
These MOUs are the first agreements the DFPI entered into under the expanded authority granted the agency by the CCFPL. The DFPI indicated in its press release that its approach would “provide the department with a better understanding of the products and services being offered” and reflect a “balanced approach” that “encourages responsible innovation.”
CFPB Advisory Opinion and Limited Safe Harbor
Since the California legislature modeled the CCFPL on Dodd-Frank Act Title X, it is not surprising that the MOUs followed soon after the CFPB’s activity relating to EWA products. First, on December 10, 2020, the CFPB published an advisory opinion on EWA programs. The opinion was the first one issued under the CFPB’s recent Advisory Opinions Policy procedural rule intended to resolve areas of regulatory uncertainty. In the opinion, the CFPB determined that a program incorporating specified features would “not involve the offering or extension of ‘credit’” under either Regulation Z or the Truth in Lending Act (TILA). For example, a program covered by the opinion would be offered by a third-party provider contracting with an employer, the provider could not charge interest or other fees, and the provider could recoup advances only through deductions taken by the employer on the subsequent payday.
Separately, on December 30, 2020, the CFPB issued an approval order granting Payactiv’s application for a safe harbor from TILA liability under the agency’s compliance assistance sandbox policy for the specific EWA program described in the application. The CFPB concluded that Payactiv’s program does not offer or extend credit; rather, it “facilitates employees’ access to wages they have already earned, and to which they are already entitled, and thus functionally operates like an employer that pays its employees earlier than the scheduled payday.”
Companies offering consumer financial products and services can take a ray of procedural hope from these MOUs. They reflect a more balanced and careful approach than we’ve seen from the California banking agency, throughout its various iterations, which favored regulation by enforcement. Admittedly, companies offering EWA products have a history of attempting to obtain regulatory rules of the road. But the MOUs reflect a focus on data collection without penalties. Hopefully, the DFPI will continue its approach of gathering data and seeking areas where the agency can align with industry.
Substantively, we see both the CFPB and the DFPI focusing on new types of financial products. We expect that focus to continue, especially in California given the DFPI’s expanded authority over financial products offered by fintechs and non-bank lenders that historically have fallen outside of the agency’s authority. We also will be watching for how the DFPI implements its apparent goal to create a de facto 36% interest rate cap across financial products, including its approach to whether certain types of fees are included in, or outside of, those caps.