In January 2021, the new California Department of Financial Protection and Innovation (DFPI) entered into memorandums of understanding (MOUs) with five earned wage access fintech companies so that these companies can continue to operate in California while providing consumers with protection against abusive practices. The DFPI, often referred to as California’s “mini-CFPB,” described these MOUs as “the first agreements of their kind” between earned wage access fintech companies and a state regulator.
Earned wage access companies allow employees to access wages that they have already earned but have not yet received through their employer’s payroll. Until the passage of the California Consumer Financial Protection Law, which went into effect in January 2021, these fintech companies were not regulated as financial service providers.
Under the MOUs, the five earned wage access fintech companies have committed to follow industry best practices and inform consumers of any fees that they might charge for their services. Additionally, the MOUs provide that the fintech companies will provide quarterly reports, starting April 2021, with a broad range of information, including fees they charge to customers; consumer complaints; average frequency of use for customers; changes to consumer contracts; and the number of consumers who partially or completely fail to repay their advances or request cancellations or deferrals.
These MOUs follow the Consumer Financial Protection Bureau’s (CFPB) December 2020 advisory opinion, clarifying that some earned wage access services do not involve an offer of “credit” under Regulation Z, and the CFPB’s December 2020 compliance assistance sandbox (CAS) approval to earned wage access companies, which provides them with a “safe harbor” for specified legal conduct in response to regulatory uncertainty.
These actions—by California’s mini-CFPB and the CFPB itself—represent a promising change of pace from previous regulation of fintech ventures exploring new territory. Rather than just cracking down on bad actors, sometimes at the risk of snuffing out a fledgling industry entirely, these regulators are seeking to preemptively foster a consumer-friendly marketplace. Even though these agencies are expected to engage in more traditional regulation over the coming year, the DFPI’s and CFPB’s willingness to work with earned wage access companies promises to improve consumer outcomes without forcing them into the underground economy by overzealous enforcement.