The Consumer Financial Protection Bureau has sent a letter to the California Department of Financial Protection and Innovation (DFPI) commenting on the DFPI’s proposal that would require providers of “income-based advances” 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).

The CFPB begins its letter with a discussion of “income-based advance products that either are or purport to be based on wages that the employee has earned” and that are marketed “using various branding terms, such as ‘earned wage access.’”  The CFPB notes that providers of these products “include both firms seeking to integrate cash advances through an employer, where repayment of the advance is made via payroll deduction, and firms that, without the involvement of an employer, contract with a consumer to obtain authorization to debit the consumer’s bank account to obtain repayment of the advance.”  The CFPB states that in both scenarios, and particularly where the employer is not involved in collection, “these products share fundamental similarities with payday loan products.”

In the letter, the CFPB makes the following key comments:

• State supervision of providers of income-based advance products is “critically important for ensuring that firms are meeting their legal obligations.”  Such supervision “helps to ensure that the label of a product does not determined how providers are held accountable, or the extent to which consumers are protected, under the law.”
• The DFPI’s proposal would clarify that income-based advances are “loans” under the CFL and that “charges” under the CFL include “gratuities” as well as “expedite fees.”  As a result, 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 plans to issue further guidance “to provide greater clarity concerning the application of the Truth in Lending Act in this market.”  Products “that do not fit within [the very narrow scope of the CFPB’s previous advisory opinion] are not excluded from existing laws.”  The CFPB 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.”

The CFPB’s support for the DFPI’s approach suggests that in its further guidance, the CFPB is likely to take a very expansive approach to the types of fees that might bring earned wage access (EWA) programs within the coverage of TILA and Regulation Z.

In a November 2020 advisory opinion (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 March 2023, the Government Accountability Office (GAO) issued a report in which it recommended that the CFPB “should issue clarification on the application of the Truth in Lending Act’s definition of ‘credit’ for earned wage access products not covered by its November 2020 advisory opinion.”  In its report, GAO stated that “without further clarification from CFPB, it is uncertain under what circumstances earned wage access products not covered by its advisory opinion are to be considered an extension of ‘credit’ to consumers under the Truth in Lending Act and therefore subject to the act’s disclosure requirements.”  Director Chopra responded to the GAO’s recommendation of further clarification by indicating that the CFPB concurred and intended to issue further clarification.  With the CFPB seven months later in its comments to the DFPI now repeating its intention to issue further clarification, perhaps that clarification will soon be forthcoming.

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