The Government Accountability Office (GAO) has issued a new report entitled “Financial Technology: Products Have Benefits and Risks to Underserved Consumers, and Regulatory Clarity Is Needed.”

The report focuses on the following four types of fintech products:

• Digital deposit accounts offered by fintech companies through partnerships with banks or credit unions.  In these arrangements, the deposit account is provided by a depository institution insured by the FDIC or NCUA but the consumer typically interacts directly with the fintech company, which manages the platform used to access funds.
• Credit builder products structured as credit cards or loans that can help consumers develop positive credit payment histories and establish or improve credit scores.  Fintech companies partner with insured depository institutions to offer these products.  The consumer interacts with the fintech company that manages the platform used to apply for and manage funds.
• Small-dollar fintech loans that are unsecured installment loans of $2,500 or less underwritten by fintech companies using nontraditional or alternative data.  Fintech companies may make these loans through a bank partnership model in which the bank partner funds the loan or as a direct lender.
• Earned wage access (EWA) products offered by fintech companies or through fintech-bank partnerships that purport to provide consumers with access to wages that have been earned but not yet paid.  The two primary business models are employer-sponsored and direct-to-consumer.

In the report, the GAO looks at:

• the benefits, risks, and limitations of the four fintech products for underserved consumers (meaning consumers who are unbanked (i.e. a household with no checking or savings account at a bank or credit union), underbanked (i.e., a banked household that also used one or more nonbank financial products or services, such as a payday loan, in the past 12 months), and credit invisibles  (i.e. consumers without a credit score) and the extent to which underserved consumers have used these products; and
• steps taken by federal and state regulators to understand and identify the benefits and risks of the four fintech products and address risks.

In analyzing the benefits of the four fintech products, GAO compared the costs of these products to those of traditional or alternative financial products, as follows:

• fintech deposit accounts compared to BankOn accounts and selected prepaid cards (BankOn accounts are traditional bank accounts that meet standards developed by the Cities for Financial Empowerment Fund to provide low-cost bank accounts for underserved consumers);
• credit builder cards and loans offered by fintech companies compared with those offered by selected traditional institutions;
• small-dollar loans compared with payday day alternative loans offered pursuant to NCUA rules; and
• EWA products compared with typical fees associated with payday loans as reported by the CFPB.

GAO makes only one recommendation for executive action in the report, which is 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 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 CAS Policy.

In October 2021, a group of 96 organizations and individuals, who described themselves as consisting of “consumer, labor, civil rights, legal services, faith, community and financial organizations and academics,” sent a letter to the CFPB urging the Bureau to regulate EWA products as credit subject to the TILA.  The letter took aim at the AO and the CFPB approval order issued in December 2020 to Payactiv, Inc. through the CFPB’s Compliance Assistance Sandbox Policy.  The approval order confirmed that Payactiv’s EWA program described in the order did not involve the offering or extension of “credit” as defined in Regulation Z, and that Payactiv therefore had a safe harbor from liability under the TILA and Regulation Z in connection with the specified EWA program.  (The CFPB terminated PayActiv’s approval order in June 2022.)  In January 2022, Seth Frotman, now CFPB General Counsel, indicated that more clarity on EWA products was needed from the CFPB.  Also, in its press release about the termination of PayActiv’s approval order, the CFPB stated that it planned to issue further guidance to provide greater clarity concerning the application of TILA and Regulation definition of “credit” to EWA products.

In its report, GAO indicates that despite the AO “some have expressed continued uncertainty about how the Truth in Lending Act and Regulation Z apply to certain earned wage access products.”  GAO states:

For example, in a September 2022 written statement for a congressional hearing, a representative of the Financial Technology Association…noted that the advisory opinion did not reference direct-to-consumer earned wage access models, leaving it unclear as to whether these models are subject to Regulation Z.   Similarly, representatives of the National Association of Consumer Credit Administrators…said its members would like further clarification on whether earned wage access products, including direct-to-consumer models, are considered credit under the Truth in Lending Act and Regulation Z.

Observing that “CFPB’s strategic plan calls on it to issue rules and guidance that respond to emerging markets and products, GAO comments 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 discourse requirements.”  In response to GAO’s recommendation that the CFPB issue further clarification, Director Chopra indicated that “the CFPB concurs with the GAO’s recommendation and intends to issue further clarification in this area.”  (A copy of Director Chopra’s letter is attached as Appendix III to the report.)

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