Wilson Sonsini Goodrich & Rosati

On August 31, 2021, the District Court for the Western District of Texas upheld the Payment Provisions in the Consumer Financial Protection Bureau’s (CFPB) 2017 “Payday, Vehicle Title, and Certain High-Cost Installment Loans” Rule (Payday Rule), but on October 15, 2021 the Fifth Circuit extended a stay on the Payday Rule while it hears an appeal from the Community Financial Services Association of America Ltd., and the Consumer Service Alliance of Texas. The Payday Rule initially had two components: 1) Mandatory Underwriting Provisions; and 2) Payment Provisions. The Mandatory Underwriting Provisions made it an unfair and abusive practice for a lender to make certain short and long-term loans with balloon payments without performing an ability-to-repay analysis. The Mandatory Underwriting Provisions were rescinded in July 2020. The Payment Provisions make it an unfair and abusive practice for a lender to make attempts to withdraw funds from a consumer account after two consecutive failed attempts unless the lender receives a new and specific authorization. The Payment Provisions apply to covered short-term or longer-term balloon-payment loans, including payday and vehicle title loans, and certain other high-cost longer-term loans. The District Court for the Western District of Texas set the mandatory compliance date for June 2022, but the Fifth Circuit ruling places that compliance date in jeopardy.

The Payday Rule helps protect those borrowers who may be living paycheck to paycheck and rely on credit. As an alternative to payday loans, there has been an uptick in Earned Wage Access (EWA) programs. EWA programs enable employees to access their earned wages before their employer's scheduled payday.

Generally, there are two EWA models: 1) the business-to-business (B2B), non-recourse model where the EWA provider contracts directly with employers; and 2) the "direct-to-consumer" (D2C) model, where the EWA provider contracts directly with employees. An increasing number of employers are considering adopting EWA programs as a benefit to attract and retain employees. EWA products represent a short-term liquidity alternative to costlier options like payday loans contemplated by the Payday Rule and high-interest credit card debt.

In November 2020, the CFPB issued an advisory opinion providing federal guidance as to whether EWA programs qualify as credit under Regulation Z, which implements the Truth in Lending Act (TILA). Via its long awaited advisory opinion, and its subsequent approval order on December 30, 2020, the CFPB delineates the set of characteristics that distinguish "covered" EWA programs from extensions of credit—opening the way for the CFPB to grant EWA programs a safe harbor from liability under TILA and Regulation Z. The approval order, issued to Payactiv, Inc., applies the characteristics of a covered EWA program to Payactiv’s business model, ultimately concluding that Payactiv’s EWA program is not an offer or extension of credit.

EWA providers sought clarification from the CFPB on whether an obligation to repay EWA funds represents “credit” under TILA and Regulation Z and, as a result, requires EWA providers to comply with the TILA and Regulation Z requirements. Through its advisory opinion, the CFPB ultimately determined EWA programs are not extensions of credit if it includes all of the following characteristics:

  • the EWA program is offered via an employer as an employee benefit;
  • wages advanced to an employee do not exceed the employee's accrued wages as verified by the employer;
  • the EWA provider does not charge an employee fees to access his or her EWA funds (beyond nominal processing fees that "do not involve the offering or extension of credit"), which requires the EWA provider to provide EWA funds to an account of the employee’s choice;
  • the EWA provider only recovers the employee's advance through an employer-facilitated payroll deduction;
  • the EWA provider does not retain any legal or contractual claim or remedy against an employee in the event of a failed or partial payroll deduction;
  • the EWA provider discloses to the employee that the EWA provider: will not require the employee to pay any charges or fees (beyond nominal processing fees) in connection with the EWA program; has no contractual claim or remedy against the employee in case the payroll deduction is insufficient to cover the EWA transaction; and will not engage in debt collection activities, place an EWA transaction with a third party as a debt, or report the EWA transaction to a consumer reporting agency; and
  • the EWA provider does not assess the credit risk of individual employees.

A covered EWA program is not an extension of credit pursuant to TILA and Reg Z because EWA transactions do not “provide employees with the right to defer payment of debt or to incur debt and defer its payment.” When looking at the totality of circumstances comparing a credit transaction to an EWA program, EWA providers have no rights against the employee for non-payment, and employees are not charged a fee to participate in the EWA program. Further, EWA providers do not pull credit scores to assess an employee’s credit risk or report EWA transactions to consumer reporting agencies. Finally, EWA providers do not engage in debt collection activities, or provide or sell EWA transactions to third parties as debts to be collected.

While EWA programs that adhere to the CFPB’s advisory opinion and approval order have a certain level of certainty regarding TILA and Regulation Z, the CFPB’s stance on EWA programs may change under the Biden administration. In October 2021, almost 100 organizations co-signed a letter to the CFPB urging the CFPB to reconsider its stance on EWA programs. The November 2020 advisory opinion and December 2020 approval order were issued under former CFPB Director Kathy Kraninger. With Director Rohit Chopra now leading the CFPB, there may be a number of Trump-era policy decisions that may be revisited.

Summer associate Yewande Alade contributed to the preparation of this Wilson Sonsini Advisory.