Earned-Wage Access Plan Opposed by Fintechs Tees Up State Clash

The Consumer Financial Protection Bureau’s new proposal to regulate earned-wage access products at the federal level is set to bolster blue states that are treating the cash advances as loans, but it’s also drawing pushback from fintech early-pay providers and could clash with states taking a different approach.

The proposed interpretive rule released Thursday would classify earned-wage access advances as loans under the Truth in Lending Act. If finalized, it will require companies providing early-pay products to disclose all fees and “tips” to customers up front and calculate them into a single annual percentage rate.

The federal regulator’s latest move comes as a handful of states are clashing about whether earned-wage access products, which allow employees to take out a small chunk of their already accrued earnings before payday, are loans.

Most states haven’t yet made a final decision, but consumer advocates hope the CFPB’s proposal pushes more states to take a tougher view of the industry.

“A lot of states have been considering this that have strong consumer protections and have been hoping and waiting for the CFPB to come along,” said Yasmin Farahi, the deputy director of state policy and senior policy counsel at the Center for Responsible Lending.

Comparison Shopping

Earned-wage access products have grown in popularity in recent years.

The products, which the CFPB refers to as “paycheck advance” products, can be offered either in partnership with employers such as Walmart Inc. and Amazon.com Inc., or on a direct-to-consumer basis. DailyPay and Payactiv are among the companies that partner with employers.

Some employers cover all of the costs associated with their workers accessing a portion of their paychecks early while others don’t, forcing employees to pay expediting and other fees.

Employer-sponsored earned-wage access products can carry APRs of nearly 110%, the CFPB said in a report released Thursday alongside its proposed rule.

The direct-to-consumer model, offered by companies such as Dave Inc. and EarnIn, can also include subscription fees that the CFPB says can range as high as $14.99 per month, as well as relying on so-called tips from customers.

By treating earned-wage access products as loans and disclosing all fees and tips in an annual percentage rate, the CFPB says it wants to help employees understand the costs of getting portions of their pay early and make it easier for them to shop among providers and alternative products.

“The CFPB’s actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices,” CFPB Director Rohit Chopra said in a statement Thursday.

Wrong Model

Earned-wage access providers said the CFPB is attempting to shoehorn the product into the wrong regulatory model. The industry is widely expected to sue if the rule is finalized as proposed.

“Earned Wage Access should not be considered a loan as it is a no-cost, non-recourse product giving access to money workers have already earned, not future pay,” said Penny Lee, the president and CEO of the Financial Technology Association.

EarnIn is an FTA member.

Requiring the disclosures may harm an effective alternative to payday loans, which can have APRs of more than 350%, and other high-cost credit options, said Phil Goldfeder, the CEO of the American Fintech Council.

“This interpretive rule creates uncertainty, limits competition, harms consumer access, and will actually serve to help payday and predatory lenders,” he said in a statement.

DailyPay, Payactiv, Dave, and EarnIn are all AFC members.

Loan Confusion

Part of the confusion around early-pay products comes from the interaction between the CFPB’s proposed rule and state laws.

Nevada, Missouri, Wisconsin, and South Carolina have all enacted laws in recent years making it easier for earned-wage access providers to operate in their states.

The states require providers to get state licenses and regular examinations by regulators. Those providers are barred from punishing customers who choose not to tip with worse service, such as longer waits for payments to process. They also must provide free options, among other provisions.

But the clash between some states and the CFPB over treating earned-wage access as a loan means providers are going to have to operate between the two poles, said Catherine Brennan, a partner at Hudson Cook LLP who advises fintechs.

“I can’t imagine a scenario where an EWA company would not provide the disclosures if the CFPB requires them,” she said.

State Split

But the CFPB’s rules will apply only to disclosures. The more substantive treatment of the loans will still be governed by state laws, said James Kim, a partner at Troutman Pepper Hamilton Sanders LLP who advises fintechs and a former CFPB enforcement attorney.

“It really shouldn’t and will not have an impact on the sovereignty of each state to determine whether EWA is a covered loan under their consumer credit statute,” he said.

Meanwhile, California is currently working on rules that will classify earned-wage access as credit, something Connecticut regulators have already done.

“Policymakers should be skeptical whenever lenders insist on regulatory exemptions from rules that apply to their competitors,” Adam Rust, the Consumer Federation of America’s director of financial services, said in a statement. The CFPB’s rule will “level the playing field,” he said.

The CFPB’s plan, even if it only implicates disclosures, could provide a push to state lawmakers and regulators who want to subject earned-wage access to the same rules as traditional loans.

“If the CFPB thinks it’s credit, it’s very likely that unless there’s something odd in their credit laws, it’s credit,” Farahi from the Center for Responsible Lending said.