Early wage access products will continue to face close scrutiny under state consumer protection, wage, and tax laws despite a recent CFPB opinion that said some of the products aren’t loans.
The Consumer Financial Protection Bureau Nov. 30 said in an advisory opinion that programs operating through employers that allow workers to get paycheck advances without fees aren’t considered credit under the Truth in Lending Act.
By exempting those products from its regulations, the CFPB made it easier for employers to partner with some early wage access companies. But the advisory opinion doesn’t cover another, burgeoning type of wage access programs, ones that bypass employers and go directly to consumers.
“The CFPB’s opinion still leaves a lot of exposure,” said Jim Hawkins, a professor at the University of Houston Law Center. “Hopefully, state lawmakers and the CFPB itself can offer more certainty in the future,” he said.
Americans in recent years increasingly have relied on early wage access products to access cash in between paychecks.
Direct-to-consumer products have been particularly popular among gig-economy workers. Such products can carry significant fees or ask customers to provide “tips” in exchange for early access to their pay.
There are also arrangements under which employers pick up the tab for workers to get their money early through third-party vendors.
Whether the employer or direct-to-consumer model should be considered a credit product has been the focus of much debate. Credit products are subject to the CFPB’s fair lending restrictions and enforcement.
Consumer and worker advocates worry that the direct-to-consumer model is little different than a payday loan because the fees can pile up if a consumer misses a repayment, said Suzanne Martindale, senior policy counsel at Consumer Reports.
The model addressed in the CFPB’s advisory opinion is different than direct-to-consumer programs, and in many ways safer for workers, Martindale said.
Early wage programs addressed by the CFPB don’t charge significant fees for people to get the money they earned. These programs protect workers from being pursued by an early wage access company if they leave the employer that partnered with the company.
“I think that for advisory opinions that could result in a product being exempt from a consumer protection law, we think narrower is better,” Martindale said.
Certain early wage service providers—including direct-to-consumer companies or employer-based models that charge high fees—don’t meet the CFPB’s outline. And they may face “even more uncertainty because falling outside the ‘safe harbor’ might create the impression that these companies are credit or closer to credit,” Hawkins said.
Regulators in states such as New York and California have been investigating the early wage access industry, with a focus on the direct-to-consumer model. While state laws may differ from CFPB standards, the states are likely to view the advisory opinion favorably because it is so narrow, said Nakita Cuttino, a professor at Duke University School of Law.
That narrow approach also makes it more likely that the incoming Biden administration will keep it in place despite the expected appointment of a CFPB leader who will be perceived to be more aggressive than current Director Kathy Kraninger.
“In this instance, this is a conservative enough approach and narrow enough approach that this may stand,” said Leslie Parrish, a senior analyst at the Aite Group and a former CFPB staffer.
The CFPB’s advisory opinion also is confined to consumer financial protection law, making it unclear how early wage access products should be treated under federal and state wage and hour and tax laws.
Many states have restrictions on the timing of wage deductions, and it’s not entirely clear whether early wage access firms fall under those statutes, said Tammy McCutchen, a principal at Littler Mendelson P.C.
“It would be really nice if the Department of Labor would take that advisory opinion and determine that this is not a payment of wages,” she said.
The issue of when taxes should be assessed also can trip up early wage access companies and their employee and employer customers alike, said Jason Lee, the CEO of DailyPay, an early wage access company.
Despite those lingering questions, having the CFPB weigh in is a positive development for the industry, Lee said.
“Any time there’s clarification on anything, that’s a good thing,” he said.