On August 31, 2021, the District Court for the Western District of Texas upheld the payment provisions of the Consumer Financial Protection Bureau’s (CFPB) 2017 rule “Payday, Vehicle Title, and Certain High-Cost Playment Loans” ( payday rule), but on October 15, 2021, the Fifth Circuit extended the suspension of the payday rule while it heard an appeal from the Community Financial Services Association of America Ltd. and the Consumer Service Alliance of Texas . The payday rule initially had two elements: 1) mandatory underwriting provisions; and 2) Payment Provisions. The mandatory underwriting clauses made it an unfair and abusive practice for a lender to grant certain short and long term loans with lump sum payments without performing a repayment capacity analysis. The mandatory subscription provisions were repealed in July 2020. The payment provisions make it an unfair and abusive practice for a lender to attempt to withdraw funds from a consumer account after two consecutive unsuccessful attempts, unless the lender receives a new specific authorisation. Payment provisions apply to covered short-term or long-term lump-sum loans, including payday loans and vehicle titles, and certain other high-cost long-term loans. The District Court for the Western District of Texas set the mandatory compliance date for June 2022, but the Fifth Circuit’s decision puts that compliance date in jeopardy.
The payday rule helps protect borrowers who can live paycheck to paycheck and rely on credit. As an alternative to payday loans, there has been a slight increase in Earned Wage Access (EWA) programs. EWA programs allow employees to access their pay before their employer’s scheduled pay day.
Generally, there are two models of EWA: 1) the business-to-business (B2B), non-recourse model, in which the EWA provider contracts directly with employers; and 2) the “direct-to-consumer” (D2C) model, where the EWA supplier contracts directly with employees. A growing number of employers are considering adopting EWA programs as a benefit to attracting and retaining employees. EWA products represent a short-term liquidity alternative to more expensive options such as 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 on whether EWA programs are eligible for credit under Regulation Z, which implements the Truth in Lending Act (TILA) . Via its long-awaited advisory opinion and subsequent approval order of December 30, 2020, the CFPB defines the set of characteristics that distinguish “covered” EWA programs from credit extensions – paving the way for the CFPB to grant EWA programs a safe harbor of liability under TILA and Regulation Z. The Approval Order, issued to Payactiv, Inc., applies the features of a covered EWA program to Payactiv’s business model, ultimately finding that the EWA program of Payactiv is not an offer or an extension of credit.
EWA Suppliers have requested clarification from the CFPB on whether an obligation to repay EWA funds represents a “credit” under TILA and Regulation Z and, therefore, obligates Suppliers to EWA to comply with the requirements of TILA and Regulation Z. Through its advisory opinion, the CFPB ultimately determined that EWA programs are not credit extensions if they include all of the following features:
- the EWA program is offered through an employer as a benefit to employees;
- wages advanced to an employee do not exceed the employee’s accrued wages as verified by the employer;
- the EWA provider does not charge the employee a fee to access their EWA funds (beyond the nominal processing fee which “does not involve offering or extending credit”), which requires the provider EWA to provide EWA funds to an Employee Choice account;
- the EWA provider only recovers the employee’s advance through an employer-facilitated payroll deduction;
- EWA’s supplier retains no legal or contractual claim or remedy against any employee for failure or partial payroll deduction;
- the EWA provider discloses to the employee that the EWA provider: will not require the employee to pay any fees or charges (beyond the nominal processing fee) in connection with the EWA program; has no claim or contractual remedy against the employee in the event that 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 under TILA and Reg Z because EWA transactions do not “entitle employees to defer payment of debt or to incur debt and defer payment “. When looking at all of the circumstances comparing a credit transaction to an EWA program, EWA providers have no rights against the employee for non-payment, and employees do not pay any fees for participate in the EWA program. Additionally, EWA providers do not pull credit scores to assess an employee’s credit risk or report EWA transactions to consumer reporting agencies. Finally, EWA vendors do not engage in debt collection activities, or provide or sell EWA transactions to third parties as receivables.
While EWA programs that adhere to the CFPB’s Advisory Opinion and Approval Order have some level of certainty regarding TILA and Regulation Z, the CFPB’s position on EWA programs may change under the Biden administration. . In October 2021, nearly 100 organizations co-signed a letter to the CFPB urging the CFPB to reconsider its position on EWA programs. The November 2020 Advisory Opinion and December 2020 Approval Order were issued under the guidance of former CFPB Director Kathy Kraninger. With Director Rohit Chopra at the helm of the CFPB, a number of Trump-era policy decisions could be revisited.
Summer Partner Yewande Alade contributed to the preparation of this Opinion Wilson Sonsini.