Earned wage access under increasing scrutiny by regulators

As the prevalence of earned wage access (EWA)/on-demand pay providers grows, the product they provide is gaining closer scrutiny and some calls for increased regulation.

Employees who enlist EWA services receive access to their earned wages that have not yet been paid. In this way, they do not have to wait until their employers’ scheduled paydays to receive some portion of their accrued wages. The EWA provider later recoups the money that it paid them through a payroll deduction or bank account debit when the employee’s payday arrives. Some EWA providers charge fees to customers, either via flat transaction fees or participation fees, according to Mayer Brown’s global Financial Services Regulatory & Enforcement practice blog, Consumer Financial Services Review.

The regulatory debate surrounding EWA has picked up steam in the past two years, particularly surrounding whether EWA’s product amounts to a loan. As the Consumer Financial Services Review noted: “EWA programs typically restrict the amount that can be advanced to a user to the amount of wages that the user has actually earned and has a property right to, and the transaction carries no recourse to the user if the provider cannot recoup the advance. These features differentiate an EWA transaction from a typical loan.”

The Consumer Financial Protection Bureau released an advisory opinion about EWA in 2020 and started to collect information from providers to study the industry more closely. In its opinion, the federal agency indicated that “the interval of time between hours worked and receiving a paycheck can contribute to employees’ financial distress,” according to PYMNTS.

That opinion also stated that EWA did not result in an extension of credit if the program provided funds to the accounts of each employee’s choice, the provider did not charge fees to their customers for delivering the funds and the provider did not require a credit check for their customers.

In October of 2021, Ballard Spahr’s John Culhane Jr. and Heather Klein, writing at JDSUPRA, noted that a group of 96 organizations and individuals sent a letter to the CFPB advocating for the agency to regulate EWA products as credit subject to the Truth in Lending Act. The activists argued that virtually all EWA programs serve as third parties advancing funds to a consumer. “That is a loan,” the signers of the letter argued.

The groups and individuals say failing to call EWA products “credit” can lead “to evasion of federal credit laws such as TILA, and of state laws, particularly state usury laws,” the JDSUPRA article continued. In addition, the signers argued that the CFPB’s reasoning in its advisory opinion could weaken the Equal Credit Opportunity Act’s protections against protected classes.

In January, the CFPB responded to the letter. The agency acknowledged that its letter had created confusion and emphasized that its opinion had applied only to EWA providers that operated in a specifically defined way, particularly those that collected no fee from customers, according to JDSUPRA.

The agency also said that its opinion did not attempt to address whether EWA products qualified as credit for laws other than the Truth in Lending Act, such as state laws, the Equal Credit Opportunity Act or the Consumer Financial Protection Act. According to Sheppard Mullin Richter & Hampton’s A.J. Dhaliwal and Moorari Shah, writing at JDSUPRA, Seth Frotman, general counsel for CFPA and the writer of the agency’s response, said that he will recommend that the agency seek to provide greater clarity on EWA issues.

States also are separately addressing EWA. PYMNTS reported that New Jersey, for instance, requires EWA providers to confirm a customer’s earned income before sending them an advance. They also must get the employee’s consent before getting information about them from employers and provide funds that represent net wages rather than gross wages.

In February, the California Department of Financial Protection and Innovation released a letter with a legal opinion in response to a request from FlexWage, an EWA provider, according to Payments Journal. In FlexWage’s product, the employers fund the payments that employees choose to select early – in contrast, many other providers are the source of the funding. In the letter, the agency asserted that FlexWage’s product is not subject to licensure in California because not only does the employer provide the funds but FlexWage does not try to collect overpayments from employees.

The opinion’s reasoning raised questions about whether the agency would have a different view for EWA providers who provide the funding for the employees and who do seek out overpayments, Payments Journal noted. Still, Consumer Financial Services Review called the ruling “encouraging” for EWA providers, noting how state laws treat EWA going forward will be crucial for the industry’s future.

“Many states require companies making consumer loans to obtain a license, and states may impose usury limits that prohibit loans from bearing interest, fees, or finance charges above a certain limit,” Consumer Financial Services Review noted. “Both of these types of laws could have a significant impact on EWA providers if the transactions were determined by a state regulator to be a loan.”