On August 31, 2021, the District Court of the Western District of Texas upheld the payment terms in the Consumer Financial Protection Bureau (CFPB) 2017 Payday Rule “Payday, Vehicle Title and Certain High Priced Installment Loans” rule, but on October 15, 2021, the Fifth Circuit extended it the suspension of the payday rule while serving an appeal from the Community Financial Services Association of America Ltd. and the Consumer Service Alliance of Texas heard. The payday rule originally consisted of two components: 1) Mandatory underwriting provisions; and 2) Payment Terms. The mandatory underwriting requirements made it an unfair and abusive practice for a lender to balloon out certain short and long term loans without performing a repayment capability analysis. The mandatory underwriting provisions were lifted in July 2020. Payment terms make it an unfair and abusive practice for a lender to withdraw funds from a consumer account after two consecutive failed attempts unless the lender receives new and specific approval. The payment terms apply to covered short or longer term balloon loans, including payday and vehicle title loans, and certain other high cost longer term loans. The District Court for the Western District of Texas has set the mandatory fulfillment date for June 2022, but the fifth district ruling puts that fulfillment date at risk.
The payday rule helps protect those borrowers who live from paycheck to paycheck and are in need of credit. As an alternative to payday loans, there has been an increase in earned wage access (EWA) programs. EWA programs allow employees to access their earned wages before their employer’s scheduled payday.
In general, there are two EWA models: 1) the business-to-business (B2B), non-recourse model, in which the EWA provider concludes contracts directly with employers; and 2) the “direct-to-consumer” (D2C) model, in which the EWA provider contracts directly with employees. More and more employers are considering introducing EWA programs as a benefit to attract and retain employees. EWA products represent a short-term liquidity alternative to more expensive options such as payday loans and high-interest credit card debt provided by the payday rule.
In November 2020 the CFPB has a advisory opinion Provide federal guidance on whether EWA programs qualify as credit under Regulation Z, which implements the Truth in Lending Act (TILA). Through his long-awaited report and his subsequent Approval order On December 30, 2020, the CFPB defines the number of features that distinguish “covered” EWA programs from lending – and paves the way for the CFPB to grant EWA programs a safe haven from liability under TILA and Regulation Z. The Authorization Order issued to Payactiv, Inc. applies the characteristics of a Covered EWA Program to Payactiv’s business model and ultimately concludes that Payactiv’s EWA Program is not an offer or credit extension.
EWA providers asked the CFPB to clarify whether an obligation to repay EWA funds constitutes a “loan” according to TILA and Regulation Z and consequently obliges EWA providers to comply with the TILA and Regulation Z requirements. The CFPB ultimately found in its opinion that EWA programs are not lending if they have all of the following characteristics:
- the EWA program is offered as an employee benefit through an employer;
- Wages paid to an employee must not exceed the employee’s accrued wages verified by the employer;
- The EWA provider does not charge an employee any fees for accessing its EWA funds (beyond the nominal processing fees, which “do not include an offer or an extension of credit”), whereby the EWA provider is obliged to accept EWA funds Employee’s account to transfer selection;
- the EWA provider only withdraws the employee’s advance payment through a wage deduction made easier by the employer;
- The EWA provider does not retain any legal or contractual claims or legal remedies against an employee in the event of a failed or partial wage deduction;
- The EWA provider informs the employee that the EWA provider: does not charge the employee any fees or charges (beyond the nominal processing fees) in connection with the EWA program; has no contractual right or legal remedy against the employee if the wage deduction is insufficient to cover the EWA transaction; and will not conduct any collection activities, place an EWA transaction as debt with a third party, or report the EWA transaction to a consumer reporting point; and
- the EWA provider does not assess the credit risk of individual employees.
A covered EWA program is not a loan under TILA and Reg Z, as EWA transactions “do not give employees the right to postpone payment of debts or to enter into debts and postpone their payment”. Considering the entirety of the circumstances that compare a credit transaction to an EWA program, EWA providers have no rights against the employee for non-payment and the employees are not charged a fee for participation in the EWA program. In addition, EWA providers do not use credit ratings to assess an employee’s credit risk or to report EWA transactions to consumer information centers. After all, EWA providers do not engage in collection activities or offer or sell EWA transactions to third parties as receivables to be collected.
While EWA programs that conform to the CFPB’s opinion and approval order have a certain level of security with respect to TILA and Regulation Z, the CFPB’s stance on EWA programs may change under the Biden government. In October 2021, nearly 100 organizations signed an a Letter to the CFPB calls on the CFPB to reconsider its position on EWA programs. The expert opinion from November 2020 and the approval order from December 2020 were issued under the former CFPB director Kathy Kraninger. With Director Rohit Chopra now running the CFPB, there could be a number of Trump-era policy decisions that could be revised.
Summer partner Yewande Alade contributed to the preparation of this Wilson Sonsini Advisory.