Access to earned wages under growing scrutiny from regulators

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As the prevalence of Earned Wage Access (EWA)/pay-as-you-go providers increase, the product they provide is coming under increasing scrutiny and some are calling for increased regulation.

Employees who use EWA’s services have access to their earned wages that have not yet been paid. This way, they don’t have to wait for their employer’s scheduled paydays to receive a portion of their accrued salary. The EWA provider later gets back the money they paid them through a payroll deduction or bank account debit when the employee’s payday arrives. Some EWA providers charge fees to customers, either through flat transaction fees or participation fees, according to Mayer Brown’s Global Financial Services Regulation and Enforcement Blog, Consumer Financial Services Review.

The regulatory debate around EWA has accelerated over the past two years, particularly over whether EWA’s proceeds amount to a loan. As the Consumer Financial Services Review noted: “EWA programs generally limit the amount that can be advanced to a user to the amount of salary that the user has actually earned and to which he or she has a right of ownership, and the transaction offers no recourse to the user if the provider cannot recover the advance.These characteristics differentiate an EWA transaction from a typical loan.

The Consumer Financial Protection Bureau issued an advisory on EWA in 2020 and began collecting information from providers to study the industry more closely. In its advisory, the federal agency said “the time gap between hours worked and the receipt of a paycheck may contribute to employees’ financial distress,” according to PYMNES.

This notice also stated that the EWA did not result in the granting of credit if the program provided funds to the accounts chosen by each employee, if the provider did not charge its customers a fee for the delivery of the funds and if the provider did not require a credit check for their customers.

In October 2021, John Culhane Jr. and Heather Klein of Ballard Spahr, writing to 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. Activists have argued that virtually all EWA programs serve as a third party advancing funds to a consumer. “It’s a loan,” the signatories of the letter argued.

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

In January, the CFPB responded to the letter. The agency acknowledged that its letter had caused confusion and stressed that its advice only applied to EWA providers who operated in a specifically defined manner, in particular those who did not collect fees from customers, according to JDSUPRA.

The agency also said its review did not attempt to determine whether EWA products qualified as credit for laws other than the Truth in Lending Act, such as state laws, the Equal Credit Opportunity or Consumer Financial Protection Act. According to AJ Dhaliwal and Moorari Shah of Sheppard Mullin Richter & Hampton, writing at JDSUPRASeth Frotman, APFC’s general counsel and author of the agency’s response, said he will recommend that the agency seek to clarify issues relating to the EWA.

States also treat EWA separately. PYMNTS reported that New Jersey, for example, requires EWA vendors to confirm a client’s earned income before sending them an advance. They must also obtain employee consent before obtaining 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 issued a letter with a legal opinion in response to a request from FlexWage, an EWA provider, according to Payment Journal. In FlexWage’s product, employers fund the payments that employees choose to select early – in contrast, many other providers are the source of funding. In the letter, the agency asserted that FlexWage’s product is not subject to licensing in California because not only is the employer providing the funds, but FlexWage does not attempt to collect overpayments from employees.

The opinion’s reasoning raised questions about whether the agency would take a different view of EWA vendors providing the funding to employees and seeking overpayments, Payments Journal noted. Still, Consumer Financial Services Review called the decision “encouraging” for EWA providers, noting that how state laws deal with EWA going forward will be critical to the future of the industry.

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

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