On August 31, 2021, the District Court for the Western District of Texas upheld the payment provisions of the 2017 Consumer Financial Protection Bureau (CFPB) rule “Payday, Vehicle Title and Certain High-Cost Modment Loans”. Payday), but on October 15, 2021, Circuit 5 extended the suspension of the payday rule while it hears an appeal from the Community Financial Services Association of America Ltd. and the Consumer Service Alliance of Texas. The payday rule initially consisted of two parts: 1) mandatory underwriting provisions; and 2) Payment arrangements. The mandatory underwriting provisions 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 The mandatory underwriting provisions were repealed in July 2020.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 failed attempts, unless the lender does not. receives a new specific authorization. Payment provisions apply to covered short or long term lump sum loans, including payday and vehicle title loans, and certain other high cost long term loans. The District Court for the Western District of Texas has set a mandatory compliance date for June 2022, but the Fifth Circuit ruling puts that compliance date in jeopardy.
The payday rule helps protect borrowers who can live paycheck to paycheck and are dependent on credit. As an alternative to payday loans, there has been a slight increase in Access to Earned Wage (EWA) programs. EWA programs allow employees to access their earned wages before their employer’s scheduled payday.
Typically, there are two EWA models: 1) the non-recourse business-to-business (B2B) model, where the EWA provider contracts directly with employers; and 2) the “direct to consumer” (D2C) model, where the EWA provider contracts directly with employees. An increasing number of employers are considering adopting 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 contemplated by the salary rule and high interest credit card debt.
In November 2020, the CFPB issued a advisory opinion provide federal guidance on whether EWA programs qualify as credits under Regulation Z, which implements the Loan Truth Act (TILA). Via its long-awaited advisory opinion, and its approval order on December 30, 2020, the CFPB delineates the set of characteristics that distinguish “covered” EWA programs from credit extensions, thus paving the way for the CFPB to grant EWA programs a safe harbor against liability under TILA and of Regulation Z. The Approval Order, issued to Payactiv, Inc., applies the features of a covered EWA program to Payactiv’s business model, ultimately concluding that Payactiv’s EWA program is not an offer or an extension credit.
EWA suppliers have sought clarification from the CFPB as to whether an obligation to repay EWA funds constitutes “credit” under TILA and Regulation Z and, therefore, requires EWA suppliers to they comply with TILA and Z regulation requirements. In its advisory opinion, the CFPB ultimately determined that EWA programs are not credit extensions if they include all of the following characteristics:
- the EWA program is offered through an employer as a benefit to employees;
- the salary advanced to an employee does not exceed the employee’s accumulated salary as verified by the employer;
- the EWA provider does not charge an employee a fee for accessing its EWA funds (beyond a nominal processing fee which “does not involve offering or extending credit”), which obligates the EWA provider to provide EWA funds to an employee’s choice account;
- the EWA provider only recovers the employee’s advance through employer-facilitated payroll deduction;
- the EWA Supplier does not retain any legal or contractual claims or remedies against any employee for failure or partial withholding from wages;
- the EWA Provider discloses to the Employee that the EWA Provider: will not require the Employee to pay any fees or charges (in excess of the Nominal Processing Fee) in connection with the EWA Program; has no claims or contractual remedies against the employee in the event that withholding from wages is insufficient to cover the EWA transaction; and will not engage in debt collection activities, place an EWA transaction with a third party as debt, or report the EWA transaction to a consumer information 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, as EWA transactions do not “give employees the right to defer payment of debt or incur debt and defer payment.” When considering all of the circumstances comparing a credit transaction to an EWA program, EWA providers have no claim against the employee for non-payment, and employees are not charged for participating in the EWA program. Additionally, EWA providers do not draw credit scores to assess an employee’s credit risk or to report EWA transactions to consumer reporting agencies. Finally, EWA providers do not engage in debt collection activities, nor do they provide or sell EWA transactions to third parties as receivables.
While EWA programs that adhere to the CFPB Advisory Opinion and Order of Approval 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 CFPB urging the CFPB to reconsider its position on EWA programs. The November 2020 Advisory Opinion and December 2020 Approval Order were issued by former CFPB Director Kathy Kraninger. With Director Rohit Chopra at the helm of the CFPB, a number of political decisions from the Trump era could be reconsidered.
Summer partner Yewande Alade contributed to the preparation of this opinion Wilson Sonsini.