Skyrocketing cost of living and persistent inflation have made buying groceries and paying bills on time a near impossible feat for many Americans. While how much workers are paid is critical, so is when they are paid — and many employers have adopted a new payroll innovation called earned wage access (EWA) to help millions of Americans access their own earned wages prior to payday. This is a game-changer for many working people and their families.
In recent months, two states have taken starkly different approaches toward regulating EWA. On the one hand, the Nevada legislature in June
EWA allows consumers to access their wages on-demand, outside of the traditional weekly, bi-weekly or monthly pay cycles. The consumer often pays a small fee to use the EWA service or to access funds immediately. Many leading providers offer multiple free ways to access earned wages. In virtually all cases, these fees are much lower than predatory payday loan charges or bank overdraft fees, and are typically less than an ATM fee. EWA products are nonrecourse — which means consumers have no obligation to repay the EWA if their paycheck deduction fails. Nor does EWA involve debt collection, credit reporting, interest charges or late fees. EWA provides a much safer and more affordable alternative for working families who need money immediately to help with emergencies and other financial stresses.
By treating EWA as a loan, the DFPI's proposed regulations would all but force providers to charge higher fees and interest than they do today and cause them to pursue debt collection. If these regulations are adopted, California would be the only state in the country to treat EWA as a loan. So far, every regulator to consider EWA — including those in Nevada, Arizona, Kansas, at the Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Treasury — has reached the same conclusion that a no-interest and nonrecourse EWA product is not a consumer loan. Not only has no federal or state regulator determined EWA is a loan, but this was also the consensus reached by the California Legislature nearly four years ago. In May 2019, the legislature, on a bipartisan basis, concluded that EWA was not credit when
Sen. Elizabeth Warren, D-Mass., said bank regulators have been shortsighted in allowing banks to merge and should be tougher when issuing M&A guidelines.
By treating EWA as if it were a predatory lending product, the DFPI is imposing unnecessary financial and regulatory burdens on EWA providers. The cost of doing business in California will go up. Prices will go up. Access will be curtailed and Californians, in effect, will be forced to resort to high-priced payday loans or hefty bank overdraft fees. They will also face collections and negative credit reporting if they do not repay on time.
Nevada has taken a bipartisan and commonsense approach that provides actual consumer protections — instead of just the fee cap proposed in California. The new law does not try to squeeze EWA into an inapplicable loan construct. Instead, it requires licensing of EWA providers and oversight of the industry. It restricts EWA providers' recourse and disallows debt collection and negative credit reporting. It also creates many limits around fees by requiring providers to offer free access to EWA and prohibiting the very fees California would allow — interest charges, late fees and origination fees. The passage of this law is a big win for the working families in Nevada who will continue to enjoy the benefits of EWA without disruption. It also serves as a model for constructive collaborations among consumer groups and the industry, Republicans and Democrats.
We are former regulators at the CFPB. While there, we evaluated EWA against higher-cost products and saw the benefits of EWA innovation. We are happy to see what EWA has become today — a mainstream, low-cost financial product favored by employers large and small who are concerned about recruiting and retaining talent, the productivity of their workforces and the financial well-being of their employees. Millions of employees have embraced EWA over other short-term liquidity products for its affordable cost, pro-consumer features and ease of use. And yet, some want to take these away from the very consumers they purport to protect and serve. Certain consumer advocates claim that regulating EWA as credit is the best way to protect consumers, though they have, confoundingly, opposed regulations that create more consumer protections than those contemplated in existing credit laws. Today, even without regulation, EWA fees remain low, consumers have free options and providers have no recourse. There is simply no basis for those who fear EWA will exploit consumers. Creating a licensing system for EWA providers adds new protections not available under misapplied credit laws.
Providing legal and regulatory certainty in EWA is urgently needed. Going forward, policymakers have two choices. Like Nevada, they can actually protect consumers against high interest charges, debt collection and dings to their credit. Or, like California, they can open the door to convert EWA into a high-cost lending product. We urge policymakers to follow in the footsteps of the Nevada legislature and establish a legal framework that truly protects consumers and cements their access to EWA products that provide a lifeline in times of need.
