The Consumer Financial Protection Bureau is inching closer to classifying
The CFPB just finished receiving comments on its plan to make earned wage access programs subject to the Truth in Lending Act, which would require certain providers to disclose fees and annual percentage rates similar to the rules for loans and credit cards.
This proposed EWA rule came at around the same time the CFPB released a report warning about the consumer impact of fees merchants charge for cash-back services, and a probe by the Department of Transportation into airline rewards programs following a CFPB hearing in May.
As consumers struggle with
Other fees also apply. "Workers who use direct-to-consumer paycheck advance products may pay monthly subscription fees, as much as $14.99, and often make payments that providers characterize as "tips," according to the CFPB.
Charging a tip
The CFPB received 85 comments on its EWA proposal, mostly from consumer groups and trade organizations that represent the EWA industry.
Opponents of the CFPB's interpretive rule on EWA, such as the
"When you think about traditional loans … number one it's going to affect credit score," said Phil Goldfeder, CEO of the AFC, in an interview. "They're going to have to underwrite the borrower."
The borrower's costs and interest rates are risk-based. A loan has to be paid back."
Earned wage access does not have that, according to Goldfeder. "There's no fees based on risk. There's no underwriting. It's nonrecourse, meaning if [the consumer] decides they don't want to pay it back, the companies cannot collect on it."
The only protection that EWA providers have against consumers not paying back the money they receive ahead of their paycheck is the fear that consumers won't be able to use the product again, Goldfeder said.
The EWA's interpretive rule would apply to EWA sellers that charge "tips" or fees, from $1.99 to $4.99, for the payroll advances. The CFPB rules would not apply to products that do not charge fees to the consumer and are instead offered as an employee benefit.
Proponents of the proposed rule, such as the Center for Responsible Lending, the National Consumer Law Center and the Consumer Federation of America, are zeroing in on those fees.
"What ends up happening is the fees end up chipping away at your paycheck, and you just end up in a cycle of repeat borrowing," said Nadine Chabrier, senior policy and litigation counsel at the Center for Responsible Lending, in an interview.
CRL is pushing for proper disclosures, so consumers understand the cost of the product, Chabrier said. "When you have a proper APR for an earned wage access loan, you will find that [to be] up to 300% if you take seven days to pay it back. It can be extremely high and really comparable to a payday loan."
Tips are particularly problematic, Chabrier said. "It's a misnomer. It's not a gratuity; it's something you agree to before you even get the money. … It's actually part of the business model that these companies have."
Neobank Dave, for example, made $56.9 million of revenue off of tips in 2023, compared to $61.9 million in 2022, according to the company's March 5 10K filing with the Securities and Exchange Commission. By another measure, tip revenue accounted for nearly a quarter of the company's total operating revenue last year.
The proposed rule will change the way EWA providers conduct business, said Anna Kooi, partner and national financial services leader at Milwaukee-based advisory and accounting firm Wipfli.
"If [the CFPB] does put [EWA] into the loan category, that then increases the compliance and regulatory operational expenses" for providers, Kooi said. Fee structures will also be put under the microscope, she said, which could pressure revenues. "Along with that, [the question is] who can play in this market?" Kooi said.
Open to interpretation
The interpretive rule marks a departure from the CFPB's 2020 stance that EWA products, which allow employees to access payroll wages ahead of their regular weekly, bi-weekly or monthly paychecks, were not a debt incurred by consumers.
In the new proposed interpretive rule, the CFPB "takes the position that they are clarifying prior statements and that their prior guidance on the subject was limited to a very specific fact pattern and only that fact pattern," said Aaron Kouhoupt, chief privacy officer at New Orleans-based consumer finance law firm McGlinchey, in an interview.
"This isn't really rulemaking. What the CFPB is saying is, 'This is us exercising our power to interpret existing law. We're not writing new law, we're not creating a new rule,'" Kouhoupt said, noting that the CFPB approached its
"The slight difference is that in buy now/pay later, they said, 'This is an interpretive rule' and they gave a sort of compliance window for when the interpretive rule would become effective."
For the EWA probe, the CFPB analyzed 2021 and 2022 data from eight companies that partner with employers to offer cash advances based on earned wages, representing "slightly less than 50% of the employer-partnered market," according to the CFPB.
It's "highly likely" that the proposed interpretive rule gets finalized, Kouhoupt said. "The CFPB obviously has a very strong opinion on this subject, so I would be surprised if it doesn't get finalized."
The reinterpretation hinges on the fact that TILA and Regulation Z have a very broad definition of credit that refers to a term, "debt," which itself is undefined, Kouhoupt said. "What the question in an earned wage product has been, really from the onset, is do you have credit, i.e., is there a debt that is created when you take out these early wage access products?"
The bureau said a debt is an obligation to pay, and fees for "tips" and expedited services charged by EWA providers constitute a finance charge, placing the industry squarely under the the Truth in Lending Act's purview.
Questions remain as to which companies will be affected by the new regulation. Dave founder and Chief Executive Jason Wilk said during an August 5 quarterly earnings call with investors that he believes Dave won't fall under the purview of the bureau despite the fact that Dave was founded on the EWA model but transitioned away from it in 2022 amid regulatory uncertainty.
"We feel very strongly in our position as an overdraft product similar to traditional banks," Wilk said. "Dave is a federally regulated overdraft product, and we spent a lot of time developing and building our business in a very compliant way leading up to going public" in January 2022.
A spokesman for Dave declined to comment further on the CFPB's proposed interpretive rule.
Branch, Chime, DailyPay, EarnIn and FinFit, among other fintechs, offer EWA products.
"If the rule were to pass … it could squeeze some players out there that are continuing to offer unlicensed credit that is not regulated," Wilk said during the call.
Clash over cash back
The CFPB's warning about merchants charging fees for cash-back offers at retailers is also drawing dueling responses.
The American Bankers Association rebuked the notion that the fees retailers charged for cash-back services were the result of bank mergers and closures.
"Any suggestion that America is dominated by 'banking deserts' is contradicted by the government's own data, which indicates that nearly 96% of Americans have a bank or credit union nearby, with the median community in the U.S. having 10 branches nearby," said Jeff Sigmund, a spokesperson for the ABA, in an email. "Retailers alone are responsible for the fees they choose to levy on their customers."
The Merchant Payments Coalition said the banks were responsible for retailer fees, saying that only three out of eight retailers surveyed by the bureau actually charged a fee.
"All of this really at the end of the day, points back to the problems that we've often highlighted with respect to the
Payments consulting firm CMSPI estimates that merchants paid $224 billion in 2023 to accept card payments, with $143 billion for interchange fees.
"Visa and Mastercard set the prices that all the banks in their [network] agree to charge, and those banks, who compete with each other on every other fee, service or interest rate – but on the fees they charge merchants to accept cards, they refuse to compete," Kantor said.
"It's a very pernicious dynamic," Kantor said.
In an email, the Electronic Payments Coalition said "Credit card interchange has remained flat for nearly a decade and debit interchange is capped. Despite this, corporate megastores continue to pocket the savings all while increasing prices on consumers faster than inflation."
Visa and Mastercard referred questions to the EPC.
