Overview: On March 7, 2023, the California Department of Financial Protection and Innovation (“DFPI”) issued a proposed rule that would for the first time subject earned wage access (“EWA”) providers and other companies that provide advances on consumers’ income to the state’s consumer financial protection laws (the “Proposed Rule”). The proposed rule may portend – and, indeed, may serve as a guide for – action in other states and possibly the federal government on these increasingly popular financial products.
Background
EWA provides employees access to wages they have earned but have not yet received through their employer payroll. EWA companies generally operate based on one of two business models: a business-to-business model in which the EWA company contracts with employers who provide the EWA service as a benefit for their employees, and a direct-to-consumer model in which the EWA company works directly with the employee, eliminating the employer from transactions. Because EWA is arguably not “credit” or a “loan” as those terms have been defined in existing federal and state law, it has been uncertain whether EWA is subject to those existing laws.
In 2020, California enacted legislation that replaced the former Department of Business Oversight and launched the DFPI as California’s new financial regulator. The legislation also broadly expanded the DFPI’s enforcement and rulemaking powers, including by granting DFPI authority to regulate previously unregulated financial products and services. Because the legislation was based on the powers of the federal Consumer Financial Protection Bureau (“CFPB”), the DFPI has been widely characterized as a “mini-CFPB.”
DFPI quickly signaled that it would use its new authority to regulate EWA. In January 2021, DFPI entered into agreements with several leading EWA providers in which the providers agreed to follow a set of industry best practices and provide quarterly reports to DFPI. DFPI subsequently kicked off a rulemaking process by issuing an invitation for public comments in November 2021. By issuing the Proposed Rule, the DFPI has now taken a major step toward becoming the first state to comprehensively regulate EWA.
EWA Providers Would be Required to Register with or Obtain a License from DFPI
The Proposed Rule would squarely address the issue of whether EWA is a “loan” by specifically expanding the definition of a loan under the California Financing Law to include any advance of funds to be repaid in whole or in part by the receipt of a consumer’s wages, salary, commissions, or other compensation for services. This definition is broad enough to cover EWA and other income advance products (such as income share agreements that are provided to students as an alternative to student loans) and means that EWA providers would be required to either register with or obtain a license from the DFPI to provide EWA in California.
The Proposed Rule would provide two paths for EWA providers to continue operating in California. First, EWA providers whose products meet certain criteria, including not collecting charges that would be greater than amounts permitted under the California Financing Law, would have the option of registering with DFPI. Companies that register with DFPI would be subject to regulatory examinations and reporting requirements, but would not be subject to the DFPI’s more detailed and complex licensing process. The second option for companies would be to apply for a full California lending license.
The Proposed Rule Would Limit the Amount EWA Providers Can Charge
EWA companies using the direct-to-consumer model typically operate via two major fee structures: subscription fees or transaction fees. A subscription-based EWA company typically charges a fixed monthly fee, and may also accept optional charges for faster service. A transaction-based EWA company may accept tips, charge fees, and collect optional fees for faster service. EWA companies that accept tips have typically argued that their tips are wholly voluntary, are not finance charges, and have no effect on their services or availability of future advances.
The Proposed Rule would provide that a voluntary or optional payment, including a tip or gratuity, paid by a borrower to a licensee or any other person in connection with a loan, is a charge subject to the California Financing Law. This means that those payments would be subject to California’s limitations on how much a consumer may be charged in connection with a loan, and could significantly reduce the amount EWA providers have previously collected as tips or gratuities.
The Proposed Rule would also clarify when a subscription fee in connection with an income-based advance is permissible. A subscription fee would be permissible if: (1) the fee is $12 per month or less; (2) the consumer has access to products or services other than income-based advances, without additional charge; (3) the fee charged does not affect the terms upon which income-based advances are made to the borrower; and (4) consumers can cancel their monthly subscription without penalty at any time.
Other States Have Introduced Legislation to Regulate EWA
Approximately a dozen state legislatures, including New York and Texas, have introduced legislation this year that would specifically regulate EWA. These bills vary to some extent among the states but, like California, would generally require EWA providers to register or obtain a license from the state regulator. Some of the states would also impose comprehensive regulatory regimes for EWA.
Outlook: The California DFPI is increasingly using its “mini-CFPB” authority to scrutinize emerging products offered by fintechs and non-bank financial services company. California will likely move forward with finalizing the Proposed Rule in the near future, and other states are also beginning to focus on EWA and other income-based advances. EWA providers should be preparing to identify the extent to which new laws and regulations will apply to them, and taking steps to build compliance programs in response to increased regulation of their products.
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AUTHOR INFORMATION:
Craig Saperstein, a member of Nacha’s Government Relations Advisory Group, is a partner in the Public Policy practice of Pillsbury Winthrop Shaw Pittman LLP in Washington, D.C. In this capacity, he provides legal analysis for clients on legislative and regulatory developments and lobbies congressional and Executive Branch officials on behalf of companies in the payments industry. Deborah Thoren-Peden is a partner and member of the Financial Institutions Team at Pillsbury Winthrop Shaw Pittman LLP. She provides advice to financial institutions, bank and non-bank, and financial services companies. Daniel Wood is a Counsel and member of the Financial Services Regulatory Team. He provides analysis for financial institutions, technology companies, and clients that offer consumer financial products. Brian Montgomery is a Senior Counsel and member of the Financial Services Regulatory Team. He provides analysis for financial institutions, technology companies, and clients that offer consumer financial products. The information contained in this update does not constitute legal advice and no attorney-client relationship is formed based upon the provision thereof.