The U.S. Consumer Financial Protection Bureau issued an advisory opinion Monday (Nov. 30) that earned wage access (EWA) products do not represent extensions of credit under one of its key regulations. Earned wage, or on-demand, payroll access is used by many companies to give their workers access to their pay before the scheduled payday arrives. The solutions in this area run from variations on payday loans, to sliding fees to straight fee arrangements to interest payments.
The regulation cited by the CFPB is within a federal law that standardizes how lenders convey the cost of borrowing to consumers. Among other products, it covers installment loans such as auto loans and personal loans. The earned wage industry is populated by specialists like Even, PayActiv and Daily Pay and HR platforms like Ceridian. Some companies provide early access to earned wages and advance the amount requested by the employee, which is then deducted from the paycheck. Other companies provide simple access to wages for a fee. None of them would characterize their offerings as a loan or extension of credit, but regulators on the state and federal level have been investigating the space to clarify what is a relatively new payroll application. As an example, PayPal has been making on-demand wage access to its employees via Even.
The opinion came in tandem with the formation of a program that allows entities to request advisory opinions from the bureau as they seek to remain in compliance with its rules and regulations. In reference to EWA, the bureau noted that “earned wage access products have recently emerged in the marketplace as an innovative way for employees to meet short-term liquidity needs that arise between paychecks without individuals having to turn to other higher-cost products.”
In the advisory opinion, the CFPB said that per data from the Bureau of Labor Statistics, nearly two-thirds of U.S. private businesses use biweekly, semimonthly or monthly pay periods. But “the interval of time between hours worked and receiving a paycheck can contribute to employees’ financial distress.” Data shows that 38 percent of individuals surveyed by the Financial Health Network show that the mismatch of timing between income and expenses may be a key reason to tap short-term, small dollar credit.
“Despite advancements in payment technologies over the past several decades, several obstacles prevent businesses from easily implementing shorter pay cycles. For instance, there may be cash flow limitations on businesses that depend on incoming payments and receivables, which subsequently need to be processed and deposited,” noted the CFPB.
Generally, continued the CFPB, EWA providers have been enabling employees to request a certain amount (or share) of accrued wages, “disbursing the requested amounts to the employees prior to payday, and later recouping the funds through payroll deductions or bank account debits on the subsequent payday.” The uncertainty surrounding the CFPB’s “Regulation Z” ties into whether the providers are in fact extending credit.
“Specifically, this advisory opinion clarifies that a Covered EWA Program does not involve the offering or extension of ‘credit'” as the providers must provide funds to accounts of employee’s choice and must not charge fees for delivering those funds. In addition, the EWA must contract directly with employers to offer and provide covered EWA transactions to the employer’s employees. In addition, the Provider Account must allow the employee reasonable use of that account at no charge,” noted the CFPB. That could include the use of prepaid cards, noted the bureau.