On July 18, 2024, the Consumer Financial Protection Bureau (CFPB) released a proposed interpretive rule, “Interpretive Rule,” that, if finalized, represents a significant change in how earned wage access (EWA) products are regulated.
EWA products allow employees and contractors (hereafter “recipient”) early access to earned wages before their scheduled pay date for additional short-term liquidity and financial flexibility in between paychecks. EWA products are typically either employer-provided or third-party-provided, where employers may partner with Fintech companies. Recipients are granted early access to earned wages using a mobile application or online platform, then pay for EWA products through subscription fees, expedited transfer fees, or by leaving optional or voluntary “tips” for the EWA providers facilitating the service.
EWA products are often used by recipients who require immediate access to cash to help cover unforeseen expenses and emergencies and make timely debt payments. However, some critics have referred to EWA products as “predatory” for the most vulnerable employees and consumers. In 2021 and 2022, the CFPB conducted a survey and found that roughly 90% of workers who utilize EWA products paid at least one earned wage product-related fee when their employer did not cover the cost. The CFPB’s survey also found that EWA products can become quite expensive, with the annual percentage rate (APR) for typical employer-partnered earned wage cash advances amounting to 109.5%.
Criticism from other parties has prompted the CFPB to revisit this topic and propose new regulations that would treat EWA products as loans and related fees as finance charges that would also require enhanced loan-like disclosures, subject to the Truth In Lending Act (TILA) and be subject to its implementing regulation, Regulation Z, similar to traditional credit such as car loans, student loans, personal loans, and the like. The goal of the proposed Interpretive Rule is to enhance transparency to ensure that EWA financers disclose the “true” costs and fees of these credit products to recipients.
Implications of the Proposed Interpretive Rule for EWA Products
The proposed Interpretive Rule has been met with criticism as it would significantly impact individuals who utilize EWA products as well as the employers, and Fintech companies who assist in facilitating these products. This proposed interpretive ruling has a widespread effect not only from a legal and regulatory perspective but also from an accounting perspective for the Fintechs. Some of the changes the Interpretive Rule would bring include:
- Transactional fees versus Interest-bearing loans – Critics of the proposed Interpretive Rule argue that it could make EWA products too expensive. Instead of transactional fees, if classified as a loan, interest fees could price out certain recipients given the current high interest rates. Additionally, employers may not be able to provide options for EWA products, thus hurting FinTech companies’ ability to provide these products.
- The projected increase in costs could cause existing EWA providers to reconsider their product offerings, leading to less competition in the marketplace.
- In an effort to protect recipients from excessive costs, the CFPB may end up making EWA products too expensive and inaccessible for millions of recipients, many of whom rely on them to cover immediate expenses.
- Classification as Loans - The proposed Interpretive Rule would classify EWA products as extensions of credit under TILA and Regulation Z and classify fees, including voluntary tips and expedited funds transfers, as finance charges. EWA providers, including Fintechs, would have to comply with TILA’s disclosure requirements (including those detailed below). Furthermore, voluntary tips and expedited transfer fees may also be subject to TILA requirements.
- Under the proposed Interpretive Rule, Fintechs would be required to accept loan classification to comply with TILA. As noted above, this could result in an increase in overall costs that may be passed down to employees and consumers through increased fees and charges to cover those costs.
- Alternatively, and in an effort to circumvent the stricter requirements, Fintechs can modify their EWA products to be outside the scope of the proposed Interpretive Rule and regulation but run the risk of confusing borrowers and EWA recipients with significant changes to existing product offerings.
- Enhanced Disclosure Requirements - The proposed Interpretive Rule would treat loan costs, including voluntary “tips” and expedited transfer fees, as finance charges that are also subject to stricter disclosure requirements, such as upfront disclosure to borrowers regarding the finance charges and a calculation of a single annual percentage rate inclusive of those charges. From the CFPB’s perspective, these stricter disclosure requirements help borrowers understand and compare loan options and ensure fair competition amongst lenders for their EWA products. The CFPB also aims to provide transparency to employees about the true cost of entering into EWA transactions.
- Compliance Requirements – Employers and Fintechs could be subject to continuous monitoring of regulatory requirements to be in compliance with Regulation Z, including regular internal audits to meet compliance requirements.
Reception to the CFPB’s proposed interpretive ruling has been mixed and controversial, with overwhelming opposition from Fintechs. The American FinTech Council commented that the “EWA is not a loan nor an “advance” and should not be regulated as such. Unlike the provision of credit or a loan, EWA is non-recourse and does not require a credit check, underwriting, base fees on creditworthiness; charge a fee in installments, charge interest, late fees, or penalties; or impact a user’s credit score.” The Financial Technology Association (FTA) asserts that EWA products “are a no-cost, non-recourse service for which the provider does not secure a legally enforceable right to repayment. Simply put, EWA services have no legal right to collect upon default and do not give rise to “consumer credit” subject to TILA.” Fintechs and EWA providers have opposed the efforts to characterize their products as traditional credit and have argued that tips and expedited fees are voluntary rather than mandatory and, therefore, should not be considered finance charges.
Key Takeaways
If the Proposed Interpretive Rule is finalized, Fintechs and EWA providers will have to consider the significant accounting impact on the presentation and classification of their financial statements. Accounting for EWA products as loans and finance charges may alter balance sheet presentation to include additional loan receivables presented as assets. Similarly, the statement of income or operations could be altered to include additional interest income from these fees that would now be classified as loans. Fintechs and EWA providers should also consider enhancing financial statement footnote disclosures due to the stricter requirements under TILA and Regulation Z.
Overall, the CFPB’s proposed Rule on EWA products represents a significant regulatory development with far-reaching implications. While controversial, the rule would mark a significant step in the paycheck advance marketplace regulation in the United States. Employees whose employers provide EWA solutions, as well as Fintechs and EWA providers, should consider the vast accounting, legal, compliance, and regulatory impact the proposed ruling would have if finalized.
Author: Edward Decolongon, CPA | [email protected]
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