Truth in Lending (Regulation Z); Earned Wage Access Programs

US Bureau of Consumer Financial Protection

(BILLING CODE: 4810-AM-P)


Summary

The Bureau of Consumer Financial Protection (Bureau) is issuing this advisory opinion to resolve regulatory uncertainty regarding the applicability of the definition of credit under Regulation Z, which implements the Truth in Lending Act (TILA), to certain earned wage access (EWA) programs that conform to the summary of material facts provided in part I.B of this advisory opinion.


A. Background

According to the Bureau of Labor Statistics, nearly two-thirds of U.S. private businesses use biweekly, semimonthly, or monthly pay periods. The Bureau understands that the interval of time between hours worked and receiving a paycheck can contribute to employees’ financial distress, particularly for new hires when the length of time between the first day of employment and the first paycheck may be longer than subsequent paycheck intervals, depending on where the hire date falls in a pay cycle.


A study by the Financial Health Network found that 38 percent of respondents cited timing mismatches between income and expenses as a reason for using 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. The Bureau has noted that periodic wage payment “appears to be largely driven by efficiency concerns with payroll processing and employers’ cash management.” Employers may also face a lack of technical ability and regulatory uncertainty about State wage and hour laws as contributing factors.


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 turning to more costly alternatives like traditional payday loans.


EWA products seek to address the lag between consumers’ hours worked and receipt of their paychecks by facilitating advance access to earned but as yet unpaid wages. EWA providers are developing programs with a variety of business models and fee structures. Typically, these programs involve an EWA provider 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 Bureau understands that there is uncertainty about the application of Regulation Z to EWA programs. Specifically, the Bureau has been asked whether EWA providers are offering or extending “credit” within the scope of the regulation. The Bureau itself has acknowledged that there is uncertainty concerning the conditions under which EWA programs involve an offer of “credit” under Regulation Z.


On November 30, 2020, the Bureau issued its Advisory Opinions Policy, the primary purpose of which “is to provide a formal mechanism through which the Bureau may more effectively carry out its statutory purposes and objectives by better enabling compliance in the face of regulatory uncertainty.”


The Bureau is issuing this advisory opinion under the Advisory Opinion Policy to resolve regulatory uncertainty regarding the application of Regulation Z to the particular type of EWA program described in the Summary of Material Facts in part I.B below (Covered EWA Program).


Specifically, this advisory opinion clarifies that a Covered EWA Program does not involve the offering or extension of “credit” as defined by section 1026.2(a)(14) of Regulation Z.


B. Summary of Material Facts

For purposes of this advisory opinion, the term “Covered EWA Program” means an EWA program that includes all of the following characteristics11:

(1) The provider of the Covered EWA Program (Provider) contracts with employers to offer and provide Covered EWA Transactions to the employer’s employees.

(2) The amount of each Covered EWA Transaction does not exceed the accrued cash value of the wages the employee has earned up to the date and time of the transaction, which amount is determined based upon timely information provided by the employer to the Provider. The Provider may not rely upon information provided by the employee, or on estimates or predictions of hours worked or hourly wage rates. The “accrued cash value of the wages” are wages that the employee is entitled to receive under State law in the event of separation from the employer for work performed for the employer, but for which the employee has yet to be paid.

(3) The employee makes no payment, voluntary or otherwise, to access EWA funds or otherwise use the Covered EWA Program, and the Provider or its agents do not solicit or accept tips or any other payments from the employee. (The Bureau notes that there may be EWA programs that charge nominal processing fees—and thus differ from the fee structure described in this section B(3)—that nonetheless do not involve the offering or extension of “credit” as defined in § 1026.2(a)(14). Such programs are not covered by this advisory opinion, but providers of such programs may request clarification from the Bureau about a specific fee structure by, for instance, applying for an Approval under the Policy on the Compliance Assistance Sandbox). To conform to this characteristic, the Provider must provide EWA funds to an account of the employee’s choice, and the Provider cannot charge fees for the delivery of EWA funds to that account. If the employee chooses a prepaid account as defined under Regulation E14 and that account is managed, issued, or otherwise facilitated by the Provider (Provider Account), the Provider cannot charge fees for opening that Provider Account. In addition, the Provider Account must allow the employee reasonable use of that account at no charge. In this context, “reasonable use” means, inter alia, that any prepaid card associated with the Provider Account must be issued on a major network brand that permits use at multiple, unaffiliated merchants; the Provider Account must not charge fees for use of an associated card to buy goods or services at merchants that accept the associated card; the Provider Account must not impose any periodic fees; and the employee must have some free and reasonably accessible means to obtain cash from the Provider Account.

(4) The Provider recovers the amount of each Covered EWA Transaction only through an employer-facilitated payroll deduction from the employee’s next paycheck. One additional payroll deduction may be attempted in the event of a failed or partial payroll deduction due to administrative or technical errors. Administrative or technical errors include, for instance, an application programming interface (API) malfunction or a mistake in the employer’s payroll process (e.g., miscalculation of an employee’s base pay or overtime award), but do not include, for instance, situations in which the employer has garnished an employee’s wages following a Covered EWA Transaction.

(5) In the event of a failed or partial payroll deduction, the Provider retains no legal or contractual claim or remedy, direct or indirect, against the employee, although the Provider may choose to refrain from offering the employee additional EWA transactions.

(6) Before entering into a Covered EWA Transaction, the Provider clearly and conspicuously explains to the employee, and warrants to the employee as part of the contract between the parties (and ultimately complies with these warranties) that it:

(a) Will not require the employee to pay any charges or fees in connection with the Covered EWA Transaction;

(b) Has no legal or contractual claim or remedy, direct or indirect, against the employee in the event the payroll deduction is insufficient to cover the full amount of a Covered EWA Transaction, including no right to take payment from any consumer account; and

(c) Will not engage in any debt collection activities related to a Covered EWA Transaction, place a Covered EWA Transaction amount as a debt with or sell it to a third party, or report to a consumer reporting agency concerning a Covered EWA Transaction.

(7) The Provider will not directly or indirectly assess the credit risk of individual employees, including through obtaining and reviewing credit reports or credit scores about the individual employees.


C. Legal Analysis

According to the Bureau of Labor Statistics, nearly two-thirds of U.S. private businesses use biweekly, semimonthly, or monthly pay periods. The Bureau understands that the interval of time between hours worked and receiving a paycheck can contribute to employees’ financial distress, particularly for new hires when the length of time between the first day of employment and the first paycheck may be longer than subsequent paycheck intervals, depending on where the hire date falls in a pay cycle.


"A study by the Financial Health Network found that 38 percent of respondents cited timing mismatches between income and expenses as a reason for using 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.


The Bureau has noted that periodic wage payment “appears to be largely driven by efficiency concerns with payroll processing and employers’ cash management.” Employers may also face a lack of technical ability and regulatory uncertainty about State wage and hour laws as contributing factors.


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 turning to more costly alternatives like traditional payday loans.


EWA products seek to address the lag between consumers’ hours worked and receipt of their paychecks by facilitating advance access to earned but as yet unpaid wages. EWA providers are developing programs with a variety of business models and fee structures. Typically, these programs involve an EWA provider 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 Bureau understands that there is uncertainty about the application of Regulation Z to EWA programs. Specifically, the Bureau has been asked whether EWA providers are offering or extending “credit” within the scope of the regulation. The Bureau itself has acknowledged that there is uncertainty concerning the conditions under which EWA programs involve an offer of “credit” under Regulation Z. On November 30, 2020, the Bureau issued its Advisory Opinions Policy, the primary purpose of which “is to provide a formal mechanism through which the Bureau may more effectively carry out its statutory purposes and objectives by better enabling compliance in the face of regulatory uncertainty.”


The Bureau is issuing this advisory opinion under the Advisory Opinion Policy to resolve regulatory uncertainty regarding the application of Regulation Z to the particular type of EWA program described in the Summary of Material Facts in part I.B below (Covered EWA Program).


Conclusion

Specifically, this advisory opinion clarifies that a Covered EWA Program does not involve the offering or extension of “credit” as defined by section 1026.2(a)(14) of Regulation Z.


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