CFPB Departs From Precedent and Reverses Itself by Proposing Novel Interpretive Rule That Applies TILA and Regulation Z to Nonrecourse Earned Wage Access Services

On July 18, 2024, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule (Proposed Rule) applying the Truth in Lending Act (TILA) and Regulation Z (collectively referred to hereafter as Regulation Z) to earned wage access (EWA) services, also known as on-demand pay services, including nonrecourse EWA services. To reach this outcome, the CFPB determined that such services are “credit” and that voluntary fees or charges, such as expedited delivery fees and tips, are “finance charges.” These novel interpretations depart from precedent, reverse the CFPB’s own recent positions, and buck the trend among a growing number of states reaching the opposite conclusion. In addition to affecting EWA services, the Proposed Rule may also have significant ramifications for other types of financial services.

The Proposed Rule seeks to overturn the CFPB’s November 2020 advisory opinion (discussed below) by declaring nonrecourse EWA products to be “credit.” This objective is unwarranted because the facts and the law have not changed. The nonrecourse EWA services continue not to obligate worker repayment, “debt” under Regulation Z continues to require a payment obligation, and “credit” under Regulation Z continues to require debt.

Particularly given the CFPB’s about-face on this issue, as well as the agency’s extremely broad interpretation of terms such as “finance charge” and “impose,” companies that provide nontraditional products, including EWA services and other nonrecourse products, should consider submitting a public comment regarding the Proposed Rule before the public comment deadline of August 30, 2024. Companies should also consider how they will comply with the various disclosure, advertising, and other requirements in Regulation Z if the CFPB stands firm on the position it articulates in the Proposed Rule.

What Are Earned Wage Access Services?

EWA services generally permit workers to access their earned but unpaid wages, salary, or other compensation before their scheduled payroll date. These services offer workers an alternative to employer-imposed pay cycles and a means to satisfy short-term liquidity needs arising between paychecks. Such services enable workers without a lot of discretionary income to manage emergencies, pay for daily necessities, and avoid third-party late fees, bounced checks, overdraft fees, and predatory debt traps. There are many providers in the marketplace that offer a variety of structures, features, and distribution models. While some services have credit-like features, many others do not. Because there are many different types of EWA services, it is difficult to paint them in broad strokes as the CFPB has done in its Proposed Rule. Based on our experience with the EWA industry, we typically see providers offer their EWA services to workers on a nonrecourse basis, meaning in this context that the worker is not required by law, contract, or otherwise, to repay the EWA proceeds and that the provider may not compel or attempt to compel repayment by a worker. Indeed, many EWA providers affirmatively disclaim any such rights in their terms of service. Many providers also offer EWA services to workers at no-cost.

What Does the Proposed Rule Do?

In short, the Proposed Rule would apply Regulation Z to EWA services. In order to apply Regulation Z in this way, the CFPB had to determine that EWA services are “credit” and that the voluntary fees or charges are “finance charges,” each as defined in Regulation Z. On its face, the Proposed Rule would apply only to those EWA services in which settlement is achieved through “some automatic means,” such as a scheduled payroll deduction or a preauthorized account debit (including automated clearinghouse, check, or other preauthorized means), but nearly all EWA providers use such means. The linchpin focus on the existence and function of an automatic settlement system, however, omits any discussion of whether a given EWA provider requires a worker to actually make any payments under such a system. EWA providers typically offer workers the ability to change, revoke, or cancel such “automatic” arrangements at any time and without any penalty or any right to pursue recovery, underscoring that settlement is neither required nor inevitable.

Why Are Earned Wage Access Services Described in the Proposed Rule as “Credit”?

Regulation Z applies to transactions that are credit transactions. Regulation Z defines “credit” as “the right to defer payment of debt or to incur debt and defer its payment.” Although the term “debt” is not defined in Regulation Z, the nature of debt is underscored by myriad sources cited in the Proposed Rule by the CFPB, which variously frame debt as “something owed,” a “sum of money due by certain and express agreement,” “a financial liability or obligation owed by one person… to another,” or something similar. The CFPB cites a variety of dictionaries, federal laws, and state laws similarly supporting this framing. For all these sources, the defining characteristic of debt is the debtor’s obligation to pay, and the CFPB concludes that the term “debt” in Regulation Z “includes any obligation by a consumer to pay another party” (emphasis added).

In the Proposed Rule, the CFPB states, “In an earned wage transaction, the consumer incurs an obligation to pay money at a future date,” and it proceeds to discuss contingent debt obligations (i.e., payment obligations that arise if some trigger event occurs) as also being covered. But what if no payment obligation exists, contingent or otherwise? The Proposed Rule declares but does not actually evaluate and establish that an obligation exists, and it therefore invites challenge. As mentioned above, workers who participate in nonrecourse EWA services are not obligated (legally, contractually, or otherwise) to repay the provider for the outstanding proceeds the provider has delivered to them. As a result, these types of services involve no debt, and without debt, they cannot be credit subject to Regulation Z.

The foregoing logic was a primary justification of the CFPB’s November 2020 advisory opinion, which granted a limited safe harbor from Regulation Z to employer-integrated EWA services that settled through payroll deductions but did not require workers to repay the provider (and also satisfied various other criteria). The CFPB is now distancing itself from its prior conclusion by asserting it previously “did not consider the full scope of available precedent and definitions in common legal usage when reaching its narrow conclusion” regarding the term “debt.” But, as set forth above, the CFPB purportedly has now considered the full scope, and the new sources it has identified still require the existence of a payment obligation for there to be a debt. This leads to the same conclusion the CFPB seeks to overturn: that such nonrecourse EWA products are not debt.

To further distance itself from the November 2020 advisory opinion, the CFPB also highlights that the opinion had emphasized that an absence of fees or charges supported the agency’s conclusion that the EWA service was not debt (notwithstanding the CFPB’s December 2020 order accepting an EWA provider into the CFPB’s compliance assistance sandbox for a nonrecourse EWA service that charged fees), yet now the CFPB has determined that, in actuality, the “vast majority of earned wage transactions involve consumer payment.” This distinction conflates separate elements of the analysis.

Credit and finance charges are separate elements when determining whether Regulation Z applies, and each element must be separately satisfied. First, one must evaluate the nature of a product to determine if it is credit. As established above, if there is in fact no payment obligation, then there is no debt. And if there is no debt, then there is no credit. Next, only after affirmatively determining that credit exists, should one go on to evaluate whether fees are finance charges. The CFPB’s November 2020 advisory opinion and December 2020 order did not have to reach the question of whether the fees were finance charges because in each of them the CFPB instead determined that the EWA services were not credit. This helps demonstrate that regardless of any fees (and without specifically relying on the presence of fees in the December 2020 order), a determination that a service is not credit is sufficient to affirm that the service is not subject to Regulation Z.

Of course, workers frequently choose to settle EWA proceeds because they benefit from EWA services and do not want to be cut off from future use. The CFPB’s focus on the chosen mechanism of settlement (e.g., whether by cash, bullion, wire transfer, check, automated clearinghouse, payroll deduction, or anything else) distracts from the essential question of whether payment is required in the first place.

Why Are Voluntary Fees or Charges, Such as Expedited Delivery Fees and Tips, Described in the Proposed Rule as “Finance Charges”?

Regulation Z generally applies to a credit transaction if it has a finance charge or is payable by a written agreement in more than four installments. EWA services do not typically feature multiple installments, so we do not discuss installments here. Regulation Z includes a complex set of rules for determining whether a given fee is a finance charge, but the general rule is that the term includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.

EWA services are typically offered to workers at no cost. Two ways that providers generate revenue, as mentioned in the Proposed Rule, include charging expedited delivery fees (typically paired with a no-cost delivery option) or by soliciting voluntary tips. The CFPB reasons that expedited delivery fees and tips occur “because of” the EWA service, so they are therefore “incident” to the service. In other words, the CFPB is imposing a “proximate cause” test to determine whether a fee is a finance charge. Curiously, even though subscription or membership fees, which are another revenue model often used when EWA services are bundled with other types of financial services, were mentioned in the press release accompanying the Proposed Rule, they are not specifically addressed in the Proposed Rule itself.

In changing this test, the CFPB disregards precedent and practice, including contrary case law, such as Veale v. Citibank FSB, 85 F.3d 577 (11th Cir. 1996), which determined that optional expedited delivery fees for loan proceeds were not finance charges, and McGee v. Kerr-Hickman Chrysler Plymouth, Inc., 93 F.3d 380 (7th Cir. 1996), which determined that costs for optional GAP insurance were not finance charges. The CFPB downplays this precedent in a footnote, pointing to comments in the Federal Reserve’s adopting release for an amendment to Regulation Z issued about five months after McGee to expressly include GAP costs as “finance charges” if certain disclosures were not provided. The Federal Reserve reasoned that because GAP cancels the remaining portion of a borrower’s debt liability, it thereby alters the fundamental nature of the borrower’s repayment obligation. Nonetheless, the Federal Reserve’s rulemaking still allowed GAP costs to be excluded from finance charges if certain disclosures were provided and certain other requirements were met. The Federal Reserve’s rulemaking did not address expedited delivery fees. And yet, the CFPB’s Proposed Rule does not explain why the Federal Reserve’s logic would apply to expedited delivery fees or tips, which do not similarly affect a borrower’s repayment obligation. The CFPB does not mention that only a few sentences before the language the CFPB has quoted, the Federal Reserve stated, “As a practical matter, most voluntary fees are excluded from the finance charge under the separate exclusion for charges that are payable in a comparable cash transaction, such as fees for optional maintenance agreements or fees paid to process motor vehicle registrations.” At least with respect to tips, the Proposed Rule sets forth an open list of factors that weigh in favor of treating tips as finance charges, which puzzlingly includes use of the word “tip” itself, a term widely understood as a type of voluntary payment that is customarily expected but not required—a critical distinction that the CFPB passes over again and again. To the extent some of the factors mentioned by the agency target practices that might undermine the truly voluntary nature of a tip, such as making it too difficult for a consumer not to tip, exercising the agency’s unfair, deceptive, and abusive practices authority would be better and more appropriate than this proposed rulemaking deeming these voluntary payments to be finance charges.

What Is an Interpretive Rule?

The Administrative Procedure Act (APA) generally establishes a fulsome notice and comment rulemaking process for agency regulations, so that members of the public and affected parties may express their views about a proposal and ensure that an agency considers them. Regulations stemming from such processes are generally binding on the public (though they can be challenged). In February 2024, the American Fintech Council, an association whose membership includes many of the major EWA providers, wrote a letter to CFPB Director Rohit Chopra advocating for the CFPB to engage in precisely this type of thorough and transparent process.

Instead, by purporting to issue an interpretive rule, the CFPB has declined to undertake such a process. True interpretive rules do not have the force of law (i.e., they do not impose new legal obligations) and therefore are not subject to the same rigor as a legislative rule. While the APA does not require agencies to undergo notice and comment for interpretive rules, the CFPB is soliciting public comments and may revise the Proposed Rule in light of feedback received. Because the CFPB takes the position that the Proposed Rule is an interpretive rule, we expect the CFPB to also take the position that it has the flexibility to set short windows for public comments — or none at all — and is not required to address public comments it receives.

What Is the Proposed Rule’s Relation to Other Laws and Regulations?

The Proposed Rule does not purport to affect federal laws other than TILA and Regulation Z. However, a number of federal laws, such as the Equal Credit Opportunity Act and its implementing Regulation B use substantially similar definitions of “credit.” Many other federal laws and regulations also apply to creditors, lenders, debt, or loans, and a number of states often consider federal precedent when charting their own courses. It remains to be seen whether the CFPB will impose a similar interpretation on other federal laws or whether any states will follow the CFPB’s approach.

We also anticipate interesting, and potentially confusing, situations to arise in the growing number of states that have determined through legislation or agency interpretation that nonrecourse EWA services are not credit (e.g., Kansas, Missouri, Nevada, South Carolina, and Wisconsin), in which the Proposed Rule would still require credit disclosures to be made for noncredit products.

What Does the Proposed Rule Mean for Other Nonrecourse Financial Services?

The Proposed Rule’s discussion of nonrecourse services and finance charges arises in the context of EWA services, but the rationale is not unique to them. The Proposed Rule therefore could similarly treat other nonrecourse products and services as credit. For the same reason, optional or voluntary fees could be deemed finance charges for other products and services.

What Timelines Should I Be Aware of?

The Proposed Rule is a proposed rule, not a final rule. A public comment period runs through August 30, 2024. Although the Proposed Rule purports to explain existing law, the CFPB has not yet proposed a compliance date as has been its recent practice for other interpretive rules.

What Should I Do Next?

Consider whether to submit a public comment regarding the Proposed Rule before the deadline. If the Proposed Rule becomes a substantially similar final rule, we expect legal challenges to be brought against it, especially following the diminution of judicial deference to agency interpretations under Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024). It is possible a court would not even offer the CFPB’s new positions with respect under Skidmore v. Swift & Co., 65 S. Ct. 161 (1944), in light of the agency’s recent inconsistent views and contrary case law.

Consider how your organization will comply with the various disclosure, advertising, and other requirements in Regulation Z. While many EWA providers have already adopted policies and procedures that address a number of the CFPB’s concerns, the Proposed Rule could present significant operational challenges to full compliance with Regulation Z.

To learn more about this proposed interpretive rule and how it may affect your business, please contact Alexander J. Callen at acallen@goodwinlaw.com or 202-346-4161, or Danielle Reyes at dreyes@goodwinlaw.com or 202-346-4103.

Mr. Callen’s extensive experience with earned wage access spans product development and structuring; customer experience; user, business partner, and vendor contracts; investor and business partner transactions and diligence; bank partnership arrangements; license choice and applications; agency inquiries and investigations; legislation and regulation drafting; comment letters; and other legal and regulatory services.

Ms. Reyes assists with compliant consumer and small business financial product design, policy construction and implementation, and related vendor and business partner contract negotiation. She also frequently helps clients liaise with federal and state regulators regarding licensing and registration requirements and to respond to regulatory inquiries. Ms. Reyes has a particular focus on financial inclusion and is a Co-Chair of Goodwin’s ESG & Impact group.

Goodwin’s Fintech group strategically leverages its regulatory, transactional, and litigation and enforcement practices to provide full-service support in every vertical of fintech and financial services, including lending, payments, alternative finance, deposits, brokerage and wealth management, digital currency and blockchain, insurance and insurtech, and transactions, including bank partnerships and deal due diligence.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.