On October 11, 2024, the California Office of Administrative Law approved the California Department of Financial Protection and Innovation’s (department) final regulations (rule) under the California Consumer Financial Protection Law requiring providers of “subject products” (including earned wage access services, debt settlement services, student debt relief services, and education financing) to register with the department. In this alert, we focus on earned wage access services, also known as on-demand pay services, which allow workers to access earned but unpaid income before payday. The rule labels earned wage access services as loans but imposes few substantive requirements on providers other than to register with the Commissioner of Financial Protection and Innovation (commissioner). The department’s approach to the industry represents a departure from the approaches taken by Kansas, Missouri, Nevada, South Carolina, and Wisconsin, each of which have established comprehensive regulatory regimes tailored specifically for the unique characteristics of earned wage access services.
Registrations and Exemptions
The rule prohibits a person from providing income-based advances (the rule’s term for earned wage access services, which is defined below and used in the rest of this alert) to California residents without first registering with the commissioner. A provider of income-based advances may assume that a consumer is a resident of the state where the consumer works if the provider knows the consumer’s work location but not the consumer’s residence. The registration requirement does not apply to licensees under the California Financing Law or the California Deferred Deposit Transaction Law that satisfy certain requirements. It also does not apply to payroll services providers who verify available earnings or perform other related facilitation activities on behalf of an obligor (e.g., an employer) or provider in connection with income-based advances.
Registration Applications
Registration applications will be submitted primarily through the Nationwide Multistate Licensing System & Registry (NMLS). Applications will include Form MU1 (NMLS Company Form) and Form MU2 (NMLS Individual Form), which respectively require extensive information about the applicant and its principal officers (i.e., individuals performing the functions of the president, chief executive officer, treasurer, chief financial officer, and chief operating officer, and the officer primarily responsible for the conduct of the applicant’s activities with respect to income-based advances in California); directors; managing members; general or managing partners; trustees; any other individual who, directly or indirectly, owns, manages, holds with the power to vote, or holds proxies representing 10% or more of the outstanding voting securities issued by the applicant and controls that applicant; and any individual primarily responsible for the applicant’s offering or provision of income-based advances in California.
In addition to the NMLS portion of the application, applicants must submit by email certain supplemental information, including:
- Documentation of standard enrollment or application processes for California residents using or requesting income-based advances by mobile application, website, or phone
- Copies of representative contracts and disclosures
- Branch location information
- Prior year financial information
- Documentation of the process by which California residents request and repay income-based advances and any standard notifications provided to them during the process
Initial application fee is $350, and annual renewal fee is $100.
Within five days of receiving its registration approval, a registrant must designate an email address for receipt of information and notices from the commissioner.
A registrant must update certain application information within 30 days of a change. Updates must also be provided annually in December.
Registrations remain effective until they are revoked by the commissioner, are surrendered by the registrant, or become inoperative under the California Consumer Financial Protection Law’s four-year sunset on the rule’s registration regime.
Commissioner’s Powers and Assessments
In addition to the powers the commissioner possesses under the California Consumer Financial Protection Law, the rule empowers the commissioner to annually assess registrants a pro rata share of all costs and expenses incurred in the administration of the California Consumer Financial Protection Law as it relates to the registrants. Apportionment will be based on the registrant’s gross income from subject products provided to California residents relative to the aggregate of the same of all registrants. The commissioner will notify a registrant of the amount of its annual assessment on or before November 30, and the amount must be paid by December 31.
Annual Reports
Every registrant who is registered as of December 31 must file by March 15 of each year an annual report relating to the income-based advances provided to California residents during the prior calendar year.
Licensees under the California Financing Law or the California Deferred Deposit Transaction Law who are exempt from registration under the rule must nonetheless provide similar annual reports regarding income-based advances provided to California residents.
Conduct Requirements
A registrant must disclose on its website that the registrant is registered under the California Consumer Financial Protection Law and provide its registration number. It is a deceptive practice for a registrant to represent that its acts, practices, or business have been approved by the commissioner or the department.
Relation to California Financing Law
The rule labels income-based advances as loans and subjects them to the California Financing Law, but in actuality this label has little substantive effect under the California Financing Law.
Under the rule, a provider of an advance does not require a license under the California Financing Law if the advance is an income-based advance and the provider has registered with the department under the California Consumer Financial Protection Law. As the department explains in its Final Statement of Reasons (FSOR), which is part of the rule’s administrative record, a provider eligible for this licensing exemption is also exempt from the California Financing Law’s substantive requirements. The scope of this relief is important, because the California Financing Law imposes a number of requirements that are incompatible with income-based advances. As one example, Financial Code § 22307 requires a loan to be repaid in substantially equal periodical installments, with the initial loan payment due not less than 15 days after the date the loan is made. However, income-based advances are typically settled in one installment, and typical weekly or biweekly payroll cycles are less than 15 days. To address this problem, an earlier proposed version of the rule had included a clarification that this statutory time limitation applies only to loans with multiple installments (and therefore would not apply to income-based advances). The FSOR justified removing the clarification from the rule, explaining “the need for [the clarification] was made less compelling when the CFL-licensure exemption for income-based-advance providers was expanded so that it no longer expires when the registration period expires. Because income-based-advance providers will not need to be licensed under the CFL, they also do not need clarification regarding the application of a substantive requirement of the CFL.” Similarly, the FSOR explains that the California Financing Law’s fee caps do not apply to providers exempt from licensing under the rule. An earlier proposed version of the rule had limited the “charges” on an income-based advance (defined for purposes of the rule as including subscription fees, expedited funds fees, account transfer fees, gratuities (aka “tips”), and other payments for optional or discretionary services elected by the consumer in connection with an income-based advance) provided by a registrant exempt from the California Financing Law to only those permissible under the California Financing Law as if the registrant were a licensee; however, such fee limitations were removed in the rulemaking process.
For purposes of the rule’s California Financing Law licensing exemption and the California Consumer Financial Protection Law’s registration regime more generally, a transaction is an “income-based advance” if:
- The advance is made to a consumer
- The advance is based on income the provider has reasonably determined to have accrued to the benefit of the consumer but has not, at the time of the advance, been paid to the consumer
- The advance is scheduled for collection in a single payment on a date within 34 days, and that date corresponds to the date that the provider anticipates the income will be paid to the consumer
- The provider warrants to the consumer as part of the contract between the parties on behalf of the provider and, if applicable, any business partners that they have no legal or contractual claim or remedy against the consumer for failure to repay; and if not repaid on the collection date, they will not engage in any debt collection activities, place the amount due as a debt with or sell it to a third party, or report to a consumer reporting agency concerning the unpaid amount
Although the FSOR states that the rule’s licensing exemption is intended to survive the registration regime’s sunset after four years (at which point the only exemption qualification criterion would be that the advance is an income-based advance), the FSOR also signals potential future rulemakings curtailing the exemption, explaining that the rule’s relief for income-based advance providers enables the department to gather data without foreclosing possible full application of the California Financing Law to them in the future.
Relation to Other Laws
The rule labels income-based advances as “loans” for purposes of the California Financing Law but disclaims interpretation of any provisions of federal law (including the Truth in Lending Act), California’s Labor Code, or California’s Constitution.
The rule states that the commissioner’s determination that a person must register does not in and of itself constitute a determination that other laws, including licensing under other laws, do not apply to that person. The rule also states that the granting of a registration to an applicant does not constitute a determination that the applicant’s conduct complies with any law or regulation.
Compliance Timelines
The California Office of Administrative Law specified that the rule becomes effective February 15, 2025. The rule does not include a grandfathering provision.
Next Steps
Providers should promptly evaluate their systems, procedures, and disclosures for compliance with California’s new requirements and should be prepared to register promptly.
To learn more about this rule and how it may affect your business or to discuss other aspects of earned wage access services, please contact Alexander J. Callen at acallen@goodwinlaw.com or 202-346-4161. 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.
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.
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Alexander J. Callen
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