CFPB’s payday rule is in jeopardy again, perhaps paving the way for more EWA programs | Wilson Sonsini Goodrich and Rosati

On August 31, 2021, the District Court for the Western District of Texas upheld the Payment Provisions in the 2017 Consumer Financial Protection Bureau (CFPB) Rule “Payday, vehicle title and certain loans to high cost deadlines ”(Payday Rule), but on October 15, 2021, the Fifth Circuit extended a suspension on the Payday Rule while hearing an appeal from the Community Financial Services Association of America Ltd. and the Texas Consumer Services Alliance. The payday rule initially had two components: 1) Mandatory subscription provisions; and 2) Payment arrangements. The Mandatory Underwriting Provisions made it an unfair and abusive practice for a lender to make certain short-term and long-term loans with balloon payments without conducting a repayment capacity analysis. The Mandatory Underwriting Provisions were rescinded in July 2020. The Payment Provisions make it an unfair and abusive practice for a lender to attempt to withdraw funds from a consumer account after two consecutive failed attempts, unless the lender receives authorization. new and specific. The Payment Provisions apply to short- or long-term balloon payment covered loans, including payday and vehicle title loans, and certain other high-cost long-term loans. The District Court for the Western District of Texas set the mandatory compliance date for June 2022, but the Fifth Circuit ruling jeopardizes that compliance date.

The payday rule helps protect borrowers who live from paycheck to pay and depend on credit. As an alternative to payday loans, there has been an uptick in Access to Work Wage (EWA) programs. EWA programs allow employees to access their earned wages before their employer’s scheduled payday.

Generally, there are two EWA models: 1) the non-recourse business-to-business (B2B) model, in which the EWA provider hires employers directly; and 2) the “direct to consumer” (D2C) model, where the EWA supplier hires employees directly. An increasing number of employers are considering adopting EWA programs as a benefit to attracting and retaining employees. EWA products represent a short-term liquidity alternative to more expensive options such as payday loans under the Payday Rule and high-interest credit card debt.

In November 2020, the CFPB issued a advisory opinion provide federal guidance on whether EWA programs qualify for credit under Regulation Z, which implements the Truth in Lending Act (TILA). Through his long-awaited advisory opinion, and his subsequent approval order On December 30, 2020, the CFPB outlines the set of characteristics that distinguish “covered” EWA programs from credit extensions, opening the way for the CFPB to give EWA programs a safe harbor of liability under TILA and Regulation Z. The approval order, issued to Payactiv, Inc., applies the characteristics of a covered EWA program to Payactiv’s business model, and ultimately concludes that Payactiv’s EWA program is not an offer or extension of credit.

EWA providers sought clarification from the CFPB as to whether the obligation to repay EWA funds represents a “credit” under TILA and Regulation Z and, as a result, requires EWA providers to comply with the requirements of TILA and the Regulation. Z. Through its advisory opinion, the CFPB ultimately determined that EWA programs are not extensions of credit if they include all of the following features:

  • the EWA program is offered through an employer as a benefit to employees;
  • wages advanced to an employee do not exceed the employee’s accrued wages as verified by the employer;
  • the EWA provider does not charge an employee fees to access its EWA funds (beyond nominal processing fees that “do not involve the offer or extension of credit”), which requires the EWA provider to provide funds from EWA to an employee choice account;
  • the EWA provider only recovers the employee’s advance through an employer-facilitated payroll deduction;
  • the EWA provider does not retain any legal or contractual claim or recourse against an employee in the event of a failed or partial payroll deduction;
  • the EWA provider informs the employee that the EWA provider will: not require the employee to pay any charges or fees (beyond nominal processing fees) in connection with the EWA program; you have no contractual claim or recourse against the employee in the event that the payroll deduction is insufficient to cover the EWA transaction; and you will not engage in debt collection activities, place an EWA transaction with a third party as debt, or report the EWA transaction to a consumer reporting agency; and
  • the EWA provider does not assess the credit risk of individual employees.

A covered EWA program is not an extension of credit under TILA and Reg Z because EWA transactions do not “give employees the right to defer payment of debt or incur debt and defer payment.” When looking at the totality of circumstances that compare a credit transaction to an EWA program, EWA providers have no rights against the employee for non-payment, and employees are not charged a fee for participating in the EWA program. Additionally, EWA providers do not obtain credit scores to assess an employee’s credit risk or report EWA transactions to consumer reporting agencies. Finally, EWA providers do not engage in debt collection activities or provide or sell EWA transactions to third parties as receivables.

While EWA programs that adhere to the CFPB’s advisory opinion and approval order have a certain level of certainty regarding TILA and Regulation Z, the CFPB’s position on EWA programs may change under the Biden administration. In October 2021, nearly 100 organizations jointly signed a letter to the CFPB urging the CFPB to reconsider its position on the EWA programs. The November 2020 advisory opinion and the December 2020 approval order were issued under the direction of former CFPB Director Kathy Kraninger. Now that Director Rohit Chopra leads the CFPB, there may be a number of political decisions from the Trump era that can be reviewed.

Summer Associate Yewande Alade contributed to the preparation of this Wilson Sonsini Notice.

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