The CFPB should stick to its original position on earned wage access

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As we enter into an election year, the Consumer Financial Protection Bureau will be taking up a range of important issues. This includes the long-awaited update on its guidance on earned wage access products, a new technology that enables workers to access their wages as they earn them, without having to wait for payday.

In a recent letter to the California Department of Financial Protection and Innovation, the bureau put forward a concerning stance that indicated it may reverse its previous position and determine that EWA's optional, nominal fees are subject to the Truth in Lending Act. If the bureau pursues this path, it will certainly be on shaky legal ground. And, it would severely adversely impact working families' access to a vital financial product without actually creating meaningful consumer protections.

While some policymakers have called for APR disclosures, it is not a meaningful protection for consumers for this product. Most EWA providers do not charge for EWA itself. Voluntary, nominal, flat fees for expediting payment delivery through private payment rails are not akin to charging interest, and would be far more confusing for a consumer to understand if calculated as an APR — much the same way it wouldn't make sense to convert an ATM fee into an interest rate compounded annually. Further, there are also several exemptions to TILA such that, even if EWA was subject to Regulation Z, most providers would not have to disclose an APR because the nominal fee is so low. Policymakers should look to more meaningful protections, like mandatory free options, prohibition on debt collection and credit reporting and clear disclosures that are aligned with how the product operates.

New research from the Financial Health Network shows that workers value EWA as an alternative to other more expensive options. The study participants widely noted EWA was preferable to taking out a payday loan, incurring late fees and overdrafts and borrowing money from friends and family. Nearly all participants in the study did not view EWA as the same or akin to loans, as they were accessing only verified wages they had already earned. The study also found that workers had positive experiences with EWA and reported they plan to continue using EWA when in times of need.

It is important to understand that EWA plays a vital role in helping consumers cost-effectively meet short-term liquidity crunches, a constant challenge that real-time payment solutions such as RTP and FedNow can never sufficiently meet. Real-time payment can only expedite the wage to a consumer's account by a mere two days and is rigidly tied to the payday. Clearly consumers can face such challenges at any point during a pay period, rendering real-time payment far less effective than many have hoped.

Regulation and compliance

Regulators initiate regulatory lookback process

The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency Tuesday issued the first in a series of requests for comment on all aspects of the regulatory apparatus as part of a required decennial review.

By John Heltman

February 6

Were the CFPB to revise or reverse its guidance as it hinted at in its letter to the DFPI, this would lead to highly detrimental results for the consumers the CFPB seeks to protect. Notably, subjecting EWA to TILA does not provide any meaningful protections and it is a solution in search of a problem. It would only cause adverse outcomes for consumers, without creating any consumer protections — notably, not even an APR disclosure. In many states, consumers would have to take on debt to access their wages. Many would be ineligible to access EWA due to lack of creditworthiness. Consumers would face new costs, like origination fees and interest, that they do not pay now. And, it's likely that EWA would no longer be available as an alternative to consumers in many states that allow hundreds of dollars in interest on payday loans.

Over the past decade, EWA has grown into a mainstream financial product used by millions of workers struggling to make ends meet. Despite the regulatory uncertainty, both employers and employees have voted with their feet to embrace EWA. There may have been some bad actors with certain unsavory business practices. However, the EWA industry has by and large been a healthy one. Fierce competition has helped keep the prices very low for consumers. 

EWA is here to stay because consumers prefer it as an alternative to high-cost debt options. It should and will be regulated, just like any other financial product. The key is how to establish meaningful guardrails without killing this innovative solution that workers value. Rather than force-fitting EWA into an existing regulatory regime that will do more harm than good, the bureau should work with members of Congress and states on a new framework to ensure the product retains its pro-consumer benefits.