Estimated reading time: 6 minutes
The following is a chronological outline of regulatory compliance impacting the Earned Wage Access (EWA) Industry in 2022.
The US EWA industry has been growing in popularity for more than a decade. Recently, its popularity has garnered greater regulatory scrutiny from federal and state entities.
What is Earned Wage Access (EWA)?
Earned Wage Access (EWA), also called on-demand pay, is a voluntary financial wellness benefit. It allows employees to access a portion of their net earned and accrued wages, when needed, between pay cycles.
February 11, 2022: CA DFPI issues EWA Interpretive Opinion to FlexWage and shares the opinion with Consumer Financial Protection Bureau (CFPB)
The California Department of Financial Protection and Innovation (DFPI) opinion states, “neither FlexWage nor its employer partners are subject to the CFL or CDDTL’s licensing requirements when offering the product described above.”
Why this is relevant: The California DFPI determined that the FlexWage model did not require a license due to its:
1. Funding source
2. Accuracy of data
3. Fee structure
Additionally, the CFPB confirmed with FlexWage that they had received the opinion from CA DFPI.
March 16, 2022: The CFPB expands its regulatory authority under the UDAAP
The Consumer Financial Protection Bureau (CFPB) revised its Unfair, Deceptive, or Abusive Acts or Practices (UDAAPs) examination procedures.
Why this is relevant: The UDAAP goal is to keep consumers safe from financial harm. Under the law, financial service and product companies cannot mislead, deceive, or coerce consumers or limit their decision-making to avoid harmful financial services or products. Therefore, it’s a good idea to read through the UDAAP examination procedures and then consider the following scenarios when selecting an EWA provider:
>>> Does the EWA provider market access to 100% of earned wages and then, in their terms and conditions, state they will determine the amount of earned wages available for transfer?
>>> Does the EWA provider use data beyond payroll and time/hours worked that have nothing to do with earned wages and everything to do with risk assessment and potential discriminatory actions? For example, employee tenure, age, gender, marital status, bank account info, and additional income are data not required for accurate, accrued earned wage calculations. Is your EWA vendor collecting and using this data?
>>>Does the EWA provider state there is no recourse (or no need ever to pay the provider back)? Yet they suspend access to the employees’ earned wages or debit the employee’s bank account due to the EWA provider’s inaccurate wage calculations.
Each of these examples could have enforcement action under UDAAP.
March 28, 2022: U.S. Treasury releases Greenbook outlining tax proposals, including “Clarify Tax Treatment for On-Demand Pay Arrangements”
The U.S. Department of Treasury Greenbook Proposal: “The proposal would amend section 7701 of the Code to provide a definition of an on-demand pay arrangement as an arrangement that allows employees to withdraw earned wages before their regularly scheduled pay dates. The proposal also would amend section 3401(b) of the Code to provide that the payroll period for on-demand pay arrangements is treated as a weekly payroll period, even if employees have access to their wages during the week. Further, the proposal would amend sections 3102, 3111, and 3301 of the Code to clarify that on-demand pay arrangements are not loans. Finally, section 6302 of the Code would be amended to provide special payroll deposit rules for on-demand pay arrangements.”
Why this is relevant: The U.S. Department of Treasury confirms that the on-demand pay (EWA) funding source is immaterial in their proposal. When they state they plan to amend sections of the code “to clarify that on-demand pay arrangements are not loans,” it indicates that no matter how the EWA model is funded, the issue (and resolution) of constructive receipt applies to all models.
Secondly, the Treasury seeks to put all EWA usage on the same tax remittance schedule.
Finally, Treasury’s proposed changes offer no additional revenue for the IRS and require a divided congress to pass legislation changing the existing laws giving Treasury the regulatory authority requested.
April 25, 2022: CFPB Invokes Dormant Authority to Examine Nonbank Companies Posing Risks to Consumers
The Consumer Financial Protection Bureau (CFPB) “believes that utilizing this dormant authority will help protect consumers and level the playing field between banks and nonbank financial companies.”
Why this is relevant: EWA is a rapid growth industry with nearly all providers from the Fintech space. Some providers promote how the CFPB regulations do not apply to them. In contrast, others have given the impression that they are CFPB-approved. Authority to rein in over-zealous marketers and ensure consumer protections are important to the CFPB’s overall mission.
May 19, 2022: CFPB Bolsters Enforcement Efforts by States
The Consumer Financial Protection Bureau (CFPB) issued an interpretive rule that describes states’ authorities to pursue lawbreaking companies and individuals that violate the provisions of federal consumer financial protection law. Because of the crucial role states play in protecting consumers, the Consumer Financial Protection Act grants their consumer protection enforcers the authority to protect their citizens and otherwise pursue lawbreakers.
Why this is relevant: The CFPB expands the state’s reach in its efforts to protect consumers. The Federal Government may work in parallel or separately with the states in their enforcement actions against lawbreakers without one action taking precedence over the other.
May 20, 2022: U.S. GAO Review of Fintech, Equity, and Inclusion
The Government Accountability Office (GAO) is an independent, non-partisan agency that works for Congress. It is starting a review of how fintech might improve financial inclusion and reduce inequities in our financial system. This annual study is required by a 2011 Congressional mandate (PL 112-10) to study financial services regulations.
This year, the GAO is studying how to select fintech products, including EWA, that can help financially underserved consumers. As a result, GAO reached out to FlexWage to understand EWA’s benefits, risks, and challenges.
Why this is relevant: GAO studies are requested by Congress. Congress is very interested in the benefits an EWA program has for the consumer and what type of regulation is needed to improve this benefit and protect consumers.
June 30, 2022: CFPB Rescinds Special Regulatory Treatment For PayActiv
According to their statement, “The CFPB informed Payactiv on June 3, 2022, that it was considering terminating the approval order in light of certain public statements the company made wrongly suggesting a CFPB endorsement of its products.”
Why this is relevant: The Consumer Financial Protection Board (CFPB) takes misrepresentations of what an approval order means very seriously. They also had more than 90 nonprofits, and consumer groups send them a 30+ page letter explaining how the previous administration had hastily issued approval to a provider that did not meet the criteria the CFPB had provided in their Advisory Opinion issued a month before the approval.
July 7, 2022: Kansas OSBC issues EWA Opinion to FlexWage
The Kansas Office of State Banking Commissioner (OSBC) issued the following opinion regarding FlexWage: “The information sent has been reviewed by the Kansas Office of the State Bank Commissioner (OSBC) staff in relation to the Kansas Uniform Consumer Credit Code (UCCC). We appreciate your thorough explanation of your business operations regarding the FlexWage Earned Wage Access program. At this time, we have determined the services you provide do not require a supervised loan license. This determination is based on employer funding, no advancement of unearned wages, and the lack of a repayment obligation. Loan, in the UCCC is defined as several mechanisms to either create or defer debt; see K.S.A. 16a-1-301 (27) for the full definition. Since access to already earned wages are employer funded, FlexWage is not creating a debt for the employee. The fee structure for data services to ensure this process was also considered”
Why this is relevant: As noted earlier, states have specific credit/lending laws and money transmitter laws and processes for licensing in their states. When a provider operates without a license, there are fines and cease-and-desist orders the state can invoke against the employer. There are also potential class action suits.
2023 Regulation Forecast for the Earned Wage Access Industry
As you can see, regulatory scrutiny continues to ramp up for the EWA industry. So as we look forward to the new year, check out our 2023 regulation forecasts for the earned wage access industry.
Stay Informed of Regulatory Compliance Impacting the Earned Wage Access Industry
Staying abreast of regulatory compliance activities impacting the Earned Wage Access industry can be time-consuming (and sometimes tedious). We’re here to help. Let’s start with a conversation about where you are in your journey to provide financial well-being to your employees.