This article contrasts and compares the recent EWA state legislation to the Federal guidelines provided by the Consumer Financial Protection Bureau (CFPB).
Estimated reading time: 10 min
Recently Passed State EWA Legislation
Nevada and Missouri recently passed Earned Wage Access (EWA) legislation. Some EWA providers, Fintech Associations, and Fintech consultants have praised this legislation, but is it really praiseworthy?
“We are concerned that some state legislators are implementing regulations that disregard the mission of EWA and increase consumer risks. FlexWage is dedicated to safe, responsible, and scalable EWA solutions, and our objective is to help legislators protect the citizens of their state while offering much needed EWA benefits. We do not believe EWA should be reduced to online payday lending standards,” said Frank Dombroski, founding CEO of FlexWage Solutions. ”Several states (California, Kansas, and Maryland) have published strong guidance on the criteria that distinguish EWA from consumer lending. We strongly support this thoughtful approach to EWA regulation.” Read the full press release.
Federal EWA Legislation
The Consumer Financial Protection Bureau (CFPB) first acknowledged Earned Wage Access in their proposed ruling on Payday, Vehicle Title, and Certain High-Cost Installment Loans in June 2016 and included the following in the final regulation on November 17, 2017:
“The Bureau notes that some efforts to give consumers access to accrued wages may not be credit at all. For instance, when an employer allows an employee to draw accrued wages ahead of a scheduled payday and then later reduces the employee’s paycheck by the amount drawn, there is a quite plausible argument that the transaction does not involve “credit” because the employee may not be incurring a debt at all. This is especially likely where the employer does not reserve any recourse upon the payment made to the employee other than the corresponding reduction in the employee’s paycheck.”
As long as EWA Providers met specific criteria, the CFPB affirmed they were not subject to regulations.
The CFPB further outlined seven key characteristics of EWA in their Advisory Opinion issued in November 2020.
The Consumer Financial Protection Bureau (CFPB) defined seven elements that must exist for an EWA program to be considered a “Covered EWA Program” and, therefore, free from regulation under the Truth In Lending Act (TILA).
Covered EWA Programs that meet the following seven criteria are not considered an extension of credit and, therefore, aren’t subject to regulatory requirements and rules.
The seven criteria are:
(1) Employer-based. The contract for EWA services is with the employer, not the employee.
(2) Accrued wages based on actual data. The EWA transfer amount does not exceed the accrued value of earned wages based on data provided by the employer.
(3) No fee or nominal processing fees. The employee does not have to pay to use the EWA benefit or access funds, and the funds are delivered to an account of the employee’s choosing.
(4) Payroll deduction. EWA funds recovery is only via a payroll deduction.
(5) No remedy. The EWA vendor does not claim a remedy for the non-recovery of funds.
(6) Transparency and confirmation. Before accessing the EWA program and funds, the employee is notified of the terms and conditions.
(7) No credit checks. The EWA vendor does not do a credit check on the employee.
The CFPB states:
“The provider of the Covered EWA Program (Provider) contracts with employers to offer and provide Covered EWA Transactions to the employer’s employees.”
The EWA legislation in Nevada and Missouri (EWA State Legislation) is not limited to employer-based EWA Providers. Direct-to-consumer (D2C) models are considered EWA Providers as well.
ISSUE: The CFPB has committed to providing additional clarity on their EWA opinion. It is reasonable to conclude that direct-to-consumer (D2C) models will not be included in the CFPB clarity, putting the EWA State Legislation at odds with the federal law.
2.) Accrued wages based on actual data.
The CFPB states:
“The amount of each Covered EWA Transaction does not exceed the accrued cash value of the wages the employee has earned up to the date and time of the transaction, which amount is determined based upon timely information provided by the employer to the Provider. The Provider may not rely upon information provided by the employee, or on estimates or predictions of hours worked or hourly wage rates. The ‘accrued cash value of the wages’ are wages that the employee is entitled to receive under State law in the event of separation from the employer for work performed for the employer, but for which the employee has yet to be paid.”
EWA State Legislation does not clearly define the kind (or accuracy) of data that must be used to calculate earned wages. Instead, vague language such as “income that a consumer has represented, and that a provider has reasonably determined has been earned” is used. This lack of clarity leaves significant room for error in calculating available earned wages.
ISSUE: This legislation is inconsistent with the CFPB Advisory Opinion and provides significant room for error.
Data from EWA Providers collected by the California Department of Financial Protection and Innovation (DFPI) shows the significant number of overpayments that occurred.
“Approximately 34% of complaints concerned settlement issues, including claims that a consumer was overcharged for repayment or the payment amount exceeded the advance amount.”
Each overpayment includes multiple attempts to recoup the funds by the EWA Provider as well as the suspension of the employee from future EWA use until the provider-caused overpayment is repaid.
EWA models that allow direct debit of an employee’s account and possible overdraft fees can no longer be considered a Financial Wellness benefit.
3.) No fee or nominal processing fees.
The CFPB states:
“The employee makes no payment, voluntary or otherwise, to access EWA funds or otherwise use the Covered EWA Program, and the Provider or its agents do not solicit or accept tips or any other payments from the employee. (The Bureau notes that there may be EWA programs that charge nominal processing fees — and thus differ from the fee structure described in this section B(3) — that nonetheless do not involve the offering or extension of ‘credit’ as defined in § 1026.2(a)(14).”
EWA State Legislation requires all EWA Providers to offer one free option to access an EWA transfer. Yet the legislation does not define what that free option is.
The two most common free options are ACH and direct deposit onto the EWA Provider’s paycard. These two options combined are requested less than 10% of the time by those enrolled in EWA benefits. And these are the options that create the most issues.
ACH transfers do not arrive immediately into the employee’s bank account; receiving these funds can take one to three business days.
When an EWA Provider’s paycard is how the funds are delivered, it takes extra steps, time, and sometimes fees for an employee to transfer from the paycard to their primary bank account.
ISSUE: Transparency in fees and tips is not the same as capped/nominal fees and no tips. A recent industry study using public data of direct-to-consumer (D2C) providers shows that a $100 transfer to an employee’s bank account could cost the consumer nearly as much or more than a payday lender in those states when you include any subscription fees, express delivery fees, and optional tips.
4.) Payroll deduction.
The CFPB states:
“The Provider recovers the amount of each Covered EWA Transaction only through an employer-facilitated payroll deduction from the employee’s next paycheck. One additional payroll deduction may be attempted in the event of a failed or partial payroll deduction due to administrative or technical errors.”
EWA State Legislation does not designate any specific process for recoupment of funds.
As highlighted in a recent article, after an employee makes an EWA transfer, there are two ways to recover the EWA transferred funds (and associate fees if applicable):
1. Payroll deduction. As part of the payroll process, the EWA funds and fee(s) are documented as an after-tax voluntary deduction on the employee’s payroll statement (aka pay stub). The funds are replenished in the EWA funding account, and fees are collected at this time. A monthly itemized statement is provided to the employer.
2. Payroll intercept. Payroll intercept is an extension of the payroll process. After the employer runs payroll, the net payroll record and funds (post taxes and deductions) for employees enrolled in the EWA program are sent to the EWA vendor.
ISSUE: When there is no designation of how the funds are recouped nor limit to the number of times an EWA Provider can attempt a recoupment, the consumer/employee is at a greater risk of overcharges and overdraft fees.
The California Department of Financial Protection and Innovation (DFPI) discovered in data from EWA providers completing an MOU that “approximately 34% of complaints concerned settlement issues including claims that a consumer was overcharged for a repayment or the payment amount exceeded the advance amount.”
5.) No remedy.
The CFPB states:
“In the event of a failed or partial payroll deduction, the Provider retains no legal or contractual claim or remedy, direct or indirect, against the employee, although the Provider may choose to refrain from offering the employee additional EWA transactions.”
EWA State Legislation includes similar wording.
ISSUE: If an EWA Provider has no legal or contractual claim, why do some providers find it necessary to require employees to assign their wages to the Provider in their Terms and Conditions? (Payday lenders, who have been regulated to protect consumers, use wage assignment. Yet, EWA State Legislation makes wage assignment perfectly legal for EWA Providers.)
6.) Transparency and confirmation.
The CFPB states:
“Before entering into a Covered EWA Transaction, the Provider clearly and conspicuously explains to the employee, and warrants to the employee as part of the contract between the parties (and ultimately complies with these warranties) that it:
(a) Will not require the employee to pay any charges or fees in connection with the Covered EWA Transaction;
(b) Has no legal or contractual claim or remedy, direct or indirect, against the employee in the event the payroll deduction is insufficient to cover the full amount of a Covered EWA Transaction, including no right to take payment from any consumer account; and
(c) Will not engage in any debt collection activities related to a Covered EWA Transaction, place a Covered EWA Transaction amount as a debt with or sell it to a third party, or report to a consumer reporting agency concerning a Covered EWA Transaction.”
EWA State Legislation says that EWA Providers must provide clear and transparent terms and conditions, including one free option to receive the EWA funds. However, there is no limit to the total cost incurred by the employee/consumer. The EWA Providers can directly debit an employee’s bank account to recoup funds without limitations. State legislation says the EWA Provider must repay any overdraft caused by attempting to collect an incorrect amount or time. Yet if the EWA Provider is confirming the transfer amount, any fees, and when the funds will be recouped, no overdraft should ever occur.
ISSUE: The transparency requirements found in EWA State Legislation are no different than the requirements already placed on payday lenders, check cashers, and any other lenders. As with many other Terms and Conditions, consumers will not read the required multi-page notifications carefully.
Additionally, the EWA State Legislation sets no limits on the total fees the EWA Provider can charge the employee/consumer.
Finally, as stated earlier, the EWA State Legislation has no limitations on the number of times a provider can attempt to recoup funds directly from the employee’s bank account.
While an EWA Provider may not sell the debt to a third party, the Providers are making numerous attempts to collect a debt that would not have occurred if they abided by criteria listed in the CFPB Advisory Opinion:
>>> Criteria (2) Accrued wages based on actual data
>>> Criteria (3) No fee or nominal processing fees
>>> Criteria (4) Payroll deduction
7.) No credit checks.
The CFPB states:
“The Provider will not directly or indirectly assess the credit risk of individual employees, including through obtaining and reviewing credit reports or credit scores about the individual employees.”
EWA State Legislation states that the EWA Provider cannot pull credit reports or scores to assess credit risk. However, no limitations are set regarding the EWA Providers who have access to an employee’s bank account or employer portal.
Consider the data available to assess credit risk within a consumer’s bank account and an employer portal.
Consider that an EWA Provider with access to a consumer’s bank account can evaluate creditworthiness based on deposits, withdrawals, overdrafts, and spending habits.
Within an employer portal, personal information, including age, sex, race, dependents, tenure, annual income, garnishments, etc., are data points an EWA Provider can use to deny access to EWA funds.
ISSUE: When providers have access to a large amount of personal employee information and decide the percentage of the earned wages an employee can access, they are assessing creditworthiness and risk.
Earned wages are wages an employee has already earned. EWA Providers have no reason to access personal employee information and determine the percentage of net earned wages each employee should have access to unless the EWA Provider is making a risk assessment.
The EWA Providers who sponsored the EWA State Legislation like to talk about all the consumer protections afforded by requiring licensing and registration of EWA Providers. However, does licensing and registration help protect consumers or, in truth, provide new sources of revenue?
These same proponents of the EWA State Legislation take no issue with using wage assignment to recover EWA transaction funds. They do not highlight that under existing state laws, most of their EWA models would require lending and money transmitter licensing if not for the exception provided by the new legislation.
The same or similar legislation has been proposed in several other states and failed.
California’s Department of Financial Protection and Innovation (DFPI) has been the leader in gathering information on the EWA industry. It has issued an Opinion letter, provided data, and proposed regulations based on their existing laws and all they have learned. California DFPI believes their regulations will be the model of the entire country, and history shows they may be correct.
Future State EWA Regulations
The California DFPI said they plan to finalize their EWA regulations by March 2024, and the CFPB said they plan to provide additional clarity to their EWA Advisory Opinion in 2024.
Considering how far removed from the CFPB advisory opinion the Nevada and Missouri State Legislation is, what will those states do when their laws do not meet the Federal requirements?
EWA Done Right
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