State efforts to regulate earned wage access are heating up

State efforts to regulate earned wage access are heating up

By Miriam Cross, American Banker

Attempts across state legislatures to regulate earned wage access services are picking up steam.

Several states, including Georgia, Kansas, Texas and Virginia, introduced bills this year. Others, including New Jersey and New York, have attempted to pass bills in recent years. California’s Department of Financial Protection and Innovation (DFPI) recently issued a notice of proposed rulemaking on the subject.

Earned wage access lets consumers get an advance on part of their pay before it hits their bank accounts. Some companies work with employers to provide this, such as DailyPay and Payactiv, while others have created apps directed at consumers, such as Earnin. Proponents argue that consumers need these wage advances to combat inflation, make ends meet and avoid high-cost credit, while critics point out these services may obscure their fees and trap consumers in a cycle of debt, because advancing pay one week means they will be short the next. Banks have started getting into this space. For instance, PNC Financial Services Group worked with DailyPay to launch EarnedIt, an on-demand payroll product for corporate users.

Even though no laws have passed, the states’ activity indicates that “the momentum is toward regulating these products,” said Jonathan Engel, a partner at Davis Wright Tremaine.

“The product has exploded in popularity,” he said. “It seems regulation is inevitable at both the state and federal levels.”

Currently, there is no clear regulatory guidance on what EWA providers are permitted to do, and they largely rely on an advisory opinion issued by the Consumer Financial Protection Bureau in 2020. The agency said earlier this year, in a response to a Government Accountability Office report about fintech benefits and risks, that it intends to give further clarification on the matter. Both state and federal legislation could shape how EWA services operate in the future, including whether or not they are classified as loans, how their fees are capped and disclosed and how they are treated under the Truth in Lending Act.

“These are products that consumers overwhelmingly like. In their safest form, they do not present a lot of risk to consumers, but there are approaches that present more risk,” said Engel. “The regulators and legislators are trying to balance where that line is between a product that is far safer than payday loans with a product that maybe butts up against some of the risks we are seeing with respect to payday loans.”

Generally, most of the bills require registration or licensure but otherwise allow many EWA providers to continue doing what they are already doing, he said.

Consumer advocates are largely unhappy with most of the bills introduced thus far.

The topic arose this week at a panel at the Consumer Federation of America’s Consumer Assembly. The session, titled State Advocacy Efforts to Stop Fintech Evasions, cited a report from California’s DFPI that came out in early 2023 and found, after analyzing data collected from several EWA companies in 2021, that the average annual percentage rate was 334% for companies that accepted tips and 331% for companies that did not. (The DFPI counted mandatory fees, tips and other optional fees in its calculations of APR.) It also found that consumers used advances an average number of nine times per quarter, or 36 times per year.

In Georgia, Senator Matt Brass introduced a bill earlier this year to set requirements for EWA providers. The bill states that earned wage access is not lending activity.

“I don’t think the legislation has enough clearly defined protections to make sure people aren’t trapped in payday lending,” said Liz Coyle, executive director at consumer advocacy organization Georgia Watch, who spoke at the Consumer Federation event. “We believe appropriate regulation will only occur when we call them what they are, which is loans, and make them subject to state small-dollar lending interest rate caps.”

Both the House and the Senate in Virginia’s state legislature introduced nearly identical bills early this year that failed to advance once sent to conference committees, effectively killing the legislation once the 2023 session ended in February, said Dana Wiggins, director of economic justice at the Virginia Poverty Law Center.

“The main point of contention at the outset was whether these were loans or not,” said Wiggins.

She says that the House of Delegates bill, in its final form, set up a stakeholder process to discuss and then report to the general assembly on earned wage advance products. The Senate bill centered around data collection, with some definitions and prohibited practices with a five-year sunset.

Consumer groups are generally pleased with the proposed regulations from California, which clarifies that these products are subject to the California Financing Law. Under that law, tips or other voluntary payments are considered charges.

“California is not banning the product, but it is making clear they are loans, that they are generally subject to California financing laws and they must comply with fee and rate caps including tips and donations,” said Lauren Saunders, associate director at the National Consumer Law Center.

Yasmin Farahi, deputy director of state policy at the Center for Responsible Lending, agrees. “A lot of the bills look similar and have been drafted off the same model bill,” she said. “It’s important that a regulatory regime treats [these services] as loans and there are appropriate consumer protections that go along with other loan products.”

In a comment letter to the California DFPI, the Financial Technology Association (FTA) voiced concerns about the proposed rule’s classification of EWA products as loans and voluntary payments as credit or loan charges.  

“EWA is a key area of innovation that offers consumers flexibility through on-demand and earlier access to their earned wages that have not yet been deposited into their account,” said the association in its letter. “Importantly, EWA products are not loans and instead simply give employees access to their already earned wages. This substantive distinction matters since the characteristics of EWA products are different from those of credit or loan products — which means that rules regarding credit or loan products would poorly fit EWA products.”

The FTA points out EWA services are nonrecourse; consumer groups counter that the vast majority of these loans are repaid, according to data from California’s DFPI, and that these services may withdraw funds from a customer’s bank account to cover their payments and trigger overdraft fees.

“I’m not sure the characterization of a loan is as important as whether there is a clear set of rules that providers need to follow to protect consumers and provide the service that is popular with consumers,” said Engel.

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