Arizona: Comment Letter to Attorney General Opinion Request R24-018

Joshua Bendor

Solicitor General

Office of the Arizona Attorney General

Solicitor General’s Office

2005 N Central Ave

Phoenix, AZ 85004

Re:      Attorney General Opinion Request R24-018

Dear Solicitor General Bendor,

On behalf of The American Fintech Council(AFC),[1] I am submitting this comment letter in response to the Attorney General Opinion Request regarding the regulation of earned wage access (EWA) products under the Consumer Lenders Act (CLA), A.R.S.§§ 6-601 et seq.

AFC’s mission is to promote an innovative, transparent, inclusive, and customer-centric financial system by supporting responsible innovation in financial technology (Fintech) and encouraging sound public policy. AFC members are at the forefront of fostering competition in consumer finance and pioneering ways to better serve underserved consumer segments and geographies .We proudly represent the largest number of EWA providers, who combined are serving millions of employees across the United States.

It has come to our attention that your office recently received a request to reexamine the qualification of an EWA product as a "consumer loan" subject to the requirements and limitations of the CLA, A.R.S. §§ 6-601 to 6-615, and A.R.S. §§ 6-631 to 6-639. AFC believes, in accordance with the legal analysis conducted in the previously issued Attorney General Opinion R22-011, that EWA products do not qualify as consumer loans subject to the requirements and limitations of the CLA, A.R.S. §§ 6-601to 6-615, and A.R.S. §§ 6-631 to 6-639. Further, as will be briefly highlighted below, AFC views the legal analysis conducted in R22-011 as sufficiently well-grounded and befitting of the current EWA market.[2] Lastly, AFC views reinterpretation of the aforementioned CLA provisions as applying to EWA products as constituting a breach of the “significant reliance interests” that EWA providers have relied upon to develop robust, consumer protected EWA products in Arizona.

I.              The Standing Attorney General Opinion on EWA Accurately Captures the Prudent Legal Interpretation for the State

As noted above, AFC believes that the legal analysis and conclusions provided in Attorney General Opinion R22-011accurately capture the relevant features of EWA products offered in Arizona and the interpretation that due to these features they do not constitute a consumer loan nor should they be subject to the requirements and limitations of the CLA,A.R.S. §§ 6-601 to 6-615, and A.R.S. §§ 6-631 to 6-639.[3]

Particularly relevant for your consideration is that EWA products do not charge any interest on the transactions and are “non-recourse”. Simply put, non-recourse means that EWA providers do not have a right to collect outstanding EWA proceeds and consumers do not have an obligation to repay these proceeds. Consumers may proactively cancel a payroll deduction without repaying EWA proceeds. As correctly explained in Attorney General Opinion R22-011, the non-recourse aspect of EWA products naturally excludes them from the falling under the definition of a “loan of money” under A.R.S. §6-601(7).[4] Given the lack of an explicit definition of “consumer loan” within the CLA, interpretations fall to an ordinary meaning standard. As argued in Attorney General Opinion R22-011, the non-recourse aspect of EWA products precludes them from being considered as a “loan” under the ordinary meaning of that term. AFC wholeheartedly agrees with the aforementioned interpretation of the CLA and relevant legal standards for determining the appropriate usage of undefined terms in the statute.

Relatedly, Attorney General Opinion R22-011also notes that the lack of a “finance charge” within EWA products necessarily excludes them from being considered a loan under the CLA.[5] Building on the analysis provided in Attorney General Opinion R22-011, under A.R.S. § 6-601(11) states that "finance charge" means "the amount payable by a consumer incident to or as a condition of the extension of a consumer lender loan but does not include other fees allowed pursuant to section 6-635." We interpret this provision as unbefitting of any fee associated with an EWA transaction due to the optional nature of any fee that a consumer may elect to have associated with their transaction, such as an expediting fee. Particularly, the “finance charge” definition only categorizes fees that are “incident to or as a condition of the extension of a consumer lender loan”. Considering the common legal definition of “incident to” as meaning “a dependent, subordinate, or consequential part”we can see that the disjunctive phrase taken individually entails a natural dependency relationship of the fee to the transaction.[6]Simply put, the fee covered under the definition of a finance charge must be a necessary aspect of the loan in order for it to be categorized as a finance charge within the statute. To reiterate, all fees that could be associated with an EWA transaction are optional. Thus, inherently missing the mandatory or necessary aspect conveyed by the statutory definition.

II.           Reevaluation of the Qualification of an EWA Product as a Consumer Loan under CLA Rests on Legally Tenuous Ground

It is our understanding that those requesting the Attorney General to reevaluate the opinion on the qualification of an EWA product as a "consumer loan" subject to the requirements and limitations of the CLA, A.R.S. §§ 6-601 to 6-615, and A.R.S. §§ 6-631 to 6-639attempted to apply the Consumer Financial Protection Bureau’s recent proposed interpretive rule concerning paycheck advance EWA products as a rationale for why you should revise Attorney General Opinion R22-011. However, as explained in our comment letter to the Consumer Financial Protection Bureau (CFPB or the Bureau) in response to its proposed interpretive rule, the Bureau stands on erroneous analysis of the EWA product, as well as weak legal and policy footing in its interpretation of EWA products as credit and the application of the Truth-in-Lending Act (TILA)upon the product.[7] Specifically, we argue that proposed interpretive wrongly reclassifies EWA products as loans because

·       Liquidating a right to future payment is not credit;

·       EWA does not fit the egal definition of credit or debt; and

·       EWA products do not have “finance charges”.[8]

Also, the proposed rule, by its own terms, does not apply outside of TILA, so it would be improper to rely on it as a justification for reconsidering the application of the CLA to EWA products.[9] Moreover, the given that the CFPB’s rule remains proposed, reliance on an unfinalized rule would be premature, as the final rule could look very different from the proposed rule. Also, within our comment letter, we convey a number of procedural missteps by the CFPB in the crafting and issuance of its proposed interpretive rule that places it on tenuous legal footing under the Administrative Procedures Act. Notably, AFC’s letter mirrors many of the views expressed in Attorney General OpinionR22-011 and serves to dismiss the use of the Bureau’s proposed interpretive rule as a valid reason to reevaluate the opinion on the qualification of an EWA product as a "consumer loan" subject to the requirements and limitations of the CLA, A.R.S. §§ 6-601 to 6-615, and A.R.S. §§ 6-631 to 6-639.

Further, there has been no requisite legislative or regulatory change within Arizona that would necessitate are evaluation of the EWA product’s standing under the CLA. Market expansion that distinctly arose based on the settled expectations set forth via Attorney General Opinion R22-011 does not pose a unique legal or regulatory reason to reevaluate a previously issued Attorney General Opinion. Nor are we aware of any material consumer complaints or other negative impacts that would justify the engagement of the Attorney General’s Office on this matter. Concerningly, it is our understanding that the initial request cites data that fundamentally misrepresents EWA products, obfuscates relevant product features by using inaccurate metrics such as annual percentage rate, and does not hold the methodological rigor to be used as evidence underlying a request for reevaluating EWA’s standing under the CLA. In order preserve pragmatic, well-informed policymaking, AFC has consistently fought against this misinformation’s ability to underly the policy decisions of those in legislatures and regulatory agencies.[10]

Given that the role of an Attorney General Opinion is to provide guidance to industry participants, it necessarily sits in a subservient manner to both statute and administrative regulations within the hierarchy of the U.S. legal system. Therefore, to move forward with are evaluation of this guidance in lieu of the requisite legislative or regulatory change would unnecessarily invert the natural order of administrative procedures.

In addition, to reverse course at this juncture would undermine existing reliance interests in the market. As a direct result, the decision to reverse course on the Attorney General’s opinion towards EWA’s standing under the CLA would make offering EWA products in Arizona unviable for EWA providers. Thus, according to data provided by AFC members, approximately350,000 Arizonans who have already used EWA products would lose access to them. Failure to consider these and other reliance interests, especially without providing amore substantial justification for its reversal in perspective renders a new interpretation of EWA—i.e. as subject to the aforementioned requirements and limitations of the CLA—arbitrary and capricious.

*          *          *

AFC welcomes responsible, pragmatic regulation of EWA products that recognizes and reflects the important features of EWA products that make them distinct from loans and beneficial to consumers. As evidenced above, AFC believes that EWA products do not qualify as consumer loans subject to the requirements and limitations of the CLA, A.R.S. §§ 6-601 to 6-615, and A.R.S. §§ 6-631 to 6-639.Therefore, we agree with perspectives expressed in Attorney General Opinion R22-011 and respectfully requests that any forthcoming Attorney General Opinion continue to stand in accordance with the legally sound interpretation of the statute expressed within Attorney General Opinion R22-011and the perspectives discussed above.

Sincerely,

Ian P. Moloney

SVP, Head of Policy and Regulatory Affairs

American Fintech Council

[1] American Fintech Council’s (AFC) membership spans EWA providers, lenders, banks, payments providers, loan servicers, credit bureaus, and personal financial management companies.

[2] Arizona Attorney General’s Office, Op. Att’y Gen. R22-011 (Dec. 16, 2022), available at https://www.azag.gov/opinions/i22-005-r22-011.

[3] Ibid, American Fintech Council.

[4] Ibid.

[5] Ibid.

[6]  See, “Black’s Law Dictionary: Second Pocket Edition”, (2001), Page 338.

[7] See, American Fintech Council, “Comment Letter on CFPB 2024 Paycheck Advance Interpretive Rule Docket No. CFPB-2024-0032”, (Aug. 30, 2024), available at https://www.fintechcouncil.org/advocacy/comment-letter-on-cfpb-2024-paycheck-advance-interpretive-rule-docket-no-cfpb-2024-0032.

[8] Ibid.

[9] As stated in the CFPB’s Interpretive Rule, “[t]his interpretive rule only addresses the application of certain Regulation Z and TILA provisions; it does not address the application of any other laws that concern “credit.” See, Consumer Financial Protection Bureau, “Truth in Lending (Regulation Z); Consumer Credit Offered to Borrowers in Advance of Expected Receipt of Compensation for Work”, Fed. Reg. 89, no. 147, (Jul. 31, 2024): 61359.

[10] See, American Fintech Council, “Misleading Statements and Flawed Methodology in Center for Responsible Lending’s Report on Earned Wage Access and National Consumer Law Center’s Endorsement”, (Oct. 23, 2023), available at https://www.fintechcouncil.org/advocacy/response-to-misleading-statements-and-flawed-methodology-in-center-for-responsible-lendings-report-on-earned-wage-access-and-national-consumer-law-centers-endorsement.

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