Comment Letter on CFPB 2024 Paycheck Advance Interpretive Rule Docket No. CFPB-2024-0032

August 29, 2024

The Honorable Rohit Chopra Director

Consumer Financial Protection Bureau

1700 G Street NW

Washington, DC 20552

Re:      2024 Paycheck Advance Interpretive Rule Docket No. CFPB-2024-0032

Dear Director Chopra:

On behalf of the American Fintech Council (AFC), we submit this comment letter in response to the July 18, 2024 noticeof proposed interpretive rule by the Consumer Financial Protection Bureau (CFPB or the Bureau) concerning paycheck advance and earned wage access (EWA) products.

AFC is a trade association with members that include EWA providers of all sizes across the United States, including employer-partnered and direct-to-consumer providers. AFC’s mission is to promote an innovative, transparent, inclusive, and customer-centric financial system by supporting the responsible growth of financial technology (Fintech), fostering innovation in the Fintech industry, and encouraging sound public policy. By increasing the availability of EWA products, AFC members have assisted millions of consumers in accessing their earned but unpaid wages before receiving their next paycheck.

AFC is committed to offering its insight and support in service of developing responsible regulations in the EWA space. On February 7, 2024, AFC wrote the CFPB to propose that the Bureau adopt a formal rulemaking process to develop a pragmatic framework forregulation of EWA products that would ensure adequate consumer financial protections and preserve the distinct characteristics of EWA products that make them a valued option for consumers. Instead, the CFPB has announced a “proposed interpretive rule” (Proposed Rule or the Rule) that would eliminate the unique aspects of EWA products that have helped drive benefits for the millions of consumers who use them.

The AFC submits this comment letter to lodge its objection to the Proposed Rule. The Bureau should withdraw the Proposed Rule for at least three reasons that are detailed below. First, the Proposed Rule would wrongly overturn and replace the Bureau’s November 2020Advisory Opinion finding that some EWA products are not credit. For years, businesses relied on that opinion to develop innovative EWA products, which consumers want and have used as an alternative to products such as payday loans and credit card debt. The Proposed Rule erroneously purports to extend the definition of credit to include all EWA products, but it does so by misstating and mischaracterizing them and ignoring their key differences from loans.

Second, the Proposed Rule is procedurally improper because it is not the “interpretive rule” it purports to be. Instead, the Proposed Rule effectively is a new legislative rule that imposes a host of new obligations and the threat of new enforcement action on EWA providers,all without the CFPB having undertaken standard and legally required processes in order to do so. If it were to adopt the Proposed Rule as an “interpretive rule,” the CFPB would be acting in contravention of well-established separation of powers principles.

Third, the Proposed Rule would harm consumers, employers, and EWA providers by causing consumer confusion and market dislocation; limiting consumer choice; pushing consumers into more expensive or inaccessible alternatives in which they are subject to credit checks and consumer reporting; and undermining consumer access to liquidity.

We urge the CFPB to withdraw its Proposed Rule and to instead defer to the ongoing, robust considerations of the appropriate regulation of EWA products that are already underway in legislative branches of government at both the state and federal levels. Recognizing that existing statutory schemes for credit products do not fit EWA products, numerous state legislatures have adopted or considered legislation concerning EWA products. In addition, the House Financial Services Committee, too, has been considering consumer protection legislation addressing EWA products on the federal level. To the extent a new approach is needed to address the innovative products introduced by EWA providers, that approach should come from these bodies of elected representatives and not the CFPB. The Bureau should work with Congress and with other stakeholders on appropriate EWA legislation. The CFPB should not attempt to usurp that process by pushing to adopt the Proposed Rule. To do so would be imprudent and incongruent with the distinct roles bestowed upon agencies and Congress in addressing policy questions.

I.              The Proposed Rule Upends Longstanding Expectations About EWA Products

Recent advances in technology have made it possible for workers to access their earned wages in advance of their regular, often bi-weekly pay cycles (referred to here as “EWA products”). Innovative companies in the Fintech space, including AFC members, have developed technology solutions for employees and employers that solve the problem of the paycheck cycle and provide access to the funds a worker has already earned—avoiding the need of having to take out a loan. Consistent with the CFPB’s prior guidance, most consumers recognize EWA as a product category distinct from lending.

A.            EWA Products Do Not Involve Lending Money

For over a century, payroll processes have been trapped in legacy batch-payment cycles, where workers incur a right to payment weeks toa month before they are actually paid. Various surveys have shown that the number of U.S. workers living paycheck-to-paycheck has been growing due to a rising cost of living—whether increased inflation (e.g., rising cost of transportation, groceries, and other necessities), higher interest rates leading to higher minimum payments, or otherwise.¹ The realities of inflation, wage stagnation, and increasing costs of living, combined with the benefits of modern technology, have led many of today’s workers to seek out products that offer “short-term liquidity”—cash in the immediate or near term—including by obtaining their pay in between pay dates. This trend will only continue, as studies show that most millennial and Gen-Z workers increasingly want their pay as soon as it is earned, and are more likely to work at a job where they are paid daily. ²

EWA products use payroll data to accurately provide a portion of the employee’s wages between employer pay dates. The data may come from integration with the employer’s payroll system or bank information. It may also come from consumer-provided pay stubs or other data points like geolocation data, timesheets, payroll API, email verification, and automated financial account data. EWA is, therefore, a modern solution to a payroll problem that leverages technology to enable short-term liquidity for consumers by allowing them to access theirown earned wages. This provision of funds is not an advance on future earnings—it is an assessment of what the employee has already earned based on real data.

Innovation in the EWA space has led toa variety of product structures now present in the market. Two primary models in the market are (1) the employer-sponsored or employer-partnered model (often referred to as employer-integrated in state and federal laws and legislative frameworks) and (2) the direct-to-consumer model. In the employer-sponsored model, employers choose to partner with EWA providers to offer EWA as an employee benefit. The EWA service is integrated into the employer’s payroll system, based on employer-verified wages. Direct-to-consumer models operate independently of employers, allowing consumers to access their earned but unpaid wages through an app or platform. While the employer-based model is often seamless, the direct-to-consumer approach offers broader accessibility to workers whose employers do not participate in an EWA program. Regardless of the model, EWA providers, including AFC’s members, offer crucial services to consumers, giving them access to their earned but unpaid wages and to a non-lending option that can fit their needs. Consumers have access to these services without having to suffer the potential negative impacts of a credit check, or the risks of interest rates, predatory debt cycles, recourse, negative credit reporting of unrepaid funds, and aggressive debt collection activities.

An EWA transaction begins with an individual having a current right to payment of a sum certain on a certain date in the future. The individual has already done the work, and they are entitled to payment for that work by their employer. In turn, the EWA provider makes a certain amount of the already earned wages available to the individual. When the earned wages are later paid by the employer, the amount previously liquidated is sent to the provider. The worker may be provided earned wage access for free, for a flat fee, or for a fee in connection with a subscription for a group of services including EWA. Workers may have the option to pay a fee to expedite the transfer. A small number of providers also allow consumers to voluntarily provide a tip. Any fees or opportunities to tip are clearly disclosed prior to completion of the EWA transaction.

EWA transactions involve no interest and no obligation to repay. No fee is variable or dependent on the time between the EWA provider paying the employee their earned wages and receiving payment. In other words, there is no interest component. If the employer does not pay the wages and the worker does not receive the wages, no amounts are owed by the worker to the EWA provider—meaning that the worker has no obligation to pay. The EWA provider taking a loss may preclude the worker’s use of the service in the future, but the provider has no recourse to seek payment from the employee if an employer fails to pay the wages.

B.            Preexisting Guidance Recognized the Distinction Between EWA Products and Loans

Before the CFPB’s July 18, 2024 notice of the Proposed Rule, legal authorities had recognized the distinction between EWA products and loans. Indeed, for almost a decade, government agencies, including the Bureau and state legislatures, have recognized that some or all EWA transactions are not “credit” for purposes of the Truth in Lending Act (TILA). For example, in its 2017 Payday Lending Rule, the CFPB excluded “programs that provide innovative access to consumers’ wages,” noting that some wage access programs were likely not credit, and others that arguably were would be excluded from the Proposed Rule if they met certain conditions, including alack of recourse for an employee’s failure to repay the transaction amount.³ The CFPB determined that programs that provide consumers access to their earned wages “do not seem to pose the kinds of risks and harms presented by covered loans.”⁴

Approximately three years later, the CFPB reiterated and expanded upon this view in a 2020 Advisory Opinion on EWA products. In concluding that EWA programs are not “credit,” the CFPB stated that “debt” is a “liability on a claim,” and “no such liability of the employee arises” in EWA transactions.⁵ The CFPB explicitly noted that the substance of EWA transactions is more like an employer paying an employee early than a lender making a loan.⁶ The Treasury Department has echoed this approach, proposing in 2022, 2023, and 2024 to amend the Internal Revenue Code to clarify that EWA products are not loans and to define them as “an arrangement that allows employees to withdraw earned wages before their regularly scheduled pay dates.”⁷

Further, several state legislatures have passed legislation, with broad bipartisan support, that confirms that EWA products are notcredit.⁸The state attorneys general of Arizona and Montana have issued opinions concluding that certain EWA products are notcredit.⁹In addition, EWA- focused legislation has been introduced in more than a dozen states, most of which explicitly state that EWA products are not credit or loans.¹⁰ In addition, Congress is currently considering a bill that would impose specific requirements on EWA providers and would define EWA as not consumer credit under TILA.¹¹

The understanding that EWA products are not credit is further confirmed by case law. A key distinction between EWA products, on the one hand, and credit or loans on the other, is that EWA products are non-recourse transactions where the EWA consumer has no legal obligation to repay—features that have been recognized by various courts as indicative of whether a transaction is a loan.¹²If the EWA provider is unable to recoup its payment to the consumer through payroll deductions or other agreed upon methods, the provider has no recourse and accepts the loss .However, with EWA products, the consumer transfers to the provider the risk of nonpayment of a future payment, so the transaction cannot be a loan or credit.

To be sure, given the recent development of EWA as a consumer product category, thought should be given to solidify an appropriate consumer protection regime for EWA products. However, such a regime should be developed by Congress, not by the CFPB. Moreover, AFC has in the past supported state-level legislative frameworks that impose licensure and other consumer protective requirements but also recognize the non-credit characteristics of EWA products. AFC recognized that such nuanced treatment and consumer protections are warranted in its February7, 2024 Letter to Director Chopra. The CFPB has rejected AFC’s efforts to engage about appropriate regulation, and Congress has since implicitly recognized, through introduction of the Earned Wage Access Consumer Protection Act, that the CFPB does not currently have adequate statutory authority to regulate EWA. ¹³ The absence of a specific statutory regime authorizing regulation of EWA products does not mean the CFPB is free to simply reclassify EWA products as loans.

C.            The Market Has Relied on the Difference Between EWA Products and Loans

Consumers generally understand that EWA products are distinct from loan products, as research shows. For example, in a November 2023research study on EWA users, the Financial Health Network found that “nearly all participants” saw EWA products as “fundamentally different from a loan.”¹⁴ One participant explained, “A loan gives me access to something I need to earn in the future. EWA gives me access to something I’ve already earned.”¹⁵ Moreover, participants preferred EWA products to other short-term liquidity options.¹⁶ In another study published by the Mossavar- Rahmani Center for Business and Government at the Harvard Kennedy School, about 70% of EWA users stated that EWA helped them stop or reduce reliance on these alternative financial services.¹⁷

In the wake of the pandemic—when costs for essential items skyrocketed and healthcare costs increased for many—consumers came to know and rely on the EWA industry, based on the premise that EWA products were an alternative to borrowing. Healthcare and other hourly workers increasingly requested EWA as an employee benefit, and given labor shortages during the pandemic, employers began offering EWA as a benefit to attract and retain workers. According to the CFPB’s Data Spotlight, in 2022, approximately 10 million users accessed EWA products for a total of $31.9 billion.¹⁸ This represents 7.2 million workers who used employer-sponsored EWA products to access $22.8 billion and approximately3 million consumers using direct-to-consumer EWA products to access $9.1 billion.¹⁹ This builds on the pre-pandemic growth of the EWA market, which, according to one study, tripled from $3.2 billion in 2018 to $9.5billion in 2020.²⁰ About 80% of employers with 1,000 or more employees now offer EWA as an employee benefit.²¹ Use of EWA products has further accelerated during the recent periods of high inflation, where it is harder for workers to pay bills and make ends meet between pay periods.

As the use of EWA products has increased, EWA providers have relied in part on the CFPB’s 2020 Advisory Opinion in building and growing their businesses. Some EWA providers structured their offerings to the preexisting state of the law—e.g., so as to constitute a “Covered EWA Program” as defined in the 2020 opinion. Providers who did so contract with employers to offer EWA to employees free of charge and recover the amount of the EWA transaction only through employer- facilitated payroll deductions. Other EWA providers developed their offerings to more broadly align with the characteristics of EWA transactions contemplated in the 2020 opinion. For example, all EWA providers—whether employer-sponsored or direct-to-consumer—limit the amount of EWA transactions so as to not exceed the estimated or actual value of the employee’s earned wages up to the date and time of the transaction. In general, EWA providers retain no legal or contractual claims against consumers in the event of an incomplete deduction, and they do not assess the credit risk of consumers. These core features, which have shaped the development of the EWA industry, are drawn directly from the CFPB’s guidelines as expressed in the 2020 opinion.

Consumers have come to rely on the ease and affordability of EWA products as compared to other short-term liquidity alternatives. In an internal study commissioned by an EWA provider, 81% of its customers who had used payday loans stopped using them after using EWA.²² Ananalys is commissioned by another EWA provider found that nearly one-third of its customers used payday loans before using EWA, and only 9% used payday loans after. Similarly, many EWA customers reported having incurred overdraft fees to access money between paychecks, and substantially fewer reported incurring overdraft fees after beginning to use EWA products. One consumer said, “If I did not have access to [EWA provider], I’d probably be losing money with overdraft fees.” Consumers intentionally choose EWA over costlier alternatives, and they understand the benefits EWA programs provide. For example, more than70% of one EWA provider’s customers said not having access to EWA would have a negative effect on their household, and that EWA helped them cope with the pressures of inflation.

D.            The Proposed Rule Wrongly Reclassifies EWA Products as Loans

The CFPB now proposes to adopt an inaccurate and expansive definition of “debt” as “any obligation by a consumer to pay another party,” in a dramatic reversal of its narrower interpretation of the same word in 2020.²³ The CFPB reasons that EWA transactions are covered by TILA merely because consumers incur debt(under the Proposed Rule’s new definition), with an obligation to repay the EWA provider, when they engage in EWA transactions. Specifically, the Proposed Rule incorrectly states that “in an earned wage transaction, the consumer incurs an obligation to pay money at a future date,” and suggests all EWA transactions are “contingent obligations” like those covered byTILA.²⁴The CFPB seems to suggest this is the case even where EWA transactions explicitly provide that they are non-recourse and that the worker has no obligation to repay the provider. The Proposed Rule then explains that TILA requires disclosures by providers that extend consumer credit subject to a finance charge, and concludes that EWA providers that earn any fees, gratuities, or other charges(regardless of the optional nature of any such charges), would be required to make such disclosures, because the fees are “finance charge[s] . . . incident to the extension of credit.”²⁵

At each step of its analysis, the CFPB employs a one-size-fits-all approach to a class of products that are distinct from loans, leading to broad and harmful consequences as discussed below in Section IV. The CFPB’s new definition of “debt” as “any obligation by a consumer to pay another party” would encompass a whole host of transactions that are not “debt” under the commonsense understanding of that term. Further, the CFPB—based on the vague assertion that “some” EWA transactions have “an element of contingency”—groups all EWA transactions together with “contingent obligations” covered by TILA by reasoning that such transactions all bring about the consumer’s “obligation to repay.”²⁶ But in EWA transactions, the consumer has no obligation to repay the provider the amount provided. Having decided that EWA transactions are “credit” based on sparse analysis, the CFPB then determines that TILA disclosure rules apply because fees and other charges paid by EWA program users are “finance charge[s] . . . incident to the extension of credit.”²⁷

Nowhere does the Proposed Rule adequately explain either the CFPB’s reversal from its prior guidance, nor the agency’s basis for treating all EWA products as one homogenous group despite recognizing the diversity of offerings on the market. The Proposed Rule ignores the varying features and benefits of EWA offerings compared to each other and compared to costlier alternatives for short-term liquidity.

The Proposed Rule is not merely a disclosure rule that would increase transparency. It would effectively eliminate the EWA product category as a distinct product offering by classifying it as a loan, despite significant and—to consumers and workers—meaningful differences built into EWA products by design. Some such differences are identified above: Consumers have access to EWA services without having to suffer the potential negative impacts of a credit check, or the risks of interest rates, predatory debt cycles, recourse, negative credit reporting of unrepaid funds, and aggressive debt collection activities. There are other differences explained below: The amount of each EWA transaction is no more than the accrued cash value of the wages the employee has earned; and there is no interest and no costs or fees imposed based on the time between transfer of earned wages and payment by the employer. By homogenizing distinctly different products and lumping EWA products in with credit:

·       The Proposed Rule would impose an entire compliance regime, currently targeted at loan products, upon EWA providers. EWA providers would need to restructure their businesses around that new regime or close.

·       The Proposed Rule would mostlikely lead EWA providers to rearrange their offerings to mirror traditionalloans to ensure compliance with inapposite regulations that were designed forcredit products. In attempting to ensure compliance with obligations for credit products, EWA companies may be forced to begin behaving more like lenders,including by, among other things, adding interest rates or running creditchecks or adding other kinds of fees that banks are able to charge—creating the very “race-to-the-bottom”²⁸ scenariothe CFPB said it was tryingto avoid in proposing the Rule.

·       Without reason or the ability for providers to offer EWA products in the manner they do, the features that draw consumers to most EWA providers currently— including the lack of a credit check, credit impact, and interest rate—are likely to disappear.

The Proposed Rule would harm consumers and force all EWA providers who do not offer bank- issued loans to convert their offerings into credit offerings, with all the attendant changes that would eliminate the reasons most consumers seek out—and EWA providers offer—EWA products in the first place. In short, the Proposed Rule would re-design EWA products in a manner never intended by the industry to the detriment of consumers and the EWA providers.

Finally, new compliance programs would increase costs and risk putting many smaller EWA providers out of business. Many members of AFC are small businesses for whom dramatic increases in compliance costs or in researching and restructuring business models to ensure compliance will be too large to bear. The market for responsible short-term liquidity will shrink— and consumers will lose an important choice, leaving them with fewer options to ease the demands of inflation and inconvenience of delayed pay.

II.           TILA Does Not Apply to EWA Products

The CFPB cannot use the Proposed Rule to transform EWA products into lending products and then subject them to regulation as loans. As a definitional matter, EWA products are not credit or debt. The CFPB’s actions are contrary to law.

A.            Liquidating a Right to Future Payment Is Not Credit

EWA products are the monetization of an existing right to payment of earned wages. This is a clear and established concept that is substantively distinct from concepts of credit and debt. Shoehorning a product category that is the epitome of a non-credit liquidity solution into a statute and regulation specifically limited to credit products is irrational, lawless, and should be abandoned.

There is a well-established track record that transactions structured like EWA products are not credit. For instance, in personal finance, there has long been a practice of monetizing a stream of payments—such as an annuity, structured settlement, or periodic lottery payout for a cash sum— without the need for credit.²⁹ Similarly, in commercial finance, rights to single payment amounts are monetized through factoring, and such transactions are not considered a loan or debt.³⁰ Further, annuity factoring companies convert all or part of an annuity payment stream to cash; that right to cash is not considered a loan or debt, and the CFPB has recognized that the protections of Regulation Z are not necessary for these products.³¹ Caselaw recognizes this category of products as distinct from debt and credit.³²

Here, technological innovation has allowed EWA companies, like AFC’s members, to offer products turning an existing right to payments into cash for individuals in relatively small amounts. The nature of the transaction for individuals remains the same as those described above: the liquidation of an asset for cash. In short, EWA transactions are not credit transactions; instead, the EWA provider is focused on the existing right of already earned wages paid in the future by a third party. At the beginning of the transaction, the worker has a right to earned funds, and the transaction converts that right in whole or in part into cash. The foundational characteristics of the EWA transaction are completely inconsistent with credit and debt:

·       The amount of each EWA transaction is no more than the accrued cash value of the wages the employee has earned up to the date and time of the transaction.

·       No credit check is conducted because credit is not being issued and the only issue is the right to payment of earned wages.

·       There is no interestcalculation, including no costs or fees imposedbased on the time betweentransfer of earned wages and payment by the employer.

·      There are no debt collection activities or recourseto the consumer.

Finally, and as relevant to consumer disclosures, consumers are informed they have no affirmative obligation to repay the amount, they are not required to pay fees for access to earned wages, that there will be no collection activities, and the provider will have no claim against the employee if the funds are insufficient at the time of withdrawal to cover the full amount of the transaction.

B.            EWA Products Do Not Fit the Legal Definition of Credit or Debt

As the above discussion makes clear, EWA transactions lack characteristics of credit or debt, as those terms are commonly used.Specifically, this is because:

·       A lending relationship requires an absolute deferred payment obligation of the amount at issue.³³ In EWA transactions, the individual has no future obligation, including no obligation to make a payment from the individual’s other funds.

·       A credit or debt transaction entails the creditor having recourse for non payment, including the pursuit of collection and other remedies to seek repayment.³⁴ With EWA products, the risk of non-payment is transferred to the EWA provider, meaning that the provider may incur a loss without recourse to the consumer.

·       A credit or loan transaction requires an obligation to repay. ³⁵ With EWA products, there is no such obligation.

TILA’s definition of credit is not broader than common usage, so EWA products do not meet TILA’s definition. TILA and Regulation Z apply to “credit” which is defined as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.”³⁶ “Debt” is not defined. To be sure, Congress recognized that not all credit products need the disclosure requirements of TILA ³⁷and empowered the CFPB to exclude credit products from the requirements if it deems the disclosures unnecessary.³⁸ But the CFPB was explicitly limited to and cannot go beyond credit products when applying TILA disclosure requirements. And that is what the CFPB is trying to do here: go beyond credit products to apply TILA to a non-credit product. AFC and its members believe that the agency should not attempt this endeavor. The CFPB’s reverse-course of suddenly deciding that EWA falls within the existing definition of credit in TILA is not only unmoored from the reality of how EWA transactions work, but also inconsistent with fundamental principles of separation of powers. TILA has not been amended by Congress, and the CFPB has no authority to legislate through the Proposed Rule.