CA: Joint Advocacy Letter in Support of Revising California Proposed Regulations on Earned Wage Access

Earned Wage Access Industry Urges Revision to DFPI’s March 2023 Proposal

The California Department of Financial Protection and Innovation’s (DFPI) March 2023 proposed regulations (PRO 01-21) on earned wage access (EWA) represent a missed opportunity to collaborate on creating important, meaningful consumer protections and generate financial product access to underserved Californians. The EWA industry and the DFPI share many of the same goals and we agree on prioritizing protections for consumers that use EWA. But this cannot be accomplished by shoe-horning an innovative industry into legacy credit law regulations. Instead, given the industry’s already very low fees and the existing lending law’s allowed fee structure, this proposal will adversely impact hard-working Californians.

DFPI Reverses Previous Guidance to Detriment of Consumers

In January 2021, the DPFI signed Memorandum of Understandings (MOUs) with several providers of income-based advances (IBA), or more widely known in the industry and to consumers as earned wage access (EWA). Through the MOUs, providers transparently provided quarterly reporting to plan for registration under the California Consumer Financial Protection Law (CCFPL). The DFPI recognized in the MOUs that EWA products do not have finance charges and thus are not included in APR calculations. In the interim, providers provided input on each new draft to ensure that the final rule would have strong consumer protections and be feasible for providers to continue serving consumers and innovate responsibly.

The DFPI’s latest proposal, however, would unnecessarily and inappropriately force EWA providers into the California Financing Law (CFL), which would consequently hurt those the industry seeks to protect the most – consumers. The DFPI has not reasonably identified the basis of the change, or why it now believes that the authority exists to regulate EWA via the CFL. Further, there is no reason to believe that imposing the CFL on providers would result in lower costs and fees. Today, licensed lenders most often charge significantly more than EWA providers, and no licensed lender offers loans at no-cost, no interest, and without recourse, which is a material difference from EWA providers.

Concerns with the 2023 Proposal‍

The draft Proposal that would force EWA into a lending framework, which has the following adverse impacts:

• Drive EWA providers to become licensed lenders, disincentivizing or eliminating EWA’s key consumer protections, including its lack of recourse, underwriting, and credit score impact.
• Reduce consumer access by limiting the number of consumers who would qualify to use EWA due to creditworthiness.
• Add unnecessary cost and complexity, including confusing disclosures, spousal consent, and expensive notarization requirements for “wage assignments” under the Labor Code.
• Harm consumers by increasing both the amount and type of fees, including interest, origination fees, and late fees.
• Harm businesses by requiring providers to overhaul their products in California.
• Decrease fair competition by restricting product types, and reducing the number of EWA companies that could operate in the state.
• Reduce wealth creation for California consumers by limiting access to free or nominal fee-based EWA programs, forcing users to take on debt through payday loans or rely on other high-cost alternatives, like credit cards and overdrawing bank accounts.
• Decrease financial stability of small and midsize businesses by shifting the obligation to fund EWA transactions from EWA providers to these businesses.

EWA is Neither Credit nor a Wage Assignment

EWA is not credit as a matter of state law. While the DFPI Proposal relies on circular and inaccurate interpretations of the terms “credit” and “debt,” the law is clear: for a contract to involve credit there must be a debt, which in turn must include an "obligation” or “legal duty.” An employee’s revocable authorization allowing EWA providers to submit a payroll deduction to his or her employer is not an “obligation” or “legal duty” to pay money.

APR Mismatch and Inaccurate Data Conclusions

The Proposal is premised on inaccurate and incomplete data findings purporting that EWA companies charge an “APR” of over 300 percent. This conclusion is misleading given how the large majority of providers offer a no cost option to consumers. In fact, Nevada’s gold-standard law requires a no cost option for consumers in order to operate.

Annual percentage rates (APR) are best suited for consumers to compare a monthly interest payment that is paid over the course of several months, if not years. An APR construct for a one-time, flat, technology transaction fee is ill-suited for consumers to use to compare out-of-pocket costs on financial products and strategies. Further, use of APR is confusing and incongruent for a product that does not annualize.

Since EWA is not credit, the EWA industry conducts no underwriting and does not base its low transaction fees or access to wages on creditworthiness. EWA providers also do not charge these low fees in installments. For these reasons, an APR rate, which would be misleadingly high even with the industry’s low fees, are incongruous to how EWA is structured. These rates therefore do not represent the actual cost and potential savings available to EWA users.

Recommendations

The DFPI should revise the proposed regulations to incorporate robust consumer protections and create a new, non-legacy credit law regulatory framework for EWA. Doing so would accomplish the DFPI’s goals without adversely impacting consumers, businesses, and providers in California.

We encourage the DFPI to revise its proposed regulations to require registered EWA providers to comply with an extensive set of consumer protection requirements similar to those already enacted in other states. Meaningful consumer protections include prohibitions on recourse or collections through the Unfair, Deceptive, Abusive Acts or Practices (UDAAP) Act, data reporting, extensive fee and tip disclosures that are not hidden in terms and conditions, and reimbursement of overdraft fees. The complicated fee rate and fee cap structure should be substituted with consumer protections more in line with the current simple and transparent nature of EWA fees.

The DFPI should revisit the Proposal and its accompanying data findings, hear from and meet with providers, consumers, and businesses that offer EWA as an employee benefit, and craft a solution that is uniquely tailored to EWA in a manner that truly leaves room for innovation while also protecting consumers.