Federal: Advocacy Letter to CRL and NCLC in Opposition to Misleading Statements and Flawed Methodology in Earned Wage Access Report

Michael Calhoun
President
Center for Responsible Lending
302 West Main Street,
Durham, NC 2770

Mr. Martin Eakes
Chief Executive Officer
Center for Responsible Lending
302 West Main Street,
Durham, NC 2770

Mr. Richard Dubois
Executive Director
National Consumer Law Center
7 Winthrop Square,
Boston, MA 02110

Re: Misleading Statements and Flawed Methodology in Center for Responsible Lending’s Report on Earned Wage Access and National Consumer Law Center’s Endorsement

Dear Messrs. Calhoun, Eaks, and Dubois:

On behalf of the American Fintech Council (AFC) and its members, I am writing to you both to convey my deep concerns regarding the Center for Responsible Lending’s (CRL) recently issue report on Earned Wage Access (EWA) products, and the National Consumer Law Center’s (NCLC) resounding endorsement of the report and its recommendations. AFC and its members believe in robust and pragmatic discussions regarding the proper regulatory frameworks for innovative financial products and services across the financial services landscape. Specifically related to EWA, AFC has long supported the creation of regulatory frameworks in states across the country for EWA products that ensures a strong consumer protection focused standard. In this vein, we welcome all stakeholders and actively pursue opportunities to collaborate and learn from individuals that hold differing views on prudent regulation for the modern financial services industry.

The authors of the CRL report demonstrated a complete misunderstanding of the Earned Wage Access product and industry. Further, I am disappointed by the findings of the report due to their overall lack of contextual sophistication and deeply dismayed at the manner that this research was conducted due to the use of unsound methodologies, a disregard for proper standards of evidence, and a manipulation of source documents that is unbecoming organizations of your caliber and sophistication. Below, I have detailed our specific concerns with the EWA report and its recommendations for your consideration.

I. EWA is Not a Loan and Should Not Be Regulated as Such

EWA is not a loan and should not be regulated as such. At its heart, lending, requires the disbursement of funds that would not under any circumstances be previously entitled to an individual. Whether the loans are for education, consumer purchases, or a home, the consumer does not have any existing entitlement to these funds. Conversely, EWA is the early and rapid disbursement of funds previously accrued by an individual due to the work they have performed as part of their employment. While some may incorrectly argue that EWA operates the same as lending, it comes down to the entitlement, ownership, or rights to the funds requested. If we were to return to a society that provided piecemeal wages on a daily basis to individuals, as opposed to the current protracted time and attendance system that is ubiquitous in the U.S. workforce, we could easily see the relevant distinction play out. Thus, the perspective that we should regulate EWA products in the same manner as lending products belies a categorical misunderstanding of the EWA product and how it differs from lending products.

In practice, EWA is a solution to the socially constructed time and attendance system that is in common practice within our workforce, and operates as a responsible alternative to high-cost products, like payday loans and overdraft fees. It enables employees to access wages they have already earned prior to their bi-weekly or monthly payday when they are short on funds between paychecks.

Importantly, EWA transactions have no-recourse, interest, late fees, credit impacts, underwriting and cost based on risk. Data from our members finds that the average amount of earned wages accessed by most consumers is about $115 to $150, once a pay period. Most users access their wages to pay bills that come with late fees, like utility bills, credit card bills, and childcare; and typically utilize one platform for about three months.

While there are usually some small costs associated with EWA, at least one “no cost” option is offered by most EWA providers, such as through a debit card, or a next business day ACH bank transfer. A nominal fee of about $3 for instant delivery to any bank account is also common. According to one Study from professors at Harvard and Yale, in 2020, US households made approximately 56 million withdrawals from EWA providers totaling approximately $9.5 billion in services to US workers.

II. The CRL Report Contained Numerous Material Inaccuracies and Relied on an Unsound Methodology to Substantiate its Findings

Upon review of the report, we found that its findings rely on material inaccuracies of cited source documents that misconstrue the source’s intent and fail to provide relevant context related to the source’s arguments. For example, the CRL authors cite a U.S. Government Accountability Office (GAO) report regarding the harms caused by EWA products. However, upon review of the report, it is clear that GAO did not assert that these harms would occur, but that they merely could occur. Also, GAO properly noted that these concerns were largely raised by consumer groups they interviewed, which included CRL and NCLC. By simply citing the GAO report without providing the additional relevant context that these harms were not definite and were originally provided to GAO by the very consumer groups citing the report is a material obfuscation of the findings within the GAO report.

The authors of the CRL report also, at times, blatantly misrepresent the information found in the source documents. For example, when citing the optional tip range in the report, the CRL report authors stated that “one prominent lender prompts users to pay a default tip, ranging from $2 to $14 dollars, depending on the amount of the loan they request”. However, review of the source document (i.e. testimony from a panelist in the House Committee on Financial Services hearing) clearly identifies that the panelist noted the allowable range for an optional tip was from $0 to $14.

Also, the CRL authors mischaracterized the costs that EWA providers shoulder to provide their services to consumers, incorrectly stating that “[t]he actual cost of providing the [EWA] service is less than $.05”. To substantiate this claim, the CRL authors cited The Clearing House’s RTP Network Fees for credit transfers sent. However, claiming that EWA providers’ costs are solely related to the RTP Network Fees is a complete assumption of the costs that EWA providers shoulder. Nowhere in the source document does it note that the cited cost is related to EWA providers. Further, The Clearing House only allows federally insured depository institutions to participate directly in their network, and thus would assess the Network Fee on the partnered financial institution. The EWA provider might face additional fees from their partnered financial institution per the terms and conditions established in their contracts. None of which are discussed by the CRL authors. The above examples represent poor research habits by the CRL authors and a lack of contextual sophistication about the EWA topic that are necessary for properly crafting policy recommendations on the issue.

Beyond the misleading statements, the CRL authors also draw hasty generalizations about the EWA industry that rely on anecdotal information and insufficient quantitative analysis for the magnitude of the authors’ claims in their report. Even rough estimates inferred from the 2020 market data above suggest that the United States’ EWA market is a multi-billion dollar industry serving millions of workers. Any generalizable claims based on quantitative analysis should be derived from a sample size proportionate to the market size. Unfortunately, the CRL authors used data from just 300 respondents to a survey the organization previously issued to make generalized statements about the practices of the industry and how consumers use EWA products. Further, the CRL authors made generalized statements about consumer practices based on the testimonial evidence of one charity-backed EWA provider. Simply put, the aforementioned data is woefully insufficient to establish a generalizable claim about the EWA industry that adequately captures the myriad of consumer experiences and industry practices. Therefore, any general claims derived from this data are methodologically unsound.

Ultimately, the level of inaccuracy and unsound methodologies used to support the claims made in the CRL report severely undercuts integrity, objectivity, and legitimacy of NCLC and CRL, as thought leaders, and calls into question your organizations’ policy research frameworks and accountability mechanisms.

III. The CRL Report Levied Recommendations that are Infeasible and Suffer and Belie an Inherent Misunderstanding of the EWA Industry, Regulatory Limitations, and the Impacts of Statutory Language

The analytical and methodological issues noted above wholly delegitimize the recommendations put forth in the report. However, putting those issues aside for a moment, the recommendations still belie a lack of contextual sophistication about lending laws, practices, and the EWA industry, which results in the recommendations coming across as utterly infeasible and impractical. In brief, AFC and its members believe that the recommendations in the CRL report fundamentally misunderstand the nuances of EWA products, regulatory limitations, and the unintended outcomes of improperly devised and overly broad statutory definitions. Therefore, we have the following concerns with the recommendations stated in the report:

• The data reporting recommendation levied by the CRL authors is inconsistent with the established data collection practices of any other financial product or service, especially those found in lending. Even the Home Mortgage Disclosure Act does not require the collection of the types of data recommended in the CRL report. This type of data collection would create an undue cost burden and level of scrutiny on EWA providers that is not even given to payday lenders. Thus, EWA providers would face even higher costs of conducting their businesses than payday lenders and would lose out on competitive advantages that make their business feasible. Ultimately consumers could lose access to EWA products due to their inability to compete with payday lenders.
• CRL’s recommendations related to tipping attempt to cover tips and other voluntary charges through a cost calculation underpinning CRL’s “cost cap”. However, capturing these voluntary charges in a cost calculation is incongruent with the established cost calculations in the Truth-in-Lending Act (TILA). In TILA, none of the charges that consumers opt into, such as tips, are considered finance charges since the charges are not required or imposed on a consumer in order for the transaction to proceed. To add voluntary tipping charges as a finance charge would be incongruous with the definition of “finance charge” in TILA. Further, even if EWA providers were subject to TILA, including tipping charges into an APR disclosure would require the EWA provider to make an assumption about the tip that they would receive from the consumer for the service provided. An assumption like this could create an incorrect APR and would violate existing Unfair, Deceptive, Acts or Practices laws.
• The sample loan definition provided in the report does not match any existing legal definition and is overly broad in a manner that could inadvertently capture tax refunds, gambling winnings from sports betting, and other similar income as defined under the Internal Revenue Service’s definition of Gross Income. Ultimately, the use of the proposed loan definition could create a complete lack of clarity as to lending and other related services.
• CRL’s recommendation of disallowing any EWA provider except for employer-integrated providers inherently limits the choices available to consumers. This recommendation disproportionately harms individuals that work at small businesses. It also establishes a barrier to service, ultimately leaving consumers without access to any low- or no-cost way to access their wages. Thus, they simply cannot cover their expenditures when they occur and suffer higher cost ramifications, such as overdraft fees, late fees, or worse yet, cancellation of service or repossession of property.

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Ultimately, this report does little to advance the dialogue about the proper regulatory framework for EWA providers in any pragmatic or grounded manner. Instead, the views and recommendations promulgated by CRL and further championed by NCLC are fruit from a poisoned tree, and therefore should be viewed with caution by policymakers, regulators, and other researchers.

The continued use of this research by CRL and NCLC to help achieve their policy and advocacy aims is tantamount to knowingly spreading misinformation to consumers and policymakers and conducting unfair or deceptive acts or practices, something has been explicitly prohibited by consumer protection laws for financial service providers when offering their products and services to consumers.

As we have expressed to you and your respective staff on multiple occasions, we are ready, willing, and able to work with you to find the appropriate balance between creating access to credit and ensuring consumer protections. It is my sincere hope that AFC can work constructively with CRL and NCLC to ensure they properly understand the EWA industry and develop pragmatic and implementable recommendations that benefit both consumers and responsible EWA actors.

Sincerely,

Phil Goldfeder, CEO
American Fintech Council