Truth in Lending (Regulation Z); Consumer Credit Offered to Borrowers in Advance of Expected Receipt of Compensation for Work

<RULE> CONSUMER FINANCIAL PROTECTION BUREAU <CFR>12 CFR Part 1026</CFR> <DEPDOC>[Docket No. CFPB-2024-0032]</DEPDOC> <SUBJECT>Truth in Lending (Regulation Z); Consumer Credit Offered to Borrowers in Advance of Expected Receipt of Compensation for Work</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Consumer Financial Protection Bureau. <HD SOURCE="HED">ACTION:</HD> Advisory opinion rescinding previous advisory opinion. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Consumer Financial Protection Bureau (CFPB) is issuing this advisory opinion to rescind an advisory opinion it issued in November 2020 that described how one particular type of “earned wage” product does not involve the offering or extension of “credit” as that term is defined in the Truth in Lending Act and Regulation Z. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> This advisory opinion is applicable January 15, 2025. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> George Karithanom, Regulatory Implementation & Guidance Program Analyst, Office of Regulations, at 202-435-7700 or at: <E T="03">https://reginquiries.consumerfinance.gov/.</E> If you require this document in an alternative electronic format, please contact <E T="03">CFPB_Accessibility@cfpb.gov.</E> </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Advisory Opinion</HD> <HD SOURCE="HD2">A. Background</HD> One major source of demand for consumer credit is derived from the mismatch of when American workers receive compensation for their labor and when they incur expenses. While there have long been sources of credit for consumers to pay expenses in advance of receiving their compensation, there are a number of new offerings that seek to provide additional choices for consumers. Instead of being paid daily or upfront, American workers generally provide services before employers pay for those services some time later—typically on a biweekly or semi-monthly wage cycle. <SU>1</SU> <FTREF/> Employers have a strong incentive to delay payment, since these delays reduce working capital needs. Nearly three-quarters of non-farm payroll employees remain paid biweekly or even less frequently, and the remainder are generally paid their wages weekly. To address liquidity challenges, many consumers therefore turn to credit products, such as payday loans, personal installment loans, and credit cards. In recent years, American consumers have significantly expanded their use of products sometimes marketed as “earned wage access” or “earned wage advance.”  <SU>2</SU> <FTREF/> As these paycheck advance products generally have features that make them subject to the CFPB's jurisdiction, the CFPB has sought to understand these and other products, particularly those offered online, by engaging in ongoing monitoring of the market, including, for example, collecting and analyzing data, engaging with stakeholders ( <E T="03">e.g.,</E> market participants, consumer groups, and States), tracking and studying market developments, and conducting market research, among other things. <FTNT> <SU>1</SU>  While the terms “employer” and “employee” are used throughout, this advisory opinion applies more broadly to situations where consumers receive payment for work performed. </FTNT> <FTNT> <SU>2</SU>  A recent CFPB report describes rapid recent growth in one part of this developing market. <E T="03">See</E> CFPB, <E T="03">Developments in the Paycheck Advance Market,</E> at 3 (July 2024) (hereinafter <E T="03">2024 Paycheck Advance Report</E> ). </FTNT> While many of these products have similarities to payday loans, there are important distinctions. The CFPB has found that there are two emerging models of earned wage products: employer-partnered and direct-to-consumer. For “employer-partnered” products, providers contract with employers to offer funds in amounts not exceeding accrued wages. Those funds are recovered via one or more payroll deductions, lowering the consumer's paychecks accordingly, with other recourse options generally unavailable to the provider. In contrast, “direct-to-consumer” products provide funds to employees in amounts that are not as strictly limited by accrued wages. Some of these products limit advances to an amount <E T="03">estimated</E> to be below accrued wages and do not consider other factors. Others consider estimated accrued wages as one of several factors when determining the amount to advance. Still others do not expressly state that estimated accrued wages are a factor considered despite being marketed as earned wage products. Regardless of the exact model, funds are generally recovered via automated withdrawal from the consumer's bank account, <SU>3</SU> <FTREF/> and generally without limit to the provider's ability to seek further recourse as necessary. <SU>4</SU> <FTREF/> <FTNT> <SU>3</SU>  This includes, without limitation, prepaid and payroll card accounts. </FTNT> <FTNT> <SU>4</SU>  As described, direct-to-consumer products lie outside the scope of the “wage advance” (12 CFR 1041.3(d)(7)) and “no cost advance” (12 CFR 1041.3(d)(8)) exclusions from the CFPB's 2017 Payday Rule. Employer-partnered products, however, may be (but are not necessarily) within the scope of one exclusion or both, with their revenue model particularly relevant to that determination. <E T="03">See</E> 12 CFR 1041.3(d)(7)(ii)(A), (d)(8). </FTNT> Some of the differences between these two types of earned wage products, however, are starting to erode. For example, some direct-to-consumer providers are now connecting directly to payroll records and recouping funds from payroll deductions, and ongoing State legal developments may cause them to limit their recourse options as well. <SU>5</SU> <FTREF/> <FTNT> <SU>5</SU>   <E T="03">See 2024 Paycheck Advance Report, supra</E> note 2, n.7. Several recently enacted State laws prohibit providers of earned wage products, including direct-to-consumer products, from compelling consumer repayment of earned wage amounts and fees through various means, such as lawsuits or third-party debt collection. <E T="03">See, e.g.,</E> Mo. Rev. Stat. § 361.749(5)(6) (2023); Wis. Stat. § 203.04(2)(f) (2023); <E T="03">cf.</E> Mont. Op. Att'y Gen., Vol. 59, Op. 2 (Dec. 22, 2023) (finding earned wage products do not meet the state law definitions of “consumer loan” or “deferred deposit loan” when they are “fully non-recourse,” among other criteria). </FTNT> Before the CFPB's market monitoring of these products intensified, the CFPB issued an advisory opinion in November 2020, <SU>6</SU> <FTREF/> that described how one particular type of earned wage product does not involve the offering or extension of “credit” as that term is defined in the Truth in Lending Act (TILA) and Regulation Z (2020 Advisory Opinion). <SU>7</SU> <FTREF/> The opinion explained that an earned wage product is not TILA or Regulation Z credit if it meets <E T="03">all</E> of several identified conditions, including: providing the consumer with no more than the amount of accrued wages earned; provision by a third party fully integrated with the employer; no consumer payment, voluntary or otherwise, beyond recovery of paid amounts via a payroll deduction from the next paycheck, and no other recourse or collection activity of any kind; and no underwriting or credit reporting. <SU>8</SU> <FTREF/> The 2020 Advisory Opinion was silent about whether earned wage products that do not meet all of these conditions are credit under TILA and Regulation Z. <SU>9</SU> <FTREF/> <FTNT> <SU>6</SU>  Truth in Lending (Regulation Z); Earned Wage Access Programs, 85 FR 79404 (Dec. 10, 2020). </FTNT> <FTNT> <SU>7</SU>  Regulation Z defines credit at section 12 CFR 1026.2(a)(14). </FTNT> <FTNT> <SU>8</SU>   <E T="03">See 2020 Advisory Opinion, supra</E> note 6, at 79405-06. </FTNT> <FTNT> <SU>9</SU>  The opinion stated that it had no application to such products. <E T="03">Id.</E> at 79408 (“This advisory opinion applies solely to the question of whether Covered EWA Programs ( <E T="03">i.e.,</E> those meeting all of the characteristics described in part I.B above) fall under the definition of credit in section 1026.2(a)(14) of Regulation Z identified above. This advisory opinion has no application to any other circumstance, and it does not offer a legal interpretation of any other provisions of law.”). </FTNT> In July 2024, the CFPB proposed an interpretive rule on this same topic (2024 Proposed Interpretive Rule) and voluntarily sought public comment. The comment period closed on August 30, 2024. <HD SOURCE="HD2">B. Legal Analysis</HD> The CFPB is rescinding the 2020 Advisory Opinion for two fundamental reasons: (i) its legal analysis is significantly flawed in numerous respects; and (ii) it engendered substantial regulatory uncertainty. <HD SOURCE="HD3">1. The 2020 Advisory Opinion's Legal Analysis Is Significantly Flawed in Numerous Respects</HD> Section 1026.2(a)(14) of Regulation Z defines “credit” as “the right to defer payment of debt or to incur debt and defer its payment.”  <SU>10</SU> <FTREF/> TILA defines “credit” virtually identically as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.”  <SU>11</SU> <FTREF/> However, TILA and Regulation Z do not define “debt.” Regulation Z provides that undefined terms “have the meanings given to them by state law or contract.”  <SU>12</SU> <FTREF/> <FTNT> <SU>10</SU>  12 CFR 1026.2(a)(14). </FTNT> <FTNT> <SU>11</SU>  15 U.S.C. 1602(f). </FTNT> <FTNT> <SU>12</SU>  12 CFR 1026.2(b)(3). </FTNT> The first analytical flaw of the 2020 Advisory Opinion is that its consideration of the meaning of “debt” under state law was insufficient. It did ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 20k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━