Earned Wage Access Consumer Protection Act: A Guide to the Rapid Growth and State of Play

The Earned Wage Access Consumer Protection Act is a rapidly growing movement in the US, with several states already implementing or considering similar legislation. This act aims to regulate the earned wage access industry, which provides employees with access to their earned wages before payday.

Some states, like California, Colorado, and Washington, have already passed bills to regulate earned wage access. These laws often require employers to provide employees with access to their earned wages on a daily or weekly basis.

The rapid growth of the Earned Wage Access Consumer Protection Act is largely driven by the need for financial stability among low-income workers. According to the article, over 40% of employees in the US live paycheck to paycheck, highlighting the importance of providing access to earned wages.

The act also aims to protect employees from predatory lending practices, which can trap workers in a cycle of debt. By regulating the earned wage access industry, lawmakers hope to ensure that employees are not being taken advantage of.

The Earned Wage Access Consumer Protection Act (EWA) has proposed several measures to regulate EWA providers and protect consumers. The act defines EWA providers and sets strict operational boundaries, regulating both employee-sponsored programs and direct-to-consumer offerings.

A key provision of the EWA bill requires EWA companies to provide a fee-free option for accessing earned wages, aiming to enhance the financial wellbeing of workers who use these services. This provision is particularly impactful, potentially reducing the overall cost of accessing earned wages early.

The EWA bill also prohibits EWA companies from using debt collectors, which aims to prevent aggressive repayment practices and ensure that the services do not lead to additional financial burdens on customers.

Here are the key regulatory requirements proposed by the EWA bill:

The proposed Interpretive Rule for EWA products has been met with criticism, which would significantly impact individuals who utilize EWA products as well as employers and Fintech companies. The rule would classify EWA products as extensions of credit under TILA and Regulation Z, requiring stricter disclosure requirements and compliance with Regulation Z.

The EWA Bill Provisions offer a clear direction for the industry and consumers alike. The bill defines EWA providers and sets strict operational boundaries.

Regulating both employee-sponsored programs and direct-to-consumer offerings is a key aspect of the bill. This ensures that EWA companies operate within a clear framework.

A notable feature of the bill is the requirement for EWA companies to provide a fee-free option for accessing earned wages. This aims to enhance the financial wellbeing of workers who use these services.

This provision is particularly impactful for low-income workers who often rely on EWA services to bridge gaps between paychecks. The bill also prohibits EWA companies from using debt collectors.

The advancement of this bill is seen as a significant win for the EWA industry. Federal regulation validates their business models and provides clarity that could spur further growth.

For consumers, the legislation promises greater security and transparency. The provision of a fee-free option reduces the overall cost of accessing earned wages early.

The Proposed Interpretive Rule for EWA Products has sparked controversy in the industry. The CFPB's proposed rule would classify EWA products as extensions of credit under TILA and Regulation Z.

Critics argue that this classification could make EWA products too expensive, with interest fees pricing out certain recipients. Employers may not be able to provide options for EWA products, hurting FinTech companies' ability to provide these products.

The proposed Interpretive Rule would require EWA providers, including Fintechs, to comply with TILA's disclosure requirements. This includes upfront disclosure to borrowers regarding the finance charges and a calculation of a single annual percentage rate inclusive of those charges.

The CFPB aims to provide transparency to employees about the true cost of entering into EWA transactions. However, Fintechs and EWA providers have opposed the efforts to characterize their products as traditional credit.

Some of the changes the Interpretive Rule would bring include:

The American FinTech Council and the Financial Technology Association have both opposed the proposed interpretive ruling, arguing that EWA products are non-recourse and do not require a credit check.

The Earned Wage Access Consumer Protection Act is designed to regulate the way employers provide access to earned wages.

Employers are required to provide employees with regular pay statements, detailing the amount of wages earned and any deductions made.

The law also requires employers to provide employees with clear information about the fees associated with earned wage access programs.

Employers are prohibited from charging employees a fee for accessing their earned wages, except in certain circumstances.

Employees have the right to opt-out of earned wage access programs at any time.

The earned wage access industry has experienced rapid growth, with over 7 million workers getting $22 billion in advances in 2022.

Many employers cover the costs of earned-wage access services, but not all do, and employees who use these services can end up paying high fees.

Employer-sponsored earned-wage access programs typically carry an annual percentage rate of nearly 110%.

Direct-to-consumer providers often charge additional fees, including a monthly subscription fee that can range up to $14.99.

Additional reading: Credit Card Fees New York

The Fintech industry is growing rapidly, but with great advancement comes a multitude of regulations that bring on compliance risks, challenges, and complications for Fintech companies.

Fintech companies are facing significant challenges with the proposed Interpretive Rule for EWA products. This rule would classify EWA products as extensions of credit, requiring Fintechs to comply with TILA's disclosure requirements.

Employers and Fintechs could be subject to continuous monitoring of regulatory requirements to be in compliance with Regulation Z, including regular internal audits to meet compliance requirements.

The proposed Interpretive Rule would also make EWA products too expensive for some recipients, as critics argue that it could classify transactional fees as interest-bearing loans, pricing out certain recipients.

Here are the four main changes the proposed Interpretive Rule would bring:

Fintechs and EWA providers have opposed the efforts to characterize their products as traditional credit, arguing that tips and expedited fees are voluntary rather than mandatory and, therefore, should not be considered finance charges.

Earned-wage access products are growing rapidly, with over 7 million workers getting $22 billion in advances in 2022.

The number of employer-partnered transactions processed grew by more than 90% from 2021 to 2022.

Employees using earned-wage access services from their employers took out an average of 27 advances per year, with an average transaction amount of around $106.

Many employers cover the costs of earned-wage access services, but not all do.

Employer-sponsored earned-wage access programs typically carry an annual percentage rate of nearly 110%.

Expediting fees, averaging around $3.18, made up 92.5% of total fee revenue for earned-wage access products.

Direct-to-consumer providers sometimes charge additional subscription fees, which can range as high as $14.99 per month.

Earned-wage access (EWA) products are being regulated at the state level, with some states taking a more permissive approach than others.

Nevada, Missouri, Wisconsin, and South Carolina have enacted laws declaring EWA advances aren't loans and aren't subject to the same disclosures and rules as payday and other nonbank lenders.

California regulators are working on rules that would treat EWA advances as loans, while Connecticut has put in place tough rules for EWA products.

The CFPB's proposed interpretive rule aims to provide clarity on the regulation of EWA products, but its interaction with more permissive state laws is unclear at this point.

Here's a breakdown of some key state laws and regulations:

The CFPB's proposal is intended to address the call for further clarity on contradictory state laws, but it remains to be seen how it will interact with existing state regulations.

Several states have taken the lead in shaping the rules for earned-wage access.

Legislators in Nevada, Missouri, Wisconsin, and South Carolina have enacted laws that exempt earned-wage access advances from loan-like regulations.

Regulators in California are working on rules that would treat these advances as loans.

Connecticut has implemented tough rules for earned-wage access products.

The CFPB's interpretive rule may interact with these state laws in unclear ways.

The House Financial Services Committee approved a measure to exempt early-pay products from credit regulations, but it's unlikely to pass in the Senate.

Curious to learn more? Check out: Consumer Lending Laws