Offering CFPB-compliant earned wage access to your employees

The Consumer Financial Protection Bureau issued two groundbreaking notices at year-end, both involving earned wage access. These releases have provided regulatory certainty for one specific provider while potentially heightening regulatory uncertainty for the others.

The CFPB’s Advisory Opinion provides the following compliance criteria in order for an EWA provider to be exempt from the Truth-in-Lending Act so that the EWA product will not be considered a loan.

The criteria are:

• The EWA Program must be employer-based.
• EWA amounts cannot exceed the amount of earned but unpaid wages.
• EWA must be free, but a “nominal processing charge” may be permitted.
• Recovery of EWA amounts can only through payroll deduction.
• No legal recourse against an employee in the event of a failed deduction.
• Clear disclosures to users.
• No credit checks.

This means that, in order not to be considered credit under the Opinion, an EWA provider must offer earned wage access as a sponsored benefit through an employer. Direct-to-consumer models or providers that ask users for “tips” are not covered under the Opinion.

Another critical criterion is that the EWA provider can only recover the amounts that employees access through payroll deductions. The CFPB grounds its logic by stating that it “believes that a Covered EWA Program facilitates employees’ access to wages they have already earned, and to which they are already entitled, and thus functionally operates like an employer that pays its employees earlier than the scheduled payday.”

Read more: Is early wage access a benefit or just another loan?

This criterion necessarily excludes EWA providers that use intermediary accounts; specifically providers that require users to deposit their entire paycheck into a provider-controlled intermediary account which sits between the employer and worker.

Thus, such providers risk being considered a lender that must abide by both federal and state lending laws. This intermediary account model could also trigger wage assignments laws and may allow employees to access the full amount of their pay, leaving nothing, or even a negative balance on payday.

Following the Advisory Opinion, the CFPB issued anApproval Orderexpressly stating that one provider’s EWA Program is exempt from the aforementioned lending laws given (a) it is not a debt, (b) it only charges nominal fees, (c) it is payroll based with no recourse against the employee, (d) does not engage in underwriting, and (e) only facilitates employees’ access to wages they have already earned.

Currently, no other providers have such an approval order from the CFPB.

While states have their own set of rules, they often look to the CFPB for guidance. The New Jersey Assembly, for example, just passed the first ever law expressly recognizing earned wage access by unanimous consent. This unanimous and bipartisan approval demonstrates that state legislators see the value in EWA as well.

Overall, this regulatory clarity is fantastic news for employers and workers. The federal consumer financial watchdog has officially acknowledged that EWA is not only a new financial product, but also, “an innovative way for employees to meet short-term liquidity needs that arise between paychecks without turning to more costly alternatives like traditional payday loans.”