The CFPB has issued an approval order through its Compliance Assistance Sandbox Policy (CAS Policy) to Payactiv in connection with its earned wage access (EWA) program.
The approval order confirms that Payactiv’s EWA program described in the order does not involve the offering or extension of “credit” as defined by section 1026.2(a)(14) of Regulation Z, and therefore, Payactiv has a safe harbor from liability under TILA and Regulation Z in connection with the specified EWA program. EWA products provide employees with access to earned but as yet unpaid wages. Such products typically involve an EWA provider (such as Payactiv) that enables employees to request a certain amount of accrued wages, disburses the requested amounts to employees prior to payday, and later recoups the funds through payroll deduction or bank account debits on the subsequent payday. The approval order is limited to Payactiv’s EWA program that recovers funds through payroll deductions, and excludes other programs that recover funds by debiting employee bank accounts.
The CFPB instituted the CAS Policy in 2019 in an attempt to encourage innovation through the testing of financial products that could benefit consumers but might pose regulatory uncertainty. Under the CAS Policy, a sandbox applicant can obtain approvals, as applicable, under the provisions of the TILA, ECOA, and EFTA that provide a safe harbor from liability under such laws in federal or state enforcement actions and private lawsuits for actions taken or omitted in good faith in conformity with the Bureau’s approvals.
In December 2020, the Bureau issued an advisory opinion dealing with EWA products that addressed whether an EWA program with the characteristics set forth in the AO was covered by Regulation Z. Such characteristics included the absence of any requirement by the provider for an employee to pay any charges or fees in connection with the transactions associated with the EWA program and no assessment by the provider of the credit risk of individual employees. The AO set forth the Bureau’s legal analysis on which it based its conclusion that the EWA program did not involve the offering or extension of “credit” within the scope of Regulation Z. In the AO, the Bureau indicated that there may be EWA programs with nominal processing fees that nonetheless do not involve the offering or extension of “credit” under Regulation Z and advised that providers of such programs could request clarification about a specific fee structure by applying for an approval under the CAS Policy.
Payactiv’s EWA program that is the subject of the approval order allows enrolled employees to access their earned wages through various means that include a Payactiv-branded prepaid debit or payroll card (on which the employee’s wages are direct deposited) or an ACH deposit to a checking or deposit account or prepaid card. Employees who do not have their wages deposited to a Payactiv-branded prepaid debit or payroll card are charged a non-recurring $1 fee for access to an unlimited number of transactions during a one-day access window, with the fees capped at $3 for a one week pay period or $5 for a bi-weekly pay period if the employee accesses EWA funds on multiple days during a single pay period.
In concluding that Payactiv does not offer or extend credit under the EWA program as described in Payactiv’s application, the Bureau notes that various features often found in credit transactions are absent from Payactiv’s program. For example, Payactiv has no rights against the employee if a payroll deduction is insufficient to cover the amount of already earned wages transferred to an employee. With regard to fees, the Bureau notes that no interest or other fees are charged against a transfer of earned wages, ensuring that the amount PayActiv is entitled to recover does not increase over time. The Bureau states that “the absence of interest and fees other than the non-recurring $1 fee demonstrates that Payactiv is not taking on the type of credit risk characteristic of a typical credit transaction.” (The Bureau notes that the approval order expresses no view on whether the $1 fee “would amount to a finance charge in an EWA or wage advance program under which Regulation Z credit was offered or provided.”)
Other characteristics noted by the Bureau as distinguishing Payactiv’s program from many credit transactions include that Payactiv does not (1) pull credit reports or credit scores on employees or otherwise assess their credit risk, (2) report information to consumer reporting agencies, or (3) engage in debt collection activities or place amounts as debt with, or sell such amounts to, any third party.
The Bureau also identifies “additional factors” it considered in issuing the approval order. Such factors include the EWA program’s “innovative mechanism for allowing consumers to bridge the gap between paychecks; its potential to provide consumers with a lower-cost alternative to traditional payday loans, other high-cost credit products, and overdraft fees; and its availability to unbanked or underbanked consumers or consumers with poor, limited, or no credit history.”
The Payactiv approval order has a 24-month duration. It is interesting to note that the copy of Payactiv’s program terms and conditions that was attached to its application as an appendix includes a mandatory arbitration provision that does not permit class arbitration.
The Bureau also noted in the approval order that the order expresses no view on whether Payactiv’s EWA program complies with state wage and hours laws. EWA programs can also raise licensing and usury issues under state law notwithstanding the Bureau’s conclusion that Payativ’s EWA program does not involve the offering or extension of “credit” as defined by TILA and Regulation Z.