A key issue for earned wage access (EWA) programs is whether they constitute “credit” for purposes of federal consumer financial protection laws such as TILA, ECOA, and the CFPA, or under state law. The Treasury Department’s General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals includes a proposal concerning how EWA programs should be characterized for tax purposes.
The proposal would amend the Internal Revenue Code to clarify that EWA arrangements (which the Treasury refers to as “on-demand pay arrangements”) are not loans. It would also add a definition of on-demand pay arrangements to the IRC. Such arrangements would be defined as “as an arrangement that allows employees to withdraw earned wages before their regularly scheduled pay dates.”
In November 2020, the CFPB issued an advisory opinion (AO) 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.
The CFPB expressly limited the AO’s application to EWA programs meeting all of the characteristics set forth in the AO. Earlier this year, Seth Frotman, now CFPB General Counsel, stated that “products that include the payment of any fee, voluntary or not, are excluded from the scope of the advisory opinion and may well be TILA credit.” He also indicated that more clarity on these issues was needed from the CFPB.
While the proposal provides helpful support for the position of EWA program providers that such programs should not be regulated as “credit” products, it is unclear whether, if adopted, the CFPB or state regulators would deem the IRC’s treatment of EWAs determinative of their treatment for consumer financial protection laws. For example, the California Department of Financial Protection and Innovation (DFPI), exercising its expanded jurisdiction over consumer financial services providers under the California Consumer Financial Protection Law (CCFPL), entered into memorandums of understanding with five EWA companies in early 2021. In doing so, the DPFI appeared to be taking an expansive view of who are “covered persons” under the CCFPL by considering companies to be offering a “consumer financial product or service” as defined in the CCFPL even when the product or service did not constitute “credit” for purposes of TILA and Regulation Z.