On December 30, 2020, the CFPB issued a follow-up order in response to its November 30, 2020 EWA advisory opinion, which provides guidance on certain earned wage access (EWA) programs (sometimes known as on-demand pay programs). In a stunning blow to the community of EWA providers who debit, the CFPB explicitly excluded debiting practices from the safe harbor. Instead, it validated the employer-based, non-recourse approach pioneered and championed for years by DailyPay.
In its follow-up order from 12/30/2020, the CFPB indicated that earned wage access providers that leverage debiting as a form of payback cannot rely on a credit safe harbor, and are likely to be seen as making extensions of credit. This is the first time a federal agency has held as such, intentionally excluding on-demand pay business models that rely on employee account debiting for repayment.
The CFPB’s approval order provides clarity around specific practices including employee payback and payroll deductions.
For reference, DailyPay has never required any form of employee payback or payroll deduction that would implicate the extension of credit, and therefore DailyPay has never been within the purview of either the November CFPB opinion or the December CFPB order.
Why did the CFPB issue a follow-up order on Earned Wage Access?
A specific provider (PayActiv) requested this follow-up order because it was at risk of being deemed non-compliant with the CFPB’s initial advisory opinion on earned wage access. Under the CFPB policy, providers can request clarity on specific points that deal with regulatory uncertainty. Because the Bureau’s November 30 opinion identified specific at-risk models that might be considered extenders of credit, this provider requested a review of their at-risk set of facts.
The opinion does not grant any approval of the specific model itself. In fact, the CFPB follow-up order states that the “Approval Order does not constitute the Bureau’s endorsement of the PayActiv EWA Program or any other product or service offered or provided by PayActiv.”
What Are the Key Takeaways of the December 30 CFPB EWA Approval Order?
Key Takeaway #1: Utilizing debiting as a form of EWA payback is likely to be considered an extension of credit.
The CFPB approval order specifies a narrow set of circumstances in which the requesting entity, PayActiv, would be perceived as not issuing loans.
However, the order intentionally excludes providers that utilize debiting as for payback, suggesting that these types of providers are deemed to be extending credit. The order’s scope is limited only to states where wage deductions are legal. In other states, where debiting is the only form of payback that providers can leverage because wage deductions are illegal, the CFPB indicates that such situations present the perception of credit.
Key Takeaway #2: Debiting consumer bank accounts continues to be a dangerous and strongly disfavored practice, both by the CFPB and other state authorities.
The CFPB’s order adds certainty around an area that has been highly discredited by state and federal authorities for many years. As the hallmark of payday lending practices, debiting as payback is a predatory practice. The CFPB order adds validity to this and indicates that debiting as a form of payback is specifically associated with the extension of credit.
Key Takeaway #3: Wage deductions continue to be illegal at the state level in many states. DailyPay has led the industry for years, avoiding both dangers — debiting and wage deductions. The CFPB order does not resolve existing legal prohibitions for the requesting provider (PayActiv) and for deduction models overall.
Even though the CFPB issued an EWA approval order, it does not eliminate the core compliance, tax and additional workflow implications caused by payroll deductions themselves (and, more importantly, the fact that laws in a number of states expressly restrict wage deductions). Regarding state prohibitions on deduction models, employers using wage deduction models to offer on-demand pay benefits to their employees are still at risk of violating wage and hour statutes, Department of Labor rules, and other rules and regulations.
Does the CFPB’s EWA Approval Order Impact the CFPB’s November 30 Opinion?
The CFPB’s Earned Wage Access advisory opinion from 11/30/2020 outlined a specific set of circumstances for EWA providers, who were at risk of being designated credit providers, to follow so as not to be considered lenders. This opinion already placed employee payback models generally at risk.
In the December approval order, debiting is expressly excluded from the credit safe harbor for EWA providers, and it indicates that any provider who leverages any form of debiting is likely to be considered an entity that extends credit.
DailyPay’s model is not impacted by either the November or December CFPB opinions. DailyPay has never used the wage deduction method, and does not need to rely on any such exemption. These exemptions only apply to providers that could be deemed to be extending credit. DailyPay has never and will never require any form of employee payback and thus does not fall within the purview of either opinion.
DailyPay continues to be the gold-standard on-demand pay provider in the market.