On 12/30/2020, the CFPB issued a follow-up order in response to its advisory opinion on Earned Wage Access from a month earlier, 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.
Key Highlight #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 certain EWA providers would be perceived as not issuing loans. 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.
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 Highlight #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 Highlight #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.