Truth in Lending (Regulation Z); Consumer Credit Offered to Borrowers in Advance of Expected Receipt of Compensation for Work

AGENCY:

Consumer Financial Protection Bureau.

ACTION:

Notice of proposed interpretive rule; request for comment.

SUMMARY:

The Consumer Financial Protection Bureau (CFPB) is charged with promoting competition and innovation in consumer financial products and services. After careful study of emerging offerings in the paycheck advance marketplace, including those marketed as “earned wage advances” and “earned wage access,” the CFPB is proposing this interpretive rule to help market participants determine when certain existing requirements under Federal law are triggered. The proposed interpretive rule would also address certain costs that are in substantial connection with extensions of such credit, such as expedited delivery fees and costs marketed as “tips.”

DATES:

Comments must be received by August 30, 2024.

ADDRESSES:

You may submit comments, identified by Docket No. CFPB-2024-0032, by any of the following methods:

• Federal eRulemaking Portal: https://www.regulations.gov. Follow the instructions for submitting comments.
• Email: 2024-Paycheck-Advance-Interpretive-Rule@cfpb.gov. Include Docket No. CFPB-2024-0032 in the subject line of the message.
• Mail/Hand Delivery/Courier: Comment Intake—2024 Paycheck Advance Interpretive Rule, c/o Legal Division Docket Manager, Consumer Financial Protection Bureau, 1700 G Street NW, Washington, DC 20552. Because paper mail in the Washington, DC area and at the CFPB is subject to delay, commenters are encouraged to submit comments electronically.

Instructions: The CFPB encourages the early submission of comments. All submissions must include the document title and docket number. In general, all comments received will be posted without change to https://www.regulations.gov. All submissions, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Proprietary information or sensitive personal information, such as account numbers or Social Security numbers, or names of other individuals, should not be included. Submissions will not be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT:

George Karithanom, Regulatory Implementation & Guidance Program Analyst, Office of Regulations, at 202-435-7700 or at: https://reginquiries.consumerfinance.gov/. If you require this document in an alternative electronic format, please contact CFPB_Accessibility@cfpb.gov.

SUPPLEMENTARY INFORMATION:

I. Background

One major source of demand for consumer credit is derived from the mismatch of when American workers receive compensation for their labor and when they incur expenses. While there have long been sources of credit for consumers to pay expenses in advance of receiving their compensation, there are a number of new offerings that seek to provide additional choices for consumers.

Instead of being paid daily or upfront, American workers generally provide services before employers pay for those services some time later—typically on a biweekly or semi-monthly wage cycle. Employers have a strong incentive to delay payment, since these delays reduce working capital needs. Nearly three-quarters of non-farm payroll employees remain paid biweekly or even less frequently, and the remainder are generally paid their wages weekly. To address liquidity challenges, many consumers therefore turn to third-party credit products, such as payday loans, personal installment loans, and credit cards. In recent years, American consumers have significantly expanded their use of products sometimes marketed as “earned wage access” or “earned wage advance.” As these paycheck advance products generally have features that make them subject to the CFPB's jurisdiction, the CFPB has sought to understand these and other products, particularly those offered online, by engaging in ongoing monitoring of the market, including, for example, collecting and analyzing data, engaging with stakeholders ( e.g., market participants, consumer groups, and States), tracking and studying market developments, and conducting market research, among other things.

While many of these products have similarities to payday loans, there are important distinctions. The CFPB has found that there are two emerging models of earned wage products: employer-partnered and direct-to-consumer.

For “employer-partnered” products, providers contract with employers to offer funds in amounts not exceeding accrued wages. Those funds are recovered via one or more payroll deductions, lowering the consumer's paychecks accordingly, with other recourse options generally unavailable to the third-party provider. In contrast, “direct-to-consumer” products provide funds to employees in amounts that they estimate to be below accrued wages; funds are then recovered via automated withdrawal from the consumer's bank account, and generally without limit to the provider's ability to seek further recourse as necessary.

Some of the significant differences between these two types of earned wage products, however, are starting to erode. For example, some direct-to-consumer providers are now connecting directly to payroll records and recouping funds from payroll deductions, and ongoing State legal developments may cause them to limit their recourse options as well.

Before the CFPB's market monitoring of these products intensified, the CFPB issued an advisory opinion in November 2020, that described how one particular type of earned wage product does not involve the offering or extension of “credit” as that term is defined in Regulation Z (12 CFR part 1026) and the Truth in Lending Act (TILA). The opinion explained that an earned wage product is not TILA or Regulation Z credit if it meets all of several identified conditions, including: providing the consumer with no more than the amount of accrued wages earned; provision by a third party fully integrated with the employer; no consumer payment, voluntary or otherwise, beyond recovery of paid amounts via a payroll deduction from the next paycheck, and no other recourse or collection activity of any kind; and no underwriting or credit reporting.

The 2020 advisory opinion was silent about whether earned wage products that do not meet all of these conditions are credit under TILA and Regulation Z. The opinion did not address what counts under TILA and Regulation Z as a finance charge with respect to any such product that is credit. As the CFPB has acknowledged, the 2020 advisory opinion appears to have caused significant regulatory uncertainty.

The CFPB is taking a number of steps to spur greater competition in markets for consumer financial products, including to address the credit needs of households who incur costs due to a mismatch in the timing of their income and expenses. In addition, some market participants and investors seek to better understand the applicability of existing federal law in these emerging business models. To provide greater clarity, the CFPB is proposing to replace the 2020 advisory opinion with a new interpretive rule. In light of the uncertainty caused by the 2020 advisory opinion as noted above and the fact that the CFPB is proposing to overturn and replace that opinion, the CFPB is opting to publish this proposed interpretive rule to solicit public comment. The proposed interpretive rule is informed by the CFPB's extensive study of this market, including data collection, continuous monitoring, investigation, coordination with states, and engagement with market participants. The CFPB is seeking comment on any aspect of this this proposed interpretive rule. The CFPB intends to publish a final interpretive rule after considering comments received.

II. Proposed Interpretive Rule

The text of the proposed interpretive rule is as follows.

A. Coverage

1. Earned Wage Products

This interpretive rule applies to products that involve both: (1) the provision of funds to the consumer in an amount that is based, by estimate or otherwise, on the wages that the consumer has accrued in a given pay cycle; and (2) repayment to the third-party provider via some automatic means, like a scheduled payroll deduction or a preauthorized account debit, at or after the end of the pay cycle. Many payday loans would also meet this definition where the lender or State law restricts the amount of the loan based on accrued wages.

2. Other Products and Other Laws

This interpretive rule only addresses the application of certain Regulation Z and TILA provisions; it does not address the application of any other laws that concern “credit.” Because the rule explains the applicability of Regulation Z, the rule may be useful to designers and creators of other financial products, including those relying on “tips” and other related payment mechanisms.

B. Legal Analysis

1. The Truth in Lending Act and Regulation Z Cover Products Where There Is an Obligation to Repay Debt

Section 1026.2(a)(14) of Regulation Z defines “credit” as “the right to defer payment of debt or to incur debt and defer its payment.” TILA defines “credit” virtually identically as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.” As described further below, earned wage products are consumer credit for purposes of TILA and Regulation Z.

TILA and Regulation Z do not define “debt.” Used infrequently in the statute and the regulation, “debt” for the most part only appears in the definition of “credit.” The term “debt” in ordinary usage means simply “something owed,” without any obvious limitation. Legal dictionaries, including those dating to the enactment of TILA, similarly describe debt as a “sum of money due by certain and express agreement” or “a financial liability or obligation owed by one person, the debtor, to another, the creditor.” If Congress had intended to substantially narrow the types of transactions that could constitute “debt,” it could have done so by defining the term in TILA. In light of this precedent, and the context in which the term “debt” appears in TILA, “debt” in TILA and Regulation Z includes any obligation by a consumer to pay another party.

This commonsense understanding of debt is reflected in State laws defining the term, which also tend to use very broad language to describe debt to mean an obligation by the consumer to pay. Bankruptcy law also uses a broad definition—“liability on a claim,” where a “claim” is “the right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”

The only enumerated consumer financial law identified in the Consumer Financial Protection Act that defines “debt,” the Fair Debt Collection Practices Act (FDCPA), broadly states that debt encompasses “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.” The main limiting feature in the definition of “debt” in the FDCPA is that it is limited to transactions for personal, family, or household purposes, a limitation already imposed elsewhere in TILA. The FDCPA definition, therefore, also supports a broad reading of “debt” under TILA and Regulation Z in this context, consistent with ordinary usage that includes all obligations to pay another.

In an earned wage transaction, the consumer incurs an obligation to pay money at a future date. For some earned wage products, the specific amount of money that the consumer is obligated to pay at a future date has an element of contingency; for example, the obligation may be limited by whether funds available from the next payroll event (or events) are sufficient to cover the amount of earned wage funds the consumer received. But that is still an obligation to pay money at a future date. TILA has long been understood to cover contingent obligations.

Earned wage products provide consumers with “the right to defer payment of debt or to incur debt and defer its payment” because they incur a “debt” when they obtain money with an obligation to repay via an authorization to debit a bank account or using one or more payroll deductions. It does not matter that the obligation to repay is sometimes satisfied via payroll deduction. It is still an act of repayment. In contrast, when an employer pays wages, no later act of repayment is required, by deduction or otherwise.

This interpretive rule replaces the advisory opinion the CFPB issued in November 2020, which stated that some earned wage products are not “credit” because they would not constitute a “debt.” A primary justification for this statement, based on a legal dictionary definition of “debt” requiring a “liability,” was that the narrow type of earned wage products covered by that opinion—which, among other characteristics, were administered through the employer and cost-free to the consumer—were “effectively” providing earned wages to consumers early and, therefore, were not debts. Per the analysis above, the 2020 advisory opinion—narrowly focused as it was on one unique type of product—did not consider the full scope of available precedent and definitions in common legal usage when reaching its narrow conclusion. Many credit products are used to gain liquidity in advance of receipt of a paycheck and thus will have some de facto resemblance to early payment of wages, but that does not take them outside the definition of credit. Earned wage products, as distinct from an employer's actual payment of wages, are no exception.

Moreover, because the 2020 advisory opinion only addressed one particular type of product, its analysis does not shed light on how TILA and Regulation Z apply to new offerings on the market. The 2020 advisory opinion found that the products it addressed “functionally operate[ ] like an employer that pays its employees earlier than the scheduled payday,” but earned wage products in which, for example, consumers make a payment in connection with receiving funds do not leave consumers in the same position that they would be if their employer just paid them earlier. While the 2020 advisory opinion emphasized the absence of fees or charges to support its conclusion that covered products were different in kind from the credit covered by TILA and Regulation Z, except on a small number of employer-specific products, the vast majority of earned wage transactions involve consumer payment.

2. Finance Charge Disclosures Include Consumer Payments That Are Made Incident to the Extension of Credit and Imposed by the Creditor Directly or Indirectly on the Consumer

a. General

In general, the obligations of Regulation Z apply to any credit provider that regularly offers or extends consumer credit subject to a finance charge. The finance charge is “the cost of consumer credit as a dollar amount.” Unless specifically excluded by the regulation, this includes “any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.” If providers do not disclose finance charges properly, they violate Regulation Z.

Neither Regulation Z nor TILA further explains the meaning of “incident to the extension of credit.” The statute's history and context indicate that Congress intended this term to be interpreted expansively. When TILA was enacted in 1968, Black's Law Dictionary defined “incident” to mean “anything which is usually connected with another, or connected for some purposes, though not inseparably.” The phrase “incident to the extension of credit” thus did not require that the degree of connection be significant. The Supreme Court, in a unanimous decision by Justice Thomas, noted in the context of TILA's finance charge provision that while “the phrase `incident to or in conjunction with' implies some necessary connection between the antecedent and its object . . . the phrase `incident to' does not make clear whether a substantial (as opposed to a remote) connection is required.” Thus, while a substantial connection may not be the minimum degree of connection required under Regulation Z and TILA for a payment to be part of the consumer's cost of credit, as an interpretive matter, any payment exacted by the creditor that is substantially connected must be part of the finance charge.

In addition, a payment may be “imposed directly or indirectly by the creditor” and hence part of the finance charge even if the credit can be obtained without making such payment. Regulation Z includes in the cost of credit payments imposed by the creditor that are “conditions of” the extension of credit and that are “incident to” it. By the same token, a creditor can “impose” a cost on a consumer—in the sense of exacting it from them—“directly or indirectly” even if that payment is not required for the extension of credit. The non-exhaustive list of finance charges provided in Regulation Z includes consumer payments that, even when they are not a condition of the extension of credit, are nonetheless finance charges because the creditor exacts them in connection with the extension of credit.

Two costs that consumers may incur in connection with particular extensions of earned wage credit are “tips” (and other similarly labeled payments, like “gratuities”) and expedited funds delivery fees. When incurred, these payments are substantially connected to the extension of credit. Each happens because of the associated extension of credit, and the connection between each type of payment and that extension is close and clear. Thus, each is incident to the extension of credit. Expedited funds delivery fees are also “imposed directly or indirectly by the creditor” and so should be included as part of the “cost of consumer credit as a dollar amount.” Under certain circumstances, discussed further below, “tips” and similarly styled consumer payments may similarly be “imposed directly or indirectly by the creditor” such that they are a part of the finance charge.

b. Expedited Funds Delivery Fees

Speed of access to funds is an integral and defining aspect of earned wage products. They are designed to address—and marketed as addressing—the liquidity problem that arises between the accrual of wages and their actual payment. That problem necessarily occurs in a very short period, so the value of this type of credit to the consumer includes the rapid availability of funds. Thus, when earned wage product providers offer two speeds for delivering funds (which they typically do), consumers predominantly opt for the faster. That option typically involves direct imposition of an expedited delivery or “instant funds” fee that the creditor does not impose on the slower form of credit.

Availability of a slower speed does not control the cost of credit for the faster form of credit. Though consumers may not have to opt for faster funds, when they do so, the resulting speed is a feature of the credit extended, so the resulting fee is part of the cost of credit. As observed by the Board of Governors of the Federal Reserve System, “even though a lender may not require a particular loan feature, the feature may become a term of the credit if it is included.” The speed with which earned wage credit provides liquidity to the consumer is an integral feature of such credit, which is why consumers tend to opt for faster delivery when it is available. Thus, when the consumer pays for that faster delivery, the associated fee is immediately and directly connected to the particular extension of credit. That substantial connection makes this “a fee imposed as an incident to that particular extension of credit,” and accordingly one that must be disclosed as part of the finance charge.

Regulation Z also covers expedited delivery fees as finance charges because such a fee is a “condition” of an extension of credit. As noted above, when an earned wage product provider offers a slower and faster loan, and the faster loan requires payment of an expedited delivery fee, the expedited delivery fee is a “condition” of the extension of that type of credit.

c. “Tips” and Similarly Labeled Payments

In connection with the extension of earned wage credit, some providers solicit consumers for what they variously describe as “tips,” “gratuities,” “donations,” “voluntary contributions,” or the like. The CFPB is aware of a wide range of practices used by credit providers to solicit these kinds of payments from consumers, including: default “tip” amounts that the consumer must remove each time to avoid being charged; suggesting particular “tip” amounts or percentages; suggesting or stating that “tips” serve to ensure the future supply of credit to the individual or other users; and including multiple prompts to “tip” throughout the process of receiving credit.

Whatever the exact practice used, when such “tip” payments are solicited and then paid in connection with the extension of credit, there is a clear and close connection between the “tip” and the associated extension of credit. In such circumstances, consumers pay the “tip” for the credit extended, and the credit is the direct and proximate cause of the “tip.” That substantial connection between payment and associated extension of credit means that the payment is “incident to . . . the extension of credit.” Indeed, as a practical matter, tips are a central source of revenue for the earned wage product providers that solicit them. For such providers, public data shows that consumers made “tip” payments in connection with about 73 percent of all such credit extensions, with such payments representing roughly the same share of consumer-side revenue for these providers.

As explained above, a payment may be “imposed directly or indirectly by the creditor” and hence may be part of the finance charge even if the credit can be obtained without making the payment. Under certain circumstances, “tips” and similarly styled consumer payments may be “imposed directly or indirectly by the creditor” such that they are part of the finance charge. A provider using its authority—real or implied—to exact a “tip” from a consumer in connection with an earned wage transaction has “imposed” the resulting consumer payment. Relevant considerations when determining whether a “tip” or similar payment is imposed by the creditor as part of the finance charge include but are not limited to: soliciting a “tip” before or at the time of a credit extension (rather than some significant time after it); labeling the solicited payment with a term (such as “tip”) that carries an expectation that the consumer will make such a payment in the normal course; setting default “tip” amounts or otherwise making it practically more difficult for the consumer to avoid leaving a “tip”; suggesting “tip” amounts or percentages to the consumer; repeatedly soliciting “tips,” even in the course of a single transaction; and stating or otherwise implying, directly or indirectly, truthfully or otherwise, that “tipping” may impact subsequent access to or use of the product.

III. Regulatory Matters

This is a proposed interpretive rule issued under the CFPB's authority to interpret TILA and Regulation Z, including under section 1022(b)(1) of the Consumer Financial Protection Act of 2010, which authorizes guidance as may be necessary or appropriate to enable the CFPB to administer and carry out the purposes and objectives of Federal consumer financial laws. While not required under the Administrative Procedure Act (APA), the CFPB is soliciting comments on the proposal and may make revisions when it issues a final interpretive rule as appropriate in light of feedback received.

By operation of TILA section 130(f), no provision of TILA sections 130, 108(b), 108(c), 108(e), or section 112 imposing any liability would apply to any act done or omitted in good faith in conformity with the final interpretive rule, notwithstanding that after such act or omission has occurred, the final interpretive rule is amended, rescinded, or determined by judicial or other authority to be invalid for any reason.

The CFPB has determined that this proposed interpretive rule, if finalized, would not impose any new or revise any existing recordkeeping, reporting, or disclosure requirements on covered entities or members of the public that would be collections of information requiring approval by the Office of Management and Budget under the Paperwork Reduction Act.