The earned wage access (EWA) space has been, until this year, operating without focused regulation, something the CFPB pledged to address in June of last year. However, over a year has passed, and still, the regulator has issued no further clarification beyond an initial advisory opinion. This has left state regulators to determine their own ways of overseeing the sector.
The first to issue guidance was Nevada regulators, who decided that EWA represented a financial tool that differed from credit products. The state issued new guidelines for EWA providers to operate and protect workers from exploitative practices.
However, despite Missouri following Nevada’s lead, the sector may be on a collision course when crossing over other state lines.
RELATED: State Regulation hits EWA (but is it enough?)
California regulators took a more restrictive stance, defining EWA as an “income-based advance” in a proposed regulation issued in May. The categorization, while unclear, could mean EWA is considered as a similar product to a payday loan.
Others have followed suit. In early September 2023, Connecticut issued guidelines that indicate EWA providers will have to adhere to the state’s small loan regulations.
“Advances of money on future wages or salary that have been earned but not yet paid, commonly referred to as “earned wage access” products, are generally covered by the Small Loan Lending and Related Activities Act,” stated the bill.
The amended small loan law is stated to enter into effect on October 1, 2023, leaving EWA providers operating in the state with little time to respond.
Industry Advocates Call for Clarity
EWA providers and industry advocates wrote that the categorization of the sector as a loan product is “unclear” and stated that Connecticut’s definition of a “small loan” based on a “potential future source of money” is incorrect.
“The Act’s new small loan definition covers an advance made on a “future potential source of money,” which is incongruent with the business model of every EWA provider,” wrote the American Fintech Council (AFC) in response to the guidance. “The earned wages which can be voluntarily accessed by employees through third-party EWA providers are not a “potential source of funds;” they are money owed to the EWA consumer.”
While many models exist for EWA providers, the AFC, among others, noted that the defining feature of EWA is providing access to wages that are already earned. The sector is thus set apart from credit products.
“EWA products are not credit and should not be classified as loans – they simply give employees access to their already earned wages,” said Penny Lee, President and Chief Executive Officer of the Financial Technology Association (FTA).“EWA products help millions of Americans tap into their earned wages to make ends meet and manage bills.”
Industry advocates explained that treating EWA as a loan product could damage the industry.
In the AFC’s letter, the group stated that the restrictions regulating credit products could eliminate EWA consumer protections. The product, now available to many who are underserved by the credit system, could be subject to implementing practices that would reduce access. According to federal government research, EWA is used primarily by underserved groups, the majority of whom earn under $50,000 annually.
“There are no other consumer financial products that, on an industry-wide basis, are entirely non-recourse,” the AFC wrote. “By making EWA credit, this harms consumers by increasing both the amount and type of fees that can be charged to consumers like interest and late fees, which no one in the EWA industry presently charges.”
As a result, both the AFC and the FTA state that users could be forced to use the predatory loan structures that EWA is attempting to remedy.
“Connecticut families should have the ability to access the wages they have already earned from responsible and innovative companies providing an alternative to high-priced payday and other predatory options,” said Phil Goldfeder, Chief Executive Officer of AFC.
