As regulators continue to ramp up activity, staying informed on the latest developments is crucial for maintaining compliance and protecting your business.
We recently sat down with Eric Goldberg, Partner at Akerman LLP, and Catherine Brennan, Partner at Hudson Cook LLP, to discuss the CFPB’s recent interpretive rules regarding earned wage access products and buy now, pay later (BNPL) products and the implications of the Supreme Court’s recent rulings on the Chevron doctrine and statute of limitations.
Earned Wage Access Products are Consumer Loans
The CFPB recently proposed an interpretive rule explaining that many paycheck advance products— also known as “earned wage access” products (EWA)— are consumer loans subject to the Truth in Lending Act (TILA).
“Earned wage access” is a program that provides early access to earned wages and can be offered through a third-party provider in partnership with the employer or independently. It is considered non-recourse, explained Eric, meaning the provider cannot collect from the consumer if the repayment doesn’t work as intended. The fees for these products are typically different from loans, with some offering free access to funds and others allowing consumers to pay a fee for expedited receipt of funds or to voluntarily offer a tip to the provider.
In 2020, the CFPB issued guidance suggesting that EWA products were not loans, as they didn’t involve a legal obligation to repay. But, the proposed interpretive rule changes this stance, now treating these products as consumer credit, requiring disclosures under the TILA.
The implications here are that anyone who is offering an earned wage access type of product now has to provide TILA disclosures.
– Catherine Brennan
This rule now requires EWA providers to disclose fees, like expedited payment fees and tips, as finance charges, potentially resulting in high, triple-digit APRs that could mislead consumers about the nature of the product.
There’s also some concern that the rule might impact subscription fees as well—a common revenue model for some EWA providers—even though the proposed rule doesn’t address this explicitly.
If you’re one of those companies out there saying, ‘ I don’t charge expedited funds fees,’ ‘I don’t collect tips,’ ‘I don’t need to worry about this,’ I would be concerned that the CFPB might be coming for subscription fees next.
– Eric Goldberg
Buy Now, Pay Later Now Regulated as Credit
The CFPB issued another interpretive rule that redefines BNPL transactions as a form of open-end credit, similar to credit cards, despite them traditionally being considered closed-end loans that involve four or fewer installments and thus exempt from TILA regulations.
The CFPB introduced the concept of a “digital user account,” treating a user’s login as equivalent to a credit card, which is controversial since BNPL products don’t function like traditional credit cards, explains Eric.
One of the more significant anticipated challenges for BNPL lenders is managing consumer disputes. The CFPB is particularly focused on how disputes are handled, and companies now need to align their processes with specific credit card rules, including billing error rules outlined in Regulation Z.
Consumer disputes are something the CFPB is always very focused on, and something where consumers typically will complain—if they have a problem, it’s during the servicing of their product that they have a dispute with the lender, or, in the case of buy now, pay later, with the merchant.
– Eric Goldberg
This shift is significant and requires BNPL companies to understand and implement these new rules, which may involve retraining customer service staff and renegotiating contracts with merchants.
Unlike making disclosures, which is relatively straightforward, adjusting dispute-handling processes to meet these new requirements is a more complex and demanding task.
Despite this, many BNPL providers have already anticipated these changes, says Catherine.
But building the policy around dispute resolution here—that is going to be a heavy lift. Again, though, I think many of the larger buy now, pay later providers have been anticipating what the CFPB did and have built out for that, but that work will be ongoing.
– Catherine Brennan
But, the transition to treating BNPL as open-end credit could still create operational challenges for lenders.
The Overturn of the Chevron Doctrine
The Chevron Doctrine is a legal principle from a 1984 Supreme Court case that gave federal agencies the power to interpret ambiguous laws within their jurisdiction, and courts would generally defer to the agency’s interpretation as long as it was reasonable.
But now, the recent overturning of the Chevron Doctrine shifts this power back to the courts, meaning judges will have the final say on how laws should be interpreted, potentially leading to more legal challenges.
It will likely take time to see the full impact of this decision. For example, in the EWA interpretive rule, the CFPB used a definition of “debt” that isn’t consistent with how debt is generally understood. In a world without Chevron, such an interpretation might not stand up in court, which could lead to more lawsuits, explains Catherine.
While regulatory agencies won’t always lose, the lack of deference means more scrutiny of agency interpretations, which could lead to more legal challenges, says Eric.
Statute of Limitations Ruling
Another significant Supreme Court decision was that the statute of limitations for a person or company to challenge a government agency’s action starts only when the action has directly harmed that specific person or company.
Now, the clock for filing a legal challenge doesn’t start ticking when the agency makes its decision but instead when someone is actually affected by it.
This decision will allow companies to challenge long-standing regulations, even if those regulations were established decades ago. This ruling provides standing for new companies to contest older rules they find improper, which could lead to a surge in legal challenges.
I think it’s going to be open season for a lot of people to challenge regulations.
– Eric Goldberg
Eric also discussed the potential for new companies to be created solely just to have the standing to challenge regulations.
This shift also may force the courts to “refresh” outdated regulations that aren’t substantiated as well as many current rules, and some agencies may have trouble substantiating those.
Key Takeaways for Companies
Be wary of product-adjacents
If you offer a product that is adjacent to EWA, BNPL, or any other industries that the CFPB may issue interpretive rules for—like another form of non-recourse product, or another form of credit that might not be subject to Reg Z—”I would think very carefully about whether the CFPB’s regulation or guidance is broad enough to cover what you’re doing,” says Eric.
Don’t panic about new regulations
Don’t panic when new regulations, rules, or guidances, are introduced, says Catherine, especially with the CFPB.
Things that the CFPB comes out with that seem potentially product-ending or product-limiting are probably not the case.
– Catherine Brennan
In the context of earned wage access, for example, some are concerned about the rule—but the industry is not going away.
A handful of states have already enacted legislation indicating that the product is not a loan product, and providers are required to be registered and provide other disclosures. This type of friction isn’t a bad thing—it gives the industry the opportunity to sharpen its pitch at the state level, says Catherine.
The CFPB has a wealth of learning material
Organizations should utilize the resources available to them, especially from the Bureau.
It’s not just in the regulations. There’s commentary, enforcement actions, and nuggets buried in press releases. One thing to keep in mind is that you want to make sure you have the full panoply of information when you’re considering some of this.
– Eric Goldberg
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