The law creating a new California mini-CFPB came into effect on January 1, 2021, and a few weeks later, the California Department of Financial Protection and Innovation (DFPI) entered into “first-of-its-kind” memoranda of understanding (MOU) , whereby the DFPI will regulate the Earned Wage Access (EWA) products offered by five companies in California. These MoUs follow the issuance of an advisory opinion by the CFPB for EWA products, but they go much further by imposing price limits and reporting and review obligations for products that the DFPI was granted regulatory authority under the new California Consumer Financial Protection Act (CCFPL). These MOUs, along with the CFPB advisory opinion, signal the creation of regulatory safeguards for previously unregulated products. They also reflect the DFPI’s continued focus on capping interest rates for financial products offered in California.
DFPI memoranda of understanding
EWA products allow employees to access wages earned before payday. The companies offering these products rely on different models and pricing structures. For example, some offer services through employers with agreements where prepaid wages are deducted from the next paycheck. Others provide services directly to consumers on terms similar to payday loans. The prices of EWA products range from a fixed charge per transaction to a fixed charge per month at no charge with the option for consumers to pay “tips”.
Companies offering EWA products have long touted the benefits of their products for underserved borrowers, and memoranda of understanding with the DFPI follow industry support for the failure of California legislation that would have created a legal framework. in which they could continue to offer these products in the state. Fast forward more than a year, and the DFPI now has authority over consumer financial products and services that are not otherwise subject to any specific regulatory regime, such as EWA products, and has exercised that authority by concluding memoranda of understanding with five companies: Inc., d / b / a Even; Activehours, Inc., d / b / a Earnin; Bridge IT, Inc., d / b / a Brigit; Payactiv, Inc .; and Branch Messenger Inc., d / b / a Branch (collectively, the “Companies”).
In the MOUs, the companies agreed to: 1) Provide quarterly reports, including on volume, default and default rates, ratio of advance amount to paycheck amount and assessed charges that are not included in the APR; 2) undergo regular DFPI reviews of their EWA programs; and 3) adhere to certain “best practices”, which include disclosure requirements and APRs and fee caps.
Some of the MOUs cap APRs at 36%, the same cap rate that the California legislature required for loans of $ 2,500 or more but less than $ 10,000 made under the California Funding Act . Note, however, that some MOUs specify that “tips” and subscription fees are not taken into account in calculating the APR.
The MOUs state that they are not to be viewed as endorsements or approvals by the DFPI of the companies’ business models. In addition, the memoranda of understanding state that the DFPI has not alleged any breach of the law by the companies.
These MOUs are the first agreements that DFPI has entered into under the extended authority granted to the agency by the CCFPL. The DFPI said in its press release that its approach “would give the ministry a better understanding of the products and services offered” and would reflect a “balanced approach” that “encourages responsible innovation”.
Limited CFPB and Safe Harbor Advisory
Given that the California legislature modeled the CCFPL on Title X of the Dodd-Frank Act, it’s no surprise that MoUs followed shortly after CFPB’s activity on EWA products. First, on December 10, 2020, the CFPB published an advisory opinion on EWA programs. The advisory was the first issued under the recent CFPB Advisory Opinion Policy rule of procedure aimed at resolving areas of regulatory uncertainty. In the opinion, the CFPB determined that a program incorporating specified features “would not involve the offering or extension of ‘credit'” under Regulation Z or the Truth in Lending Act (TILA) . For example, a program covered by the notice would be offered by a third-party provider contracting with an employer, the provider could not charge interest or other fees, and the provider could only recover advances through holdbacks. performed by the employer on the next payday. .
Separately, on December 30, 2020, the CFPB issued an approval order granting Payactiv’s request for a safe harbor of TILA responsibility under the agency’s compliance assistance sandbox policy. for the specific EWA program described in the application. The CFPB concluded that the Payactiv program neither offers nor grants credit; on the contrary, it “facilitates the access of employees to the wages they have already earned and to which they are already entitled, and thus functionally functions as an employer who pays its employees earlier than the scheduled payday”.
Take away food
Companies offering financial products and services to consumers may derive a procedural glimmer of hope from these MOUs. They reflect a more balanced and cautious approach than the one we have seen from the California banking agency, through its various iterations, which has favored regulation through enforcement. Certainly, companies offering EWA products have a habit of trying to get regulatory rules out of the way. But the MOUs focus on collecting data without penalties. Hopefully the DFPI will continue its approach of collecting data and researching areas where the agency can align with industry.
Basically, we see both the CFPB and the DFPI focusing on new types of financial products. We expect this concentration to continue, particularly in California, given the DFPI’s expanded authority over financial products offered by fintechs and non-bank lenders who historically fall outside the authority of the Bank. the agency. We will also be monitoring how the DFPI implements its apparent goal of creating a de facto 36% interest rate cap for all financial products, including its approach to determining whether or not certain types of fees are included in it. these ceilings.