California DFPI Signs First Memorandum of Understanding with Earned Wage Access Companies | Man’s pepper with trout
the California Consumer Financial Protection Act (CCFPL) entered into force on January 1. The CCFPL demands that the Department of Financial Protection and Innovation (DFPI), formerly the Department of Business Supervision, establish an Office of Financial Technology Innovation (OFTI). The DFPI declared in its recent monthly bulletin that OFTI would allow it to “work proactively with entrepreneurs and create a regulatory framework for emerging and responsible financial products”. DFPI wasted no time focusing on emerging financial products in the FinTech sector when it recently ad that he had signed memoranda of understanding with five companies offering earned wage access (EWA) products, allowing them to continue to operate in California under certain conditions. This is an important event for two reasons: first, it shows that OFTI plans to actively work with FinTech companies who want to bring new products to California consumers; and second, because it will be one of the first instances of a state financial regulator dealing directly with EWA products
EWA products can be an alternative to high-cost payday loans, when a fintech company makes a deal with employers and employees to give employees early access to salaries they’ve earned, but not yet received. because prior to their pay date. EWA companies often offer an employee line of credit that they can access up to a portion of the salary they have earned but not yet received. EWA companies enter into an agreement with either the employer, where the employer will pay them a fee for providing this service, or the employee will be charged a nominal fee for obtaining the advance.
A key question in these types of arrangements is whether the advance provided to an employee is a loan subject to state licensing and usury laws. For the purposes of the Federal Lending Truth Act, the CFPB has issued a advisory opinion end of 2020 determining that, if these devices have certain characteristics, they do not imply a “credit” subject to regulation Z. At least one company has obtained a CFPB order of approval for its EWA offer. However, the application of state usury laws and licensing laws remains unclear.
In the MOUs, DFPI stated that under the CCFPL, companies are “covered persons” or “service providers” that allow DFPI to request certain types of information from companies. Acknowledging the sale of EWA products by companies in California, the DFPI has stated its intention to obtain reports from companies to (1) help them better understand the benefits and risks that EWA products from companies may present to consumers. Californians; (2) determine whether DFPI should consider EWA product loans; and (3) determine whether EWA products should be subject to other financial laws.
The companies are particularly committed to:
- Provide quarterly reports to DFPI related to, among other things, EWA product payment volume, fees, default rates and cash advanced to paycheck ratios;
- Authorize DFPI to examine its books and records with 10 working days written notice; and
- Include language in their EWA product agreements clearly stating that their EWA products are not licensed or regulated by DFPI, but this may change in the future.
It is not clear from the MOUs why these companies voluntarily agreed to these terms. DFPI Press release said that “the MOUs pave the way for Earned Wage Access companies to continue operating in California, prior to possible registration under the law. [CCFPL], which came into effect this year and defines businesses as newly covered financial services. As a result, these companies may have entered into memoranda of understanding with the DFPI to reduce the risk of enforcement action for the provision of their services to California consumers.
Ultimately, the MoUs express DFPI’s intention to learn more about EWA products, which could lead to new California state regulations in the near future and remove some of the uncertainties under of state law presented by EWA products. It remains to be seen whether other states will follow California’s lead.