The Consumer Financial Protection Bureau signaled that it’s likely to take a hard look at on-demand pay services proliferating across the U.S., and may revisit controversial policies on the topic issued during the Trump Administration.
In response to consumer advocates in New Jersey protesting state legislation that would have provided leeway for companies to collect payments for on-demand services, the CFPB’s acting general counsel, Seth Frotman, said in a letter Monday that the state proposal shouldn’t be seen as being supported by a 2020 CFPB advisory opinion.
The scope of that order is very narrow, he explained, and doesn’t cover any services in which fees, either voluntary or involuntary, are part of an offering. He also noted that some of those services may be considered loans under federal laws, including the Truth in Lending Act.
"Products that include the payment of any fee, voluntary or not, are excluded from the scope of the advisory opinion and may well be TILA credit," Frotman said in his Jan. 18 response to the New Jersey advocate organizations.
Frotman added that because of "signficant confusion" apparently caused by the Trump era CFPB advisory opinion, he plans to recommend that CFPB Director Rohit Chopra clarify that guidance. The New Jersey advocates had asked the agency in a Dec. 22 letter to rescind the CFPB's opinion related to on-demand pay, also known as earned wage access.
Dozens of financial technology companies have rolled out earned wage access services in the past decade with various revenue-generating models. They describe their offerings as much-needed alternatives to payday lenders that impose high-interest fees. Some of the services charge employees flat fees while others charge based on employee use. And some require the employer to pay for their services.
Some of the biggest companies offering the increasingly popular services include San Jose, California-based Payactiv, New York-based DailyPay and Oakland, California-based Even.
The coalition of New Jersey consumer advocate organizations contend that the New Jersey bill would provide leeway for companies to take advantage of low-income workers. The legislation proposed setting up certain licensing requirements for providers. It also proposed to exempt certain fees or voluntary payments from some state lending laws.
The New Jersey advocates argued that proponents of the legislation were using the CFPB advisory opinion to avoid a 30% state law interest rate cap and other protections applying to consumer credit.
Similarly, an October letter to the CFPB from national consumer advocacy organizations, including the National Consumer Law Center, voiced some of the same concerns about state legislative proposals percolating across the country.
"The letters make evident that the advisory opinion has caused significant confusion in the marketplace," Frotman said in his letter.
The advocacy groups welcomed his response. The New Jersey legislation "would have allowed predatory payday lending companies to target low-wage workers and potentially trap them in a destructive cycle of debt," the New Jersey organizations said in a press release Tuesday. The groups included New Jersey Citizen Action, Appleseed New Jersey and Consumer Reports.
They also urged the CFPB to rescind the 2020 opinion, saying it was being used to justify skirting state laws and consumer protections.
The New Jersey legislative proposal was put forward by Democratic Sen. Nicholas Scutari, and passed unanimously earlier this month by that state's Senate Budget and Appropriations Committee. Nonetheless, days later it was put on hold in the state’s other chamber by fellow Democrat Assembly Speaker Craig Coughlin, according to one of consumer advocate groups. A Scutari staff person didn't immediately respond to a request for comment.
Such legislation has been floated in other states and received mixed reactions. California has imposed an extensive review process for some such companies and their services. In Utah, one legislative proposal was also blocked, but a variation on the legislation may be in the offing.
"Exempting earned wage advance programs from New Jersey’s banking and usury laws would empower employers, payroll and fintech companies to charge high fees to the state's most vulnerable workers," Chuck Bell, programs director for Consumer Reports, said in the New Jersey coalition’s press release. "With 25% of the state’s workers living paycheck to paycheck, this is a bread-and-butter survival issue for retail, restaurant, manufacturing and delivery workers."
