California DFPI Issues Regulations to Classify Earned Wage Access as Loans

On October 22, 2024, the California Department of Financial Protection (DFPI) issued final regulations which, when effective, will classify most EWA programs in the market as consumer loans, and which subject EWA providers to registration and regulation under California’s consumer-credit laws. Although the regulations will classify EWA products as loans for purposes of California’s lending laws—and subject most EWA providers to the California Financing Law’s regulatory scheme and related practice requirements—the regulations also spare EWA providers from the licensing regime under the California Financing Law. Instead, EWA providers offering their programs in California may choose to register with the DFPI and adhere to reporting and other substantive obligations under the California Consumer Financial Protection Act.

The regulations have a somewhat-complicated origin story. The DFPI first issued a proposal in March 2023 that, similar to the final regulations, would have classified advances made by EWA providers as loans for purposes of California law. After making several modifications to the proposed regulations, the DFPI submitted the regulations to the state Office of Administrative Law for review and approval. However, the Office of Administrative Law disapproved the DFPI’s rulemaking action in an April 26, 2024 decision, on the grounds that the proposed regulations failed to comply with the Administrative Procedures Act, and that the DFPI failed to follow required administrative procedures. The final regulations, which were approved by the OAL on October 11, 2024, represent the DFPI’s second bite at this particular apple.

These regulations mark the latest development in the rapidly evolving landscape of federal and state regulation of innovative, non-recourse EWA products. While several states, such as Missouri, Nevada, Kansas, Wisconsin, and South Carolina, have enacted laws that specifically provide that EWA providers offering their products in compliance with state law are not engaged in lending, Connecticut—and now California—have taken the opposite approach, having classified most EWA programs operating in the market as involving consumer loans. California’s regulations also come on the heels of the CFPB issuing a proposed interpretive rule in July 2024 which, if finalized, would interpret the federal Truth in Lending Act and Regulation Z in a manner that would characterize certain non-recourse EWA programs to involve the extension of “consumer credit.”

Below, we discuss the scope of the regulations as they apply to EWA programs, and the DFPI’s legal arguments for its conclusion that typical EWA advances constitute consumer loans for purposes of California law.

Scope and Implications of the Regulations

The regulations require any person offering a “subject product,” which includes EWA products (as well as debt settlement services, education financing such as income share agreements, and student loan debt relief services), to register with the DFPI under the California Consumer Financial Protection Act. In addition to requiring EWA providers to register, the regulations also adopt new regulations under the CFL which provide that, for purposes of the CFL, any “advance of funds to be repaid in whole or in part by the receipt of a consumer’s wages, salary, commissions, or other compensation for services” is a loan for purposes of the CFL, regardless of the provider’s means of collection, whether the provider has legal recourse if the provider is unable to collect the amount it advanced, or whether the consumer has the right to cancel collection of the amount advanced (such as by cancelling an electronic-payment authorization or payroll-deduction authorization given to the provider). Thus, the regulations classify earned-wage access advances—which are based on an employee or worker’s earned but unpaid wages—as consumer loans for purposes of the CFL, and subject EWA programs to the CFL’s limitations and restrictions applicable to consumer loans, regardless of the fact that the EWA advances are nonrecourse or whether the consumer incurs an absolute obligation to repay the advance. The regulations also do not distinguish between direct-to-consumer EWA programs which are offered without the involvement of the consumer’s employer, and employer-integrated programs offered by providers that integrate with employers’ wage-and-hour systems and provide EWA advances as an employee benefit under a contract with an employer. (The regulations do, however, provide that employers who advance earned wages from their own funds are not engaged in making loans for purposes of the CFL.)

The regulations also extend an olive branch to EWA providers, however. EWA providers would not be required to obtain a license under the CFL (which can take anywhere from six to twelve months for the DFPI to approve and issue) if the provider is registered with the DFPI, and if the EWA advance has all of the following characteristics:

• The advance is based on income the provider has reasonably determined to have accrued to the benefit of the consumer but has not, at the time of the advance, been paid to the consumer;
• When the advance is made, the advance is scheduled for collection in a single payment within 34 days, and the date for collection corresponds to the date that the provider anticipates the consumer’s wages or compensation will be paid to the consumer; and
• The provider warrants to the consumer as part of the contract between the parties on behalf of the provider and, if applicable, any business partners that: (i) the provider and any business partners have no legal or contractual claim or remedy against the consumer based on the consumer’s failure to repay in full the amount due; and (ii) if the amount due is not repaid on the collection date, the provider and any business partners will not engage in any debt collection activities, place the amount due as a debt with or sell it to a third party, or report to a consumer reporting agency concerning the amount due. (For purposes of the regulation, “debt collection activities” do not include initiating with the consumer’s authorization an electronic fund transfer or payroll deduction to collect any outstanding amount due.)

The regulations also characterize any voluntary or optional payments—such as “tips” or other voluntary fees that an EWA provider may receive in connection with an advance—as a “charge” for purposes of the CFL. This would have the effect of subjecting voluntary fees or other amounts that are commonly charged or received by EWA providers, such as expedited payment fees or “tips,” to the CFL’s limitations on loan charges applicable to small-dollar consumer loans. In this sense, the DFPI’s regulation is consistent with the CFPB’s July 2024 proposed interpretive rule that interpreted the Truth in Lending Act and Regulation Z to characterize expedited payment fees and “tips” as “finance charges” for purposes of the Truth in Lending Act.

The regulations provide for the DFPI to implement the registration through the Nationwide Multistate Licensing System (NMLS), which is the main database through which most state financial services regulators administer their consumer credit licenses. Registered EWA providers will be required to provide annual reports to the DFPI that contain extensive transaction- and portfolio-level information regarding their activity in California, which may further inform the DFPI’s rulemaking and enforcement efforts.

The DFPI’s Statement of Reasons

At the same time that the DFPI issued the final regulations, it also released a statement of reasons that sets forth its legal reasoning for characterizing EWA advances as loans for purposes of California law and addresses comments received from the public on the regulations. The statement of reasons notes that the DFPI’s conclusion that EWA advances are loans because third-party EWA programs involve “the core feature of lending,” which is a cash advance provided by a third party that is repaid at a later date. The DFPI noted that its conclusion does not depend on whether an EWA program is employer-integrated or direct-to-consumer. The DFPI also rejected arguments that the nonrecourse nature of an EWA product, and lack of an absolute obligation to repay, render EWAs a non-credit product that falls outside the scope of California’s lending and consumer credit laws.

The DFPI also addressed commenters’ arguments that EWA providers are not lenders because the providers do not loan money, but rather provide workers early access to their earned, but unpaid, wages in which the worker has an existing property right (such that there is not a debtor-creditor relationship that exists between the worker and the provider). The DFPI noted that it found this argument unpersuasive because, in the DFPI’s view, EWA providers are third parties that do not, themselves, owe any obligation to pay wages or compensation to a worker, and because the DFPI did not receive any evidence to suggest that EWA companies provide wage payments in compliance with the same wage and hour obligations that apply to employers under California’s labor laws. As an example, the DFPI cited California’s wage and hour laws that prohibit reducing or discounting employees’ wage payments to assert that EWA providers whose programs feature transaction fees would not be in compliance with California law if they themselves were paying wages directly to an employer.

Effective Date

The DFPI’s regulations will take effect on February 15, 2025. EWA providers that offer their programs in California should review the regulations and consider whether to begin preparing to register when the regulations take effect next year.