Credit, tips, duty to pay: CFPB’s proposed interpretive rule seeks to clarify access to earned wages and Regulation Z | McGlinchey Stafford

On July 18, 2024, the Consumer Financial Protection Bureau (CFPB) published a proposed interpretive rule (rule) that withdraws a previous 2020 opinion on the definition of “credit” in Regulation Z. The rule also declares certain types of optional consumer payments to be “related to or as a condition of the origination of credit,” making the charge a finance charge for purposes of Regulation Z.

Review of the 2020 report

The CFPB formulated the rule by acknowledging its 2020 opinion, but asserted that the 2020 opinion interpreted the term “loan” very narrowly and limitedly. While the opinion only clarified whether a covered EWA program included the making of loans under Regulation Z, the CFPB’s analysis went into a detailed analysis of the term “debt” in terms of how the term should be viewed. Generally, Regulation Z applies when “loan making” occurs and four conditions are met:

1. The credit is offered or granted to consumers.

2. Loans are granted or awarded on a regular basis.

3. There is a financing fee for the loan.

4. The loan is primarily for personal, family or household purposes.

The term “credit” is then defined as the right to postpone payment of a debt or to incur debt and postpone payment of it. Both the Opinion and the Rule recognize that Regulation Z does not define the term “debt.”

Definition of debt in the CFPB’s proposed rule

The opinion relied on the definition of debt in Black’s Law Dictionary, which it believes is the “general” meaning of the term “debt,” defining it as a liability for a claim, a specific amount of money owed by agreement or otherwise. The rule examines the definition of “debt” in various sources, including Merriam-Webster, supporting its conclusion that the term essentially means a engagement to pay. The rule states: “This general understanding of debt is reflected in state laws, which define the term debt as engagement and then cites a number of state laws that define the term debt. A common denominator in these definitions is the idea of ​​an “obligation” to repay an advance. In its conclusion, the CFPB again links the “ordinary use” of the term debt to a engagement pay someone else.

Debt obligations in access to earned wages

The CFPB also puts it broadly, stating that “in an earned-wage transaction, the consumer assumes an obligation to pay money at a future date.” While it does not address the fact-specific nature of such an inquiry, the CFPB asserts that the future obligation may be based on an element of contingency. The CFPB does not address the authority under state law when these elements and the lack of a remedy impact court decisions on whether a product is a loan. They also assert that a engagement exists because the lender receives authorization to debit a bank account. The CFPB does not address the fact that authorizations can be revoked by a consumer without consequence, leaving significant uncertainty about whether earned wage sharing (EWA) products would even meet the CFPB’s standards as formulated.

The rule reflects an interesting position in that it makes a finding of fact regarding whether a transaction represents an obligation for a disparate industry without considering the analysis of state laws on those issues (although state laws are referenced in other parts of the analysis). The rule attempts to create broad definitions of debt, relying heavily on the term obligation, but then dismisses that obligation in just a few sentences and without reference to any authority. Courts have grappled with the question of whether an obligation to repay exists for centuries, and many decisions have concluded that nonrecourse transactions are not loans or credits under current law. However, the CFPB seeks to dispel these findings of fact through a proposed “interpretive rule.”

Financing costs: tips and fees

The CFPB then examines whether a finance charge applies when a product has no interest but provides for optional additional payments. The CFPB focuses on two types of payments: “tips” and “expedited transfer fees.” The CFPB concludes that each of these payments is a “lending incident” and should therefore be treated as a finance charge. In footnote 31, the CFPB also notes that finance charges are not a necessary condition for the application of Regulation Z obligations, meaning that even EWA providers that do not charge finance charges could be subject to Regulation Z. While neither the Truth in Lending Act (TILA) nor Regulation Z explain the meaning of “lending incident,” the rule states that “any payment required by the lender that Is are essentially linked must be part of the financing costs.”

Voluntary payments

The rule also clarifies that voluntary payments not required to obtain the loan can also be finance costs because they “may be charged directly or indirectly by the lender.” However, the rule “does not attempt to determine the required degree of connection, except that ‘related to’ includes costs that are substantially related to a particular loan origination.” The rule identifies tips and payments for expedited money delivery as two costs that consumers may incur in connection with certain loan originations, and indicates that the CFPB considers these payments to be substantially related to the loan origination.

Express transfers and tips as financing costs

With respect to payments for expedited delivery of funds, the CFPB has determined that these are part of the funding fee because it considers the speed of access to funds to be an integral and defining aspect of EWA products. The rule states that speed is a feature of the credit being extended, so if the consumer pays for the expedited delivery, the CFPB believes the associated fee is immediately and directly related to the origination of the credit, so it must be disclosed as part of the funding fee.

The rule states that tips are part of the finance charge if they are solicited and paid in connection with the loan origination and are directly or indirectly required by the lender, even if the loan can be obtained without payment. Tips are considered to be “directly or indirectly required by the lender” if an EWA provider uses its actual or implied authority to require a consumer to pay a tip. The rule states that “[a] If the consumer reasonably believes that a supplier expects a ‘tip’ in connection with a transaction, that is evidence that the supplier is requesting it as an official act.” The rule also lists relevant considerations in determining whether a ‘tip’ or similar payment is part of the finance charge, such as the timing of the request for payment, the designation used for the payment, establishing standard ‘tip’ amounts, suggesting ‘tip’ amounts, repeatedly requesting ‘tips’, and suggesting that ‘tips’ could affect subsequent access to or use of the product.

Public comment

The CFPB is encouraging and will accept comments until August 30, 2024.