‘Earned wage access’ programs by fintechs need clarification as to application of truth-in-lending rules, watchdog advises

“Earned wage access” products need clarification as to whether they are subject to truth-in-lending disclosures, the congressional watchdog said in a report issued Wednesday.

The Government Accountability Office (GAO) said its report found that the “earned wage access” products (which the GAO said purport to give consumers access to money that has been earned but not yet paid) are largely used (more than 50%) by underbanked customers. Those are, the GAO said, customers that have bank accounts “but use alternative financial services like payday loans, which can be costly.” Additionally, the GAO said, 15% of those were previously unbanked.

The products are typically offered by financial technology (fintech) companies, the GAO noted.

The products, the GAO said, potentially help lower-income consumers meet financial obligations. However, it added, the costs of the product may not be transparent, and there may be risks of unexpected overdraft fees. The agency said its research found that the products were used mostly by consumers earning less than $50,000 annually.

In any event, the GAO said, “regulatory uncertainty exists for certain earned wage access products.”

“For example, the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion in November 2020 clarifying that earned wage access products with specific characteristics are not considered to be an extension of credit under the Truth in Lending Act,” the GAO wrote. “Despite this guidance, some have expressed continued uncertainty about how the law applies to products that do not fall under the advisory opinion. Further clarification could help companies that offer these products understand whether the act and its disclosure requirements are applicable.”

The GAO said it recommended that the CFPB issue clarification on the application of the Truth in Lending Act’s definition of “credit” for earned wage access products not covered by its November 2020 advisory opinion. The agency said the CFPB agreed with the recommendation.

Financial Technology: Products Have Benefits and Risks to Underserved Consumers, and Regulatory Clarity Is Needed

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