GAO issues report on fintech products; recommends the CFPB clarify when earned income access products are “credit” under the Truth in Lending Act

The Government Accountability Office (GAO) has released a new report titled “Financial Technology: Products Have Benefits and Risks to underserved Consumers, and Regulatory Clarity is Needed.”

The report focuses on the following four types of fintech products:

• Digital deposit accounts offered by fintech companies through partnerships with banks or credit unions. In these arrangements, the deposit account is provided by a depository institution insured by the FDIC or NCUA, but the consumer typically interacts directly with the fintech company, which manages the platform used to access funds.
• Credit building products structured as credit cards or loans that can help consumers develop positive credit payment histories and establish or improve credit scores. Fintech companies partner with insured depository institutions to offer these products. The consumer interacts with the fintech company that manages the platform used to search and manage funds.
• Small dollar fintech loans which are unsecured installment loans of $2,500 or less guaranteed by fintech companies using non-traditional or alternative data. Fintech companies can provide these loans through a banking partnership model where the banking partner finances the loan or as a direct lender.
• Earned Wage Access (EWA) products offered by fintech companies or through fintech-bank partnerships that purport to give consumers access to wages that have been earned but not yet paid. The two primary business models are employer sponsored and direct to consumer.

In the report, GAO looks at:

• the benefits, risks and limitations of the four fintech products for unserved consumers (i.e. unbanked consumers (i.e. a household without a checking or savings account at a bank or credit union), underbanked (i.e. a banked household that also used one or more non-bank financial products or services, such as a payday loan, in the past 12 months), and credit invisibles (ie, consumers without a credit score) and the extent to which underserved consumers have used these products; and
• steps taken by federal and state regulators to understand and identify the benefits and risks of the four fintech products and address risks.

In analyzing the benefits of the four fintech products, the GAO compared the costs of these products to the costs of traditional or alternative financial products, as follows:

• fintech deposit accounts compared to BankOn accounts and select prepaid cards (BankOn accounts are traditional bank accounts that meet standards developed by the Cities for Financial Empowerment Fund to provide low-cost bank accounts for underserved consumers);
• credit building cards and loans offered by fintech companies compared to those offered by selected traditional institutions;
• small dollar loans compared to alternative payday loans offered under NCUA rules; and
• EWA products compared to typical payday loan fees as reported by the CFPB.

The GAO makes only one recommendation for executive action in the report, which is that the CFPB “should provide clarification on the application of the Truth in Lending Act’s definition of “credit” to earned income access products not covered by its November 2020 advisory opinion. In its advisory opinion of November 2020 (AO), the CFPB addressed whether an EWA program with the characteristics set forth in the AO was covered by Rule Z. Such characteristics included the absence of any requirement by the provider that an employee pay fees or charges in connection with the transactions related to the EWA program and no assessment by the provider of the credit risk of the individual employee. The AO presented the Bureau’s legal analysis on which it based its conclusion that the EWA program did not involve the offering or extension of “credit” within the scope of Rule Z. In the AO, the Bureau indicated that the may be EWA programs with nominal processing fees that nevertheless do not involve the offering or extension of “credit” under rule Z and advised that providers of such programs could request clarification on a specific fee structure by applying for approval under the CAS policy.

In October 2021, a group of 96 organizations and individuals, describing themselves as consisting of “consumer, labor, civil rights, legal services, faith, community and economic organizations, and academics,” sent a letter to the CFPB urging the Bureau to regulate EWA products as credit subject to TILA. The letter addressed the AO and the CFPB approval order issued in December 2020 to Payactiv, Inc. through the CFPB’s Compliance Assistance Sandbox Policy. The approval order confirmed that Payactiv’s EWA program described in the order did not involve the offering or extension of “credit” as defined in Rule Z, and that Payactiv therefore had a safe harbor from liability under TILA and Rule Z in connection with the specified EWA program. (The CFPB terminated PayActiv’s approval order in June 2022.) In January 2022, Seth Frotman, now CFPB General Counsel, indicated that more clarity on EWA products was needed from the CFPB. In its press release on the termination of PayActiv’s approval order, the CFPB stated that it planned to issue additional guidance to provide greater clarity regarding the application of TILA and the regulatory definition of “credit” to EWA products.

In its report, the GAO indicates that despite the AO, “some have expressed continued uncertainty about how the Truth in Lending Act and Regulation Z apply to certain earned income access products.” GAO says:

For example, in a September 2022 written statement for a congressional hearing, a representative of the Financial Technology Association noted … that the advisory opinion did not directly refer to consumer earned income access models, making it unclear whether those models are subject to Regulation Z. Similarly said representatives of the National Association of Consumer Credit Administrators… that members want further clarification on whether earned income access products, including direct-to-consumer models, are considered credit under the Truth in Lending Act and Regulation Z. .

Noting that “the CFPB’s strategic plan encourages it to issue rules and guidance that respond to emerging markets and products, the GAO comments that “without further clarification from the CFPB, it is uncertain under what circumstances earned income access products not covered by its advisory opinion should be considered as an extension of “credit” to consumers under the Truth in Lending Act and therefore subject to the Act’s discourse requirement.” In response to GAO’s recommendation that the CFPB issue additional clarifications, Director Chopra indicated that “the CFPB agrees with GAO’s recommendation and intends to provide further clarification in this area.” (A copy of Director Chopra’s letter is attached as Appendix III to the report.)