The Government Accountability Office (“GAO”) recommended that the CFPB clarify how the definition of “credit” in the Truth in Lending Act (“TILA”) and Regulation Z should be applied to earned income access (“EWA”) products. GAO’s recommendation followed an analysis of the potential benefits and risks associated with FinTech products offered to underserved consumers.
In its report, GAO analyzed four FinTech products used by underserved consumers: (1) digital deposit accounts, (2) credit-building products, (3) small-dollar FinTech loans, and (4) EWA products. The GAO found that:
- underserved consumers may benefit from the minimal balance requirements of digital deposit accounts, but (i) may be unaware that the funds are not held by FinTech companies (since most are non-bank entities) and (ii) may not know how to retrieve the funds its should the company go out of business;
- while products such as credit builder cards and credit builder loans can help build or establish a credit report, underserved consumers face the risk of damaging their credit scores if they miss payments;
- Small Dollar FinTech Lending Through the Use of Alternative Data (e.g, cash flow data, utility or rent payments, employment history, and education level) can help expand loan offerings to underserved consumers, but can potentially charge higher annual interest rates than small dollar loans offered by credit unions; and
- EWA products give consumers access to unpaid wages, but consumers may find themselves charged with unexpected overdraft fees due to a lack of cost transparency from FinTech companies.
The GAO said it is unclear to what extent consumers are using and benefiting from these FinTech products. The GAO found that while regulators, including the CFPB, have taken steps to better evaluate new products, policymakers remain concerned about whether current regulations adequately address the risks associated with these products.
In particular, the GAO pointed to a November 2020 CFPB advisory opinion, which clarified that EWA products that meet specific characteristics (e.g. EWA programs covered by employer contracts) are not considered extensions of credit under TILA. However, this statement did not directly refer to consumer EWA models. The GAO recommended that the CFPB clarify the application of TILA’s definition of “credit” to EWA products not covered by its November 2020 advisory opinion.
