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March 28, 2024 Politics & Policy

State lawmakers seek compromise on earned wage access regulations

PHOTO | CONTRIBUTED Phil Goldfeder is the CEO of the American Fintech Council.

Connecticut lawmakers are working on compromise legislation intended to reopen the door to fintech providers that offer “earned wage access” services in the state, while avoiding what some describe as predatory lending practices.

Earned wage access services allow users to access already earned wages before payday, and have been used by more than 150,000 Connecticut workers since 2012.

The Connecticut Department of Banking in September issued new guidance on the industry — in response to a series of changes adopted by state lawmakers in 2023 — that require earned wage access companies to be licensed and regulated as small loan providers.

More importantly, lawmakers also changed the formula used to determine a small loan’s annual percentage rate, adding tips and subscription or convenience fees into the calculation. Those are key revenue streams for earned wage access providers, and the formula change pushed them well past the 36% small loan APR cap set by state law.

The new regulations drove earned wage access companies to stop offering services in Connecticut, which resulted in industry and consumer complaints to the banking department and lawmakers.

On one side, the department and consumer advocates argued that money provided by earned wage access companies comes with fees far in excess of the 36% APR allowable for small loans under state law. That could wind up digging vulnerable consumers deeper into a cycle of debt.

EWA companies and fintech associations argued the cash provided by the companies is not a loan; it’s money workers have already earned on the job. They stress that most services are offered free-of-charge, with elective fees for expedited service and tips.

Last year’s change in state law, coupled with the banking department’s interpretation, made those tips and voluntary fees part of the APR calculation, putting most EWA providers many times in excess of the allowable 36% APR limit.

The earned wage access industry generally works through two models. In one, consumers appeal to online EWA companies for money based on past pay history. The EWA company gets access to a consumer’s bank account in which paychecks are direct deposited, and withdraws the advanced sum on payday.

In the second model, EWA companies work with employers to verify wages earned, and the money advanced, plus any fee, is handed over by the employer to the EWA company, and then deducted from paychecks.

The Banking Committee has proposed and passed a revision to last year’s law changes that would open the door to EWA providers working directly with employers. They would be excluded from the 36% maximum APR limit, but would be limited to charges for same-day transfer fees only. Those fees would be set at a maximum of $4 per transaction, or $16 monthly, whichever is less.

The General Assembly’s Banking Committee passed the bill out of committee on a 10-2 vote during a March 12 hearing.

Jason Doucette

“I think, again, it provides somewhat of a compromise, especially with respect to employer-integrated products, which I will submit look less like a loan than some of the other direct-to-consumer products that arguably fall under this framework and are subject to regulation,” State Rep. Jason Doucette (D-Manchester), co-chair of the Banking Committee.

Striking a balance

The bill received mostly a negative response from consumers, EWA industry representatives and consumer advocates. Supporters of EWA services and earned wage access companies argued the bill doesn’t go far enough in enticing them to re-enter the Connecticut market. Consumer advocates say employer-sponsored programs, even with guardrails in the new legislation, could still harm economically vulnerable users.

Attorney Raphael L. Podolsky, of Connecticut Legal Services, testified that he appreciates the proposal doesn’t totally deregulate the EWA industry and recognizes the service as a loan. Still, he argued the proposed fee caps are “unnecessarily high.” He argues a preferential solution to providing access to wages ahead of payday would be to have employers absorb the cost.

“It is very important to recognize that the most negative aspects of EWAs are felt by the very workers that are most in need of protection, i.e., those with the lowest income,” Podolsky’s testimony reads.

Phil Goldfeder, CEO of American Fintech Council, argued in his testimony that earned wage access is not a loan and should not be regulated as such. He voiced support for a move to establish a licensing protocol, but argued against setting distinctions between direct-to-consumer and employer-integrated models.

“EWA is a safe, reliable alternative to payday and predatory loans and gives consumers the ability to access the money they have already earned on their own terms,” Goldfeder testified.

During the March 12 hearing, Doucette acknowledged that neither side of the EWA debate is satisfied with the committee’s proposed compromise.

“I think you can look through the testimony that we received to see that no one who was interested in this bill was really happy with it,” Doucette said. “And perhaps that is a good place to be or perhaps not. Again, we tried to strike a balance here. It is a difficult issue.” 

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