United States: The State Of Play On EWA: Missouri And Nevada Adopt EWA Licensing Laws

We have focused much of the content in our Licensing Link newsletter on state licensing developments in traditional credit products that have been offered for decades. But that is not to say that state legislatures are ignoring some of the new and innovative financial products offered by fintechs and other market participants, offering novel and creative ways of delivering financial solutions to consumers. State legislatures in Missouri and Nevada recently enacted new laws to regulate innovative earned wage access ("EWA") programs, which should facilitate certain providers' ability to offer these programs in each state, and may provide a model for other states to license and regulate the product. While providers will have time to come into compliance with the Nevada law, which takes effect on July 1, 2024, the Missouri law becomes effective August 28, 2023.

Before diving into the Missouri and Nevada laws, we briefly remind readers of the basic structure of EWA programs. Earned wage access is a service that allows workers to obtain wages that they have earned, but have not yet been paid, prior to the worker's regularly scheduled payday. EWA programs have grown in popularity in recent years, and many large employers now partner with EWA providers to offer the providers' programs as an employee benefit, with the goal of promoting employees' financial well-being and offering employees access to a lower-cost alternative to payday loans or short-term loans.

As an emerging product, EWA programs present novel financial regulatory issues. The most significant of these issues is the status of an EWA transaction as a non-credit transaction. Regardless of the model, EWA programs typically restrict the amount that can be advanced to a user to the amount of wages that the user has actually earned and has a property right to, and the transaction carries no recourse to the user if the provider cannot recoup the advance. These features differentiate an EWA transaction from a consumer loan.

Although the exact structure of each program differs, EWA programs generally fall into two broad categories:

• Direct-To-Consumer Models are offered directly to workers, without the employer's involvement. Any eligible worker can access EWA from a direct to consumer model, as the worker's employer offering the service is not a prerequisite. Because direct-to-consumer models do not integrate with employers, recoupment of EWA advances is typically effected through a single-use automated clearinghouse transaction from the employee's personal bank account on the employee's payday.
• Employer-Integrated Models involve the EWA provider entering into a contract with an employer to offer the service as an employee benefit to the employer's employees. An EWA provider using the employer-integrated model may integrate with the employer's payroll and time card systems to receive data about the amount of earned wages that an employee has accrued as of a certain date. Employer-integrated programs typically fund an earned wage advance through the employer's payroll system, and then recoup the advance through a payroll deduction facilitated by the employer on the employee's next regular payday.

Although EWA providers generally assert that their products are not loans, and are not subject to the myriad state consumer loan licensing and regulatory laws, no states had enacted laws that specifically regulate EWA transactions prior to the Missouri and Nevada laws. The Missouri and Nevada laws provide significant clarity to the EWA industry and should encourage the continued adoption of earned wage access as a solution to employees' needs for low-cost temporary liquidity. We discuss each law in detail below.

Missouri

On July 6, 2023, Governor Mike Parson signed Senate Bill 103 ("SB 103"). Among other provisions, SB 103 establishes a licensing and regulatory framework for EWA programs operating in Missouri. The new law applies to both direct-to-consumer and employer-integrated programs. Under the new law, EWA providers must register with the Missouri Division of Finance and pay a $1,000 annual registration fee. The registration must contain information about the EWA provider, including (i) the name, business address, and telephone number of the provider; (ii) the names and business addresses of the provider's officers, directors, principals or partners; and (iii) a sworn statement by a corporate officer, principal, or partner that the provider is financially capable of offering earned wage access services, and, if the provider is a corporation, that the provider is authorized to transact business in Missouri.

SB 103 clarifies that EWA programs offered by registered providers are, as a matter of law, not a loan or credit or a sale or assignment of wages, and do not constitute money transmission. Further, any fees, voluntary tips, gratuities, or donations are not considered interest or finance charges under Missouri law. The new law also imposes substantive compliance obligations on EWA providers.

These include:

• Disclosures: The law requires EWA providers to inform the consumer of their rights under an EWA agreement and disclose all fees associated with the EWA program. Providers must also disclose any material changes to the terms and conditions of an EWA program prior to those changes becoming effective.
• Disbursement of Earned Wages: An EWA provider must provide proceeds of an EWA to the consumer by any means agreed upon by the provider and consumer.
• Recoupment by ACH: If the provider will recoup the EWA through an electronic fund transfer from the consumer's bank account, the provider must comply with the Electronic Fund Transfer Act and Regulation E. If the provider erroneously debits the consumer's account for an incorrect amount, or initiates an EFT prior to the recoupment date that was disclosed to the consumer, resulting in the consumer's bank assessing an overdraft or insufficient funds fee, the EWA provider must reimburse the consumer for the full amount of any fee imposed on the consumer.
• Voluntary "Tips": If the EWA provider will be compensated in the form of a voluntary "tip" paid by the consumer or solicits "tips", then the provider must:
  
  • Clearly and conspicuously disclose to the consumer immediately prior to each transaction that a tip, gratuity, or donation amount may be zero and is voluntary.
  • Clearly and conspicuously disclose in its service contract or terms and conditions, and elsewhere, that tips, gratuities, or donations are voluntary and that the offering of EWA services, including the amount of the proceeds a consumer is eligible to request and the frequency with which proceeds are provided to a consumer, is not contingent on whether the consumer pays any tip, gratuity, or donation, nor on the size of any tip, gratuity, or donation;
  • Refrain from misleading or deceiving consumers about the voluntary nature of such tips, gratuities, or donations; and
  • Refrain from making representations that tips or gratuities will benefit any specific, individual person.
• Information Security: EWA providers must comply with all federal, state, and local privacy and information security laws.

The new law also prohibits EWA providers from engaging in certain practices in connection with EWAs. Specifically, an EWA provider may not:

• Share any fees, tips, gratuities, or other donations received from or charged to a consumer for EWA services with an employer;
• Charge a consumer interest on any outstanding EWA transaction, fees, or other amounts;
• Report the consumer's inability to repay the provider to any consumer reporting agency or debt collector;
• Require a consumer's credit report or credit score to determine their eligibility for an EWA program;
• Accept payment from a consumer via credit card or charge card; or
• Seek repayment from a consumer by (i) filing a lawsuit against the consumer; (ii) hiring a third party to collect from the consumer, or (iii) selling an outstanding EWA or outstanding amounts to a debt buyer or collection agency. The law contains a limited exception from these prohibitions that permits an EWA provider to seek repayment of any outstanding amount that was obtained by the consumer through fraud or misrepresentation. In addition, the law states that it is not intended to prevent an EWA provider from pursuing an employer if the employer has breached its contractual obligations to a provider (presumably, under an employer-integrated model).

Finally, the law provides that EWA providers must develop and implement policies and procedures to respond to questions raised by consumers and address consumer complaints in an "expedient manner." FDIC-insured banks, state-licensed lenders, and credit unions are among the entities exempt from the new law.

SB 103 takes effect on August 28, 2023. The Missouri regulator does not appear to have issued registration forms or issued guidance on the registration process, so earned wage access providers should closely monitor any announcements regarding implementation of the new law.

Nevada

On June 13, 2023, Governor Joe Lombardo signed Senate Bill 290 ("SB 290") which, similar to Missouri, establishes a regulatory framework for EWA programs operating in Nevada. Like the Missouri law, SB 290 applies to both employer-integrated and direct-to-consumer programs. SB 290 imposes a requirement for EWA providers operating in Nevada to obtain a license from the Nevada Division of Financial Institutions through the NMLS system. The licensing application process will require a prospective licensee to provide, among other information, a copy of its EWA program terms and conditions—which must include a statement that the provider will operate in compliance with the Electronic Fund Transfer Act and Regulation E—a fee schedule, and the provider's privacy policy. Applicants must also obtain a $35,000 surety bond.

The Nevada law provides that EWA services offered in compliance with the new law are not a loan or credit, a sale or assignment of wages, or money transmission, and fees, tips, or other gratuities are not interest or finance charges on an extension of credit. The Nevada law specifically provides that an EWA transaction is not subject to the Nevada Installment Loan and Finance Act or Nevada's high-interest loan law (Chapter 604A), unless the provider separately conducts loan business that is subject to one or both of those laws. Separately, SB 290 amends the Installment Loan and Finance Act and Chapter 604A to provide a statutory exemption under each law for a licensed EWA provider.

SB 290 contains similar compliance obligations and prohibitions to the Missouri law. These include:

• Disclosures: Like the Missouri law, the Nevada law requires providers to disclose the user's rights under an EWA agreement, and any fees that may be imposed under the agreement.
• Voluntary "Tips": Providers that solicit or accept "tips" must disclose that a tip does not inure to the benefit of any specific person, and must conspicuously provide an option for a consumer to leave no tip.
• No Fees For Nonpayment: Licensed providers are prohibited from charging any late fees, deferral fees, interest, or other penalties for failure to pay any outstanding amounts.
• Prohibition on Suit, Credit Reporting, or Assignment of Debt: Like the Missouri law, SB 290 prohibits a licensed EWA provider from suing a consumer to collect unpaid amounts, reporting the outstanding amount to a consumer reporting agency or debt collector, hiring a collection agency to pursue the consumer for unpaid amounts, or selling any outstanding amounts to a debt buyer or collection agency. (The Nevada law also provides an exception for pursuit of a consumer who obtained an EWA by fraudulent or unlawful means.)
• Right to Cancel: Under the Nevada law, an EWA provider must permit a consumer to cancel their participation in an EWA program at any time and without a fee.
• Complaint Handling: EWA providers must develop and implement policies and procedures to respond to questions raised by consumers and address consumer complaints in an "expedient manner."

Federally insured banks are exempt from the new law. The law takes effect on July 1, 2024, although the law is effective immediately for the limited purpose of enabling the Division of Financial Institutions to promulgate regulations and perform other administrative tasks to prepare for the law to take effect. EWA providers who do not currently hold other licenses or registrations through the NMLS will need to familiarize themselves with that system, and establish a company record in the coming months to prepare for the license application process once it is established by Nevada regulators.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.