After Maryland’s Commissioner of Financial Regulation delivered guidance on earned wage access practices at the start of this month, opposition emerged within days.
The Maryland policy edict determined that some earned wage access services provided by third parties may qualify as loans, and therefore will be subject to the state’s lending regulations. It also noted that on-demand pay provided directly by the employer to the employee, at no cost to the employee, wouldn’t be considered a loan.
“If a Maryland consumer receives the product from an independent third party, the arrangement’s facts and circumstances must be analyzed to determine if those providers are to be deemed lenders and whether they would require a license,” the Aug. 1 advisory said.
States nationwide have been mulling how to treat the new earned wage access payments offering, with some recently enacting new laws in the area. Missouri and Nevada recently passed legislation requiring registration of EWA providers. Wagestream said this week that it has become the first EWA provider to be granted a state license in the U.S. after it registered in Missouri.
The new state laws are being met with skepticism from some consumer advocacy groups. The National Consumer Law Center, which had been critical of Nevada’s law, expressed concern that EWA was not being treated like payday lending, which the Federal Deposit Insurance Corp. has said presents “significant risks.”
EWA services have mainly been available to hourly and gig workers, but the services are becoming available to more employees across the country as employers compete for workers and EWA providers proliferate. Other companies that provide EWA services include Payactiv, DailyPay and Earnin, but their business models vary.
EWA services have also drawn scrutiny from the Consumer Financial Protection Bureau, which is considering new rules as well.
That determination will turn on whether the third-party provider is acting as a “service provider to the employer,” or not, the state agency said. That assessment will include three tests, including a determination of what entity bears the financial risk; what level of contact the provider has with the consumer; and who benefits from any fees or tips the consumer pays.
If the third-party provider bears the financial risk, then that entity will more likely be seen by the state as a lender, the state said. If the provider has little contact with the consumer, then it’s more likely to be considered an extension of the employer. Finally, if the provider is the chief beneficiary of any fees paid by the consumer, it’s more likely to be seen as a lender by the state, especially if the fees are paid directly to the provider.
If the payment provided to the consumer is considered a loan under the Maryland guidance then any interest paid on that loan would be subject to the state’s laws on lending, including a cap on that interest.
Maryland’s Office of Financial Regulation, which is part of the state’s Department of Labor, plans to keep an eye on the new EWA services and to pay particular attention to the fees associated with it, the state said in the advisory. “OFR will also be monitoring this product for any practices that are deceptive, unfair, or abusive,” the advisory said.
The American Fintech Council pushed back against the new Maryland guidance last week, arguing that earned wage access shouldn’t be considered lending.
“Unlike the provision of credit or a loan, EWA is non-recourse and does not require a credit check; underwriting; base fees on creditworthiness; charge a fee in installments; charge interest, late fees or penalties; or impact a user’s credit score,” the Aug. 9 letter said.
The council contended that EWA services should be seen as a positive alternative to payday lenders that charge exorbitant interest rates. In its letter, the council said that some 60,000 workers in Maryland have access to EWA services.
In a letter to OFR Commission Antonio Salazar, the council requested a meeting to discuss the state’s position on EWA. A spokesperson for the council said by email that Maryland's agency agreed to a meeting on the topic next week. The state didn’t immediately respond to a request by Payments Dive for further comment.
