The Center for Responsible Lending, Consumer Federation of California, National Consumer Law Center, and Office of Kat Taylor submitted comments to the California Department of Financial Protection and Innovation on its revised proposed regulations of income-based advances.
The DFPI’s regulatory proposal for income-based advances recognizes, rightly, that these products must be regulated as credit. This is so because the DFPI has correctly determined that “income-based advances” are loans under the California Financing Law and that all costs associated with a transaction, whether voluntary or not, are “charges” under that statute. Those determinations are absolutely critical to any regulatory approach to fintech cash advances, and the DFPI must maintain those aspects of regulatory text in the final draft rules.
Because DFPI so correctly understands the true nature of fintech cash advances, we are deeply disturbed by DFPI’s proposal to eliminate the requirement that income-based advance providers that register under the California Consumer Financial Protection Law (CCFPL) comply with the cost caps under the CFL. It will harm consumers to allow income-based advance providers to continue to operate without any cost limitation, which DFPI should restore.
It is especially dangerous and unjustified to extend this exemption to fake earned wage advance lenders and other direct-to-consumer fintech cash advances. The proposed definition of “income-based advance,” covering advances “based on income the provider has reasonably determined to have accrued,” is far too loose, both in covering accrued “income,” not just wages, and in allowing models that have no connection to time and attendance systems or payroll. These advances are unquestionably loans that should be covered under existing licensing and cost limitations. Any alternative registration regime should be limited, at most, to employer-integrated programs that do not debit consumer bank accounts.
A stricter definition is also essential to prevent traditional payday lenders or CFL lenders from claiming that they, too, “reasonably determine” accrued income and can use the alternative registration path. The definition of “income-based advance” should be further limited to advances that, together with all costs, are $300 or less and that are not deferred deposit transactions.
In addition to restoring the cost limits, DFPI must prohibit the other especially harmful aspects of these products by banning repeat bank account debits and the inclusion, by default, of “tips” and other purportedly voluntary payments.
Finally, if the DFPI is not going to restore the requirement that registrants comply with the CFL cost caps, we urge the Department to view these rules as just the beginning of addressing the regulatory regime for fintech cash advances. Not all providers of these loans will fall under the definition of income-based advances, and evasions should not be permitted in other markets. Moreover, the registration provisions will expire, and any separate registration regime must only be temporary. Thus, we urge DFPI not to wait four years, and to bring income-based advances fully within the CFL as soon as possible, even DFPI declines to do so at the present time.