GAO Says Regulatory Clarity Needed on Consumer FinTech Products

The Government Accountability Office ("GAO") recommended that the CFPB provide clarity on how the definition of "credit" in the Truth in Lending Act ("TILA") and Regulation Z should be applied to earned wage 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 builder products, (3) small-dollar FinTech loans, and (4) EWA products. GAO found that:

• underserved consumers could 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 the majority are nonbank entities) and (ii) may not know how to retrieve their funds should the company go out of business;
• while products such as credit builder cards and credit builder loans can help to build or establish a credit report, underserved consumers face the risk of hurting their credit score should they miss payments;
• small-dollar FinTech loans through the use of alternative data (e.g., cash flow data, utility or rental payments, employment history and level of education) can help to extend loan offerings to underserved consumers but could potentially charge higher APRs than small-dollar loans offered by credit unions; and
• EWA products give consumers access to unpaid wages, but consumers could find themselves being charged with unexpected overdraft fees due to a lack of cost transparency by FinTech companies.

GAO said that the extent to which consumers use and benefit from these FinTech products is unclear. GAO found that while regulators, including the CFPB, have taken steps to better evaluate new products, policymakers remain concerned about whether current regulations sufficiently address the risks associated with these products

Specifically, 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 opinion did not reference direct-to-consumer EWA models. GAO recommended that the CFPB clarify the application of TILA’s definition of "credit" for EWA products not covered by its November 2020 advisory opinion.