Earned Wage Access (or EWA) programs are popular programs that allow employees to access their salary or wages that have already been earned, prior to the scheduled payroll date. Many argue that these beneficial programs are not truly “loans” because employees are accessing their own money without paying the high fees charged by payday lenders. However, some state regulators disagree, making EWA programs more difficult to access, depending on what state in which the employee lives.
For example, recent amendments to the Connecticut Small Loan Act (“SLA”), as interpreted in guidance issued by the Connecticut Department of Banking (“CDB”), would have the effect of (i) requiring licensure to issue any EWA product with an annual percentage rate (APR) of more than 12%; and (ii) banning products with an APR above 36%, even if offered by a licensed entity.
Originally effective October 1, 2023 (but under a recent no-guidance letter, now effective January 1, 2024), the SLA will require a license to provide EWA products if the amount accessed is less than $50,000 and the APR as calculated under Connecticut law exceeds 12%. This is a 12% APR, not a 12% interest rate. For example, if an employee pays just 24 cents to access $100 of her earned wages 7 days in advance, that would result in an APR of 12.51% – requiring a license. While some EWA programs are paid for entirely by the employer, many others require the employee to pay a small fee for the service. Such programs would be at risk in Connecticut.
From the plain language of the statute, it appears that the SLA amendments were not intended to apply to earned wages, but the CDB thinks otherwise. The SLA defines small loan to include “an advance of money on … a borrower’s future potential source of money, including, but not limited to, future pay [or] salary.” But in its recent guidance the CDB disregards the references to “future” salary and takes the position that access to wages “that have been earned” are included within the definition of small loan. Unless the CDB changes its position, the offering of EWA products for even a small fee paid by employees will require a license if the APR exceeds 12%. And even for licensed entities, no EWA product can be offered if the APR (under Connecticut rules) exceeds 36%.
Federally insured banks, thrifts and credit unions would be exempt from the SLA license requirement, as would certain of their subsidiaries. However, the SLA amendments also codify Connecticut’s “true lender” principles, which can have the potential of requiring even an employer to be licensed when a bank is providing the earned wage access if, among other things, the employer holds “the predominant economic interest” in program, or “facilitates” the “loans” and can purchase “loan” receivables.
Hopefully the CDB will reconsider its interpretation, but until then, Connecticut employees might have very limited EWA choices.