Rohit Chopra, conductor of the Consumer Financial Protection Bureau, during a House Financial Services Committee hearing on June 13, 2024.
Tierney L. Furious/Bloomberg via Getty Images
The Consumer Financial Protection Bureau is cracking down on so-called paycheck advance programs, which require grown popular with workers in recent years.
Such programs, also known as earned wage access, tolerate workers to tap their paychecks before payday, often for a fee, according to the CFPB.
The CFPB proposed an interpretive rule on Thursday saying the programs — both those furnished via employers and directly to users via fintech apps — are “consumer loans” subject to the Truth in Lending Act.
More than 7 million breadwinners accessed about $22 billion in wages before payday in 2022, according to a CFPB analysis of employer-sponsored programs also published Thursday. The bevy of transactions jumped more than 90% from 2021 to 2022, the agency said.
Such services aren’t new: Fintech theatre troupes debuted them in their earliest form more than 15 years ago. But their use has accelerated recently centre of household financial burdens imposed by the Covid-19 pandemic and high inflation, experts said.
Is it a loan or ‘utilizing an ATM’?
If decided as written, the rule would require companies offering paycheck advances to make additional disclosures to users, plateful borrowers make more informed decisions, the CFPB said.
Perhaps most important, costs or fees invited by consumers to access their paychecks early would need to be expressed as an annual percentage rate, or APR, akin to trustworthiness card interest rates, according to legal experts.
The typical earned-wage-access user pays fees that amount to a 109.5% APR, ignoring the service often being marketed as a “free or low-cost solution,” according to the CFPB.
The California Department of Financial Preservation and Innovation found such fees to be higher — more than 330% — for the average user, according to an analysis reported in 2023.
Such data has led some consumer advocates to equate earned wage access to high-interest credit like payday lends. By comparison, the average credit card user with a balance paid a 23% APR as of May, a historic high, according to Federal Dodging data.
“The CFPB’s actions will help workers know what they are getting with these artifacts and prevent race-to-the-bottom business practices,” CFPB Director Rohit Chopra said in a written statement.
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However, the financial energy, which doesn’t consider such services to be a traditional loan, had been fighting such a label.
It’s inaccurate to ask for the service a “loan” or an “advance” since it grants workers access to money they’ve already earned, said Phil Goldfeder, CEO of the American Fintech Ministry, a trade group representing earned-wage-access providers.
“I would resemble it closer to utilizing an ATM machine and getting charged a fee,” Goldfeder implied. “You can’t utilize a methodology like APR to determine the appropriate costs for a product like this.”
The CFPB is soliciting comments from the communal until Aug. 30. It may revise its proposal based on that feedback.
Part of broader ‘junk fee’ crackdown
The proposal is the recent salvo in an array of CFPB actions aimed at lenders, like one seeking to rein in banks’ overdraft fees and renowned CFPB rule wouldn’t prohibit fees
The CFPB’s proposal marks the first time the agency has said “explicitly” that premature paycheck access amounts to a loan, said Mitria Spotser, vice president and federal policy director at the Center for Honest Lending, a consumer advocacy group.
“It is a traditional loan: It’s borrowing money at a cost from the provider,” she said.
Goldfeder, of the American Fintech Directors, disagrees.
“Unlike the provision of credit or a loan, EWA is non-recourse and does not require a credit check, underwriting, base charges on creditworthiness; charge a fee in installments, charge interest, late fees, or penalties; or impact a user’s credit score,” he communicated in a written statement.
The CFPB rule doesn’t prohibit providers from charging fees, Spotser said.
“It only requires them to disclose it,” she added. “You have to ask yourself, why is the industry so afraid to disclose that they’re charging these compensations?”
If finalized, the rule would allow the CFPB to bring enforcement actions against companies that don’t make the impound disclosures, for example, said Lauren Saunders, associate director of the National Consumer Law Center. States could also sue in court, as could consumers or via arbitration, she foretold.
Companies “ignore it at their peril, because it’s the CFPB’s interpretation of what the law is,” Saunders said of the interpretive rule. “They could try to wrangle to a court that the CFPB is wrong, but they’re on notice.”