Rohit Chopra, Director of the Consumer Financial Protection Bureau, during a hearing before the House Financial Services Committee on June 13, 2024.
Tierney L. Cross/Bloomberg via Getty Images
The Consumer Financial Protection Bureau is cracking down on so-called paycheck advance programs, which have gained popularity among workers in recent years.
These programs, also known as “earned wage access,” allow workers to withdraw their paychecks before payday, often for a fee, according to the Consumer Financial Protection Bureau.
The Consumer Financial Protection Bureau on Thursday proposed an interpretive rule stating that programs — whether offered through employers or directly to users via fintech apps — are “consumer loans” subject to the Truth in Lending Act.
More than 7 million workers received about $22 billion in wages before payday in 2022, according to a Consumer Financial Protection Bureau analysis of employer-sponsored programs released Thursday. The agency said the number of transactions increased by more than 90% from 2021 to 2022.
Such services are not new: Fintech companies first launched them more than 15 years ago. But experts say their use has accelerated recently amid the financial strains imposed on households by the Covid-19 pandemic and high inflation.
Is it a loan or “use an ATM”?
The Consumer Financial Protection Agency said the rule, if finalized as written, would require companies that offer payroll advances to provide additional disclosures to users, helping borrowers make more informed decisions.
Perhaps most importantly, the costs or fees consumers incur in order to access their paychecks early may need to be expressed as an annual percentage rate, or APR, similar to interest rates on credit cards, according to legal experts.
The typical user pays fees of up to 109.5% per year to access Earned Wage, even though the service is often marketed as a “free or low-cost solution,” according to the Consumer Financial Protection Bureau.
The California Department of Financial Protection and Innovation found that these fees are higher — more than 330% — for the average user, according to an analysis published in 2023.
Such data has prompted some consumer advocates to equate the paycheck to high-interest credit like payday loans. By comparison, the average credit card user with a balance was paying 23% in annual interest as of May, a record high, according to Federal Reserve data.
“The CFPB’s actions will help workers know what they are getting for these products and prevent business practices that boil down to charging too much,” CFPB Director Rohit Chopra said in a written statement.
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However, the financial industry, which does not consider such services to be a traditional loan, has been resistant to such a classification.
Phil Goldfeder, CEO of the American Council for FinTech, a trade group representing providers of earned wage access services, said it's inaccurate to call the service a “loan” or an “advance” because it gives workers access to money they've already earned.
“I think it’s like using an ATM and getting charged a fee,” Goldfeder said. “You can’t use a methodology like the annual percentage rate to determine the appropriate costs for a product like this.”
The Consumer Financial Protection Agency is seeking public comments through August 30. It may revise its proposal based on those comments.
Part of a wider campaign against 'garbage charges'
The proposal is the latest in a series of actions by the Consumer Financial Protection Bureau targeting lenders, such as those seeking to limit bank overdraft fees and buy-now-pay-later programs.
This is also part of a broader campaign by the Biden administration to eliminate “junk fees.”
Consumers may access earned wages under different names, such as daily wages, instant wages, access to accrued wages, same-day wages, and on-demand wages.
Employer-provided business models use payroll records and work schedules to track the earnings accrued for employees. When payday comes, the employee receives the portion of the wage that was not paid early.
Third-party apps are similar but issue funds based on estimated or historical earnings and then automatically deduct the money from the user's bank account on payday, experts said.
Branch, DailyPay, Payactiv, Dave, EarnIn, and Brigit are examples of some of the largest providers in the B2B or third-party ecosystem.
Providers may offer various services for free, and some employers offer programs to their employees for free.
The Consumer Financial Protection Bureau said the requirements of its proposals do not apply in cases where the consumer does not incur a fee.
However, most users pay fees, the Consumer Financial Protection Bureau found in its analysis of employer-sponsored programs.
More than 90% of workers paid at least one fee in 2022 when their employers didn’t cover the costs, the agency said. The vast majority of those fees were for “expedited” money transfers; these fees range from $1 to $5.99, with an average fee of $3.18, according to the Consumer Financial Protection Bureau.
Many of them are frequent users: Workers made 27 transactions a year and paid $106 in total fees, on average, according to the Consumer Financial Protection Bureau, which warned that consumers could “become under excessive financial stress if they simultaneously use multiple earned-wage products.”
The Consumer Financial Protection Bureau's rules will not prohibit the charges.
The Consumer Financial Protection Bureau's proposal marks the first time the agency has “explicitly” said that early access to paychecks is equivalent to a loan, said Mitria Spotzer, vice president and director of federal policy at the Center for Responsible Lending, a consumer advocacy group.
“It's a traditional loan: it's borrowing money at a cost from the service provider,” she said.
But Goldfeder, of the US FinTech Council, disagrees.
“Unlike providing credit or a loan, EWA is non-auditable and does not require a credit check, underwriting or base fees on creditworthiness; does not charge premiums, interest, late fees or penalties; or impact a user’s credit score,” he said in a written statement.
Consumer Financial Protection Bureau rules do not prevent providers from charging fees, Spatzer said.
“It just requires them to disclose it,” she added. “And you have to ask yourself why is the industry afraid to disclose that they are charging these fees?”
The rule would allow the Consumer Financial Protection Bureau to take enforcement action against companies that don’t provide adequate disclosures, for example, said Lauren Saunders, associate director of the National Consumer Law Center. States could also file lawsuits, as could consumers or through arbitration, she added.
“Companies ignore it at their own peril, because this is the CFPB’s interpretation of the law,” Saunders said of the interpretive rule. “Companies can try to argue in court that the CFPB is wrong, but that’s a given.”
