Photo credit: www.cnbc.com
The Consumer Financial Protection Bureau Targets Paycheck Advance Programs
The Consumer Financial Protection Bureau (CFPB) is taking aim at paycheck advance programs, which have gained traction among workers lately.
These programs, also known as earned wage access services, allow workers to access their wages before payday, typically for a fee. The CFPB has proposed an interpretive rule classifying these services as “consumer loans” regulated under the Truth in Lending Act.
In 2022, more than 7 million workers withdrew approximately $22 billion in early wages, reflecting a significant rise of over 90% from the previous year, according to CFPB’s analysis of employer-sponsored programs.
While this service has existed in various forms for over 15 years, its popularity has surged due to financial pressures from the Covid-19 pandemic and rising inflation.
Loan or ATM Usage?
If enacted, the CFPB’s rule would mandate clearer disclosures from companies offering paycheck advances, helping consumers make more educated borrowing decisions. A central requirement would be expressing any costs or fees as an annual percentage rate (APR), like credit card rates.
Despite being marketed as low-cost or free, users typically face fees equating to a 109.5% APR. The California Department of Financial Protection and Innovation found even higher rates—exceeding 330%—for average users.
These findings have drawn parallels between earned wage access services and high-interest payday loans. For context, the average credit card APR stood at 23% in May, a historic high.
“The CFPB’s move will ensure workers understand what they are signing up for and curb exploitative business practices,” said Rohit Chopra, CFPB Director.
However, the financial sector argues against labeling these services as loans. “Calling it a loan or advance is misleading because it merely provides early access to earned wages,” said Phil Goldfeder, CEO of the American Fintech Council. “It’s more comparable to using an ATM and paying a fee.”
The CFPB is inviting public comments until August 30 and may amend the proposal based on the feedback received.
A Fight Against ‘Junk Fees’
This proposal is part of a broader CFPB initiative against lenders’ fees, including overdraft charges and buy now, pay later programs. It also aligns with the Biden administration’s campaign to eliminate “junk fees.”
Workers can encounter earned wage access under different names like daily pay, instant pay, and on-demand pay. Employer-based models leverage payroll and time-sheet records for tracking, while third-party apps use estimated or historical earnings to advance funds, debiting the user’s account on payday.
Prominent providers include Branch, DailyPay, Payactiv, Dave, EarnIn, and Brigit. Some of these apps offer free services, and certain employers provide these programs without charging employees.
The CFPB’s proposed rules won’t apply if no fee is charged to the user. Nevertheless, most users end up paying fees; the agency revealed that over 90% of workers paid at least one fee in 2022 for expedited fund transfers, averaging $3.18 per transaction.
Frequent use is common, with workers making an average of 27 transactions a year, paying about $106 in total fees. The CFPB cautioned that multiple simultaneous usage of these services could lead to financial strain.
Fee Disclosure Required
This is the first time the CFPB has clearly stated that early wage access constitutes a loan, said Mitria Spotser of the Center for Responsible Lending. “It’s essentially borrowing money at a cost from the provider,” she noted.
Disagreeing, Goldfeder pointed out that earned wage access does not have typical loan characteristics like recourse, credit checks, or installment fees.
The proposed rule does not ban the fees but requires transparent disclosure. “Why is the industry afraid of disclosing these charges?” Spotser asked.
Should the rule be finalized, it would empower the CFPB to enforce compliance through legal actions. States and consumers could also pursue claims in court or arbitration, noted Lauren Saunders of the National Consumer Law Center.
Ignoring the CFPB’s interpretation could be risky for companies, Saunders explained, as they would need to convince a court that the CFPB is mistaken.
Source
www.cnbc.com