What CFPB’s rule on paycheck advance programs means for workers

The Consumer Financial Protection Bureau is cracking down on so-called payroll advance programs that have become increasingly popular with workers in recent years.

Such programs, also known as earned wage access, allow workers to receive paychecks before payday, usually for a fee, according to the CFPB.

Bureau of Consumer Protection propose rules of interpretation said on Thursday that these programs – whether offered through employers or directly to users through fintech apps – are “consumer loans” and are subject to the Truth in Lending Act.

More than 7 million workers were paid about $22 billion ahead of payday in 2022, according to CFPB data analyze Employer-sponsored programs were also announced Thursday. The agency said the number of transactions surged by more than 90% from 2021 to 2022.

Such services are not new: fintech companies first launched them 15 years ago. But experts say their use has accelerated recently as the Covid-19 pandemic and high inflation put a financial burden on households.

If finalized, the rule would require companies that provide payroll advances to provide additional disclosures to users to help borrowers make more informed decisions, the CFPB said.

Perhaps most importantly, legal experts say, the cost or fee a consumer incurs by taking a paycheck early needs to be expressed as an annual percentage rate (APR), similar to a credit card interest rate.

Despite the service, the typical Payroll Access user pays a whopping 109.5% APR According to the CFPB, it is often promoted as a “free or low-cost solution.”

The California Department of Financial Protection and Innovation found that for the average user, such fees were higher, more than 330%. analyze Published in 2023.

The data has led some consumer advocates to equate earned wages with high-interest credit like payday loans. By comparison, the average balance among credit card users Salary Annual interest rates as of May were 23%, a record high, according to the Federal Reserve.

“The CFPB's action will help workers understand what they are getting from these products and prevent race-to-the-bottom business practices,” CFPB Director Rohit Chopra said in a written statement.

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However, the financial industry does not consider such services traditional lending and has struggled with such a label.

Phil Goldfeder, CEO of the American Fintech Council, said it was inaccurate to call the service a “loan” or “advance” because it gives workers access to money they've already earned.

“I think it's more like using an ATM and charging a fee,” Goldfeder said. “You can't use a method like annual percentage rate to determine the appropriate cost of a product like this.”

The CFPB will seek public comment until August 30.

The proposal is the latest in a series of actions by the Consumer Financial Protection Bureau against lenders, including seeking to rein in bank overdraft fees and popular “buy now, pay later” programs.

It's also part of a broader effort by the Biden administration to crack down on “garbage fees.”

Consumers may encounter wage capture methods under various names, such as daily pay, instant pay, accrued pay, same-day pay, and pay-as-you-go.

Track users' accrued income using payroll and timesheet records through an employer-provided business-to-business model. When payday arrives, employees will receive a portion of their salary that has not been withdrawn in advance.

Experts say third-party apps are similar but dole out funds based on estimated or historical earnings and then automatically debit the user's bank account on payday.

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 plans at no cost to employees.

The requirements of the CFPB proposal would not apply if a consumer does not pay.

However, the CFPB found in its analysis of employer-sponsored plans that most users did pay the fee.

The agency said more than 90% of workers paid at least one fee in 2022 without their employer covering the cost. The vast majority are for “quick” transfers of funds; the CFPB said such fees range from $1 to $5.99, with the average fee being $3.18.

Many are repeat users: The CFPB said workers made an average of 27 transactions per year and paid a total of $106 in fees. .

Mitria Spotser, vice president and director of federal policy at the Center for Responsible Lending, a consumer advocacy group, said the CFPB's proposal marks the first time the agency has “clearly” stated that taking a paycheck early amounts to a loan.

“It's a traditional loan: it borrows money from the provider at a cost,” she said.

Goldfeder of the FinTech Council disagrees.

“Unlike extending credit or a loan, EWA is non-recourse and does not require a credit check, underwriting, credit base fees; installment fees, interest, late fees or penalties; or impact the user's credit score,” he said in a said in a written statement.

Spother said CFPB rules do not prohibit providers from charging fees.

“It just requires them to disclose,” she added. “You have to ask yourself, why is the industry so afraid of disclosing that they charge these fees?”

For example, Lauren Saunders, deputy director of the National Consumer Law Center, said that if finalized, the rule would allow the CFPB to take enforcement action against companies that fail to make appropriate disclosures. States can also file lawsuits in court, and consumers can file lawsuits through arbitration, she said.

Sanders said of the interpretation of the rule that companies “ignore it at their own peril because that's the CFPB's interpretation of the law.” “They may try to argue in court that the CFPB was wrong, but they've noticed.”