The Consumer Financial Protection Bureau proposed an interpretive rule classifying paycheck advances and earned wage access (EWA) products as consumer loans.
According to the CFPB, employees take an average of 27 employer-sponsored paycheck advance loans each year, and these loans carry an average annual percentage rate of 109.5%. Under the new rule, paycheck advance lenders will have to disclose their fees and rate information like other consumer lenders.
“Paycheck advance products are often marketed to and designed for employers, rather than employees,” said CFPB Director Rohit Chopra. “The CFPB’s actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices.”
A Growing Need
Roughly 75% of U.S. workers receive their paychecks on a biweekly or monthly basis. Due to the lingering effects of high interest rates and inflation, many workers can’t wait until payday to meet certain expenses.
The EWA industry has grown rapidly to address this need, with the CFPB estimating that more than seven million workers accessed wages totaling approximately $22 billion in 2022. Proponents of paycheck advance products highlight that these products allow workers to receive the money they’ve earned faster.
Truth in Lending
The CFPB’s main concern is the potential exploitation of workers through high APRs and undisclosed fees. The Bureau found that more than 90% of workers incurred a fee in 2022 that wasn’t reimbursed by their employer. Most of those fees, which ranged from $1 to $5.99, were paid to expedite paycheck transfers.
Additionally, the CFPB expressed concern over some EWA companies mandating tips for payment processing. Under the new rule, these fees and tips would need to meet the Truth in Lending Act’s standards for finance charges.
The decision to regulate EWA lenders follows the CFPB’s interpretive rule asserting that buy now, pay later lenders should be treated like credit card companies. Similarly, the BNPL rule requires that these lenders need to clearly disclose their fees and issue statements like credit card companies do.
While the rule didn’t have immediate ramifications for the BNPL industry, the EWA industry might feel more shockwaves from the CFPB’s actions. Many EWA providers have asked state and federal lawmakers to give them an exemption from lending regulations and it’s not immediately clear how the CFPB’s new rule will affect those efforts.
