NEW YORK — The Consumer Financial Protection Bureau said Thursday that apps that allow employees have access to their pay slips in advanceprovide loans, often for a fee, and are therefore covered by the Truth in Lending Act.
If adopted, the proposed rule would provide clarity to a fast-growing industry known as Earned Wage Access, which has been compared to payday lending. The agency wants borrowers to be able to “easily compare products” and avoid “race-to-the-bottom business practices,” CFPB Director Rohit Chopra said on a call with reporters.
Earned Wage Access Apps have been around for more than a decade, but they have become popular in the years before the pandemic and after. The apps provide small, short-term loans to workers between paychecks so they can pay bills and meet their daily needs. On payday, the user repays the money from their wages, along with any fees. Between 2018 and 2020, transaction volume tripled from $3.2 billion to $9.5 billion, according to Datos Insights.
The CFPB said its research shows that the average worker using Earned Wage Access takes out 27 of these loans per year, meaning there’s one loan for nearly every biweekly paycheck. That may seem like a revolving credit card balance. But with fees that would equate to an average annual percentage rate (APR) of more than 100%, the loans carry higher interest rates than the most expensive subprime credit card. Most of that interest comes from fees to accelerate access to paychecks, the CFPB found.
According to the Government Accountability Office, the typical user of these apps also earns less than $50,000 a year and faces the pressure of two years of high inflationMany apps charge monthly subscription fees and most charge mandatory fees for instant money transfers.
Christine Zinner, a policy adviser at Americans for Financial Reform, said the paycheck advance products “are nothing more than workplace loans, with consumers becoming even more vulnerable because money is just a tap of a cell phone away.”
“People can easily get into a cycle of debt by borrowing again and asking for advances 12 to 120 times each year just to cover basic household expenses and get by,” the spokesperson said.
The CFPB also said it is paying close attention to the “gratuity” that many apps charge when providing paycheck advances. During the call, Chopra called the practice odd, noting that many companies that provide paycheck advances generate “substantial revenue” from the so-called tips.
In 2021, the California Department of Financial Protection and Innovation found that “users often feel coerced into (tipping) due to pressure tactics used, such as… claiming that tips will be used to support other vulnerable consumers or for charitable purposes.”
In the interpretive rule, the CFPB clarifies that “if employees receive money that they must repay out of their paychecks, this is a loan under federal law, (and) companies must disclose an interest rate.”
This means that tips and expedited transfer fees must be included in the cost of the loan, according to the disclosure schedule established by the Truth in Lending Act, and that these fees should not be treated as “incidental,” even if the amount is variable, Chopra said.
Some Earned Wage Access companies have argued that these fees should not be considered part of the standard APR calculation for the loans. When Connecticut passed a law limiting the fees the apps could charge under the state’s usury limits, at least one Earned Wage Access company, EarnIn, stopped operating in the state. Asked why, EarnIn CEO Ram Palaniappan said it was no longer “economically viable.”
The agency will consider comments on the proposed interpretive regulations until the end of August.
“Today’s report and regulations are important steps for the CFPB to ensure that the market works,” Chopra said. “We want the market to be competitive and to reduce costs for workers and employers.”
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