Recently, the Consumer Financial Protection Bureau (CFPB) proposed a new interpretive rule aimed at regulating paycheck advance programs. These programs, also known as earned wage access, have gained popularity among workers in recent years as an alternative way to access their paychecks before the actual payday. The proposal suggests that such programs should be classified as “consumer loans” and are subject to the Truth in Lending Act. The number of transactions through these programs has increased by more than 90% from 2021 to 2022, indicating growing popularity and usage.
One of the key aspects highlighted in the CFPB proposal is the need for companies offering paycheck advances to disclose additional information to users. This includes expressing any costs or fees in terms of an annual percentage rate (APR) to provide more transparency to consumers. The typical earned wage access user pays fees equivalent to a 109.5% APR, despite the service often being marketed as a “free or low-cost solution.” However, a further analysis conducted by the California Department of Financial Protection and Innovation revealed that these fees could be even higher, exceeding 330% for the average user.
When compared to traditional credit card interest rates, the fees associated with earned wage access programs seem disproportionately high. While the average credit card user with a balance paid a 23% APR as of May, the APR for earned wage access users is significantly higher. This has raised concerns among consumer advocates who equate these programs to high-interest credit options like payday loans. The CFPB’s efforts to introduce more comprehensive disclosures aim to educate workers about the actual costs involved in utilizing these services.
Despite the CFPB’s classification of earned wage access as consumer loans, the financial industry has been resistant to this label. Phil Goldfeder, CEO of the American Fintech Council, argues that these services should not be considered traditional loans or advances as they provide access to already earned funds. Drawing a comparison to ATM fees, Goldfeder believes that using the APR metric to assess the costs of such services is not appropriate. The industry has been urging for a reevaluation of the proposed rule before its finalization.
The feedback solicited by the CFPB from the public until Aug. 30 will influence the final version of the proposed rule. If implemented, the rule would empower the CFPB to take enforcement actions against companies that fail to comply with the disclosure requirements. This could have significant implications for providers of earned wage access programs, as they may face legal action from both regulatory authorities and consumers. The rule aims to bring more clarity and transparency to the industry, ensuring that workers are aware of the costs associated with accessing their paychecks early.
The increasing scrutiny of paycheck advance programs by the CFPB highlights the need for greater consumer protection and transparency in the financial industry. While these programs offer a convenient way for workers to access their earnings before payday, the costs and fees associated with them warrant closer examination. The proposed rule signals a significant shift in how these programs are regulated and could have lasting effects on both providers and users. As the debate continues, it is essential for all stakeholders to consider the implications of these programs and work towards ensuring fair and equitable financial practices for all.