US Agency Proposes Treating Paycheck Advance Products as Consumer Loans

The Consumer Financial Protection Bureau building in Washington, on Oct. 31, 2023. (Madalina Vasiliu/The Epoch Times)

The Consumer Financial Protection Bureau (CFPB) proposed a rule affirming that lenders providing paycheck advance loans are extending consumer loans and thus subject to provisions under the Truth in Lending Act.

The CFPB rule relates to earned wage products that offer workers access to a portion of their unpaid wages prior to their payday. The employee is required to repay the amount from their paycheck together with some charges, which include interest rates and fees for expedited access to funds.

The CFPB found that interest rates for these products tend to be more than 100 percent annual percentage rate (APR), which is higher than credit cards. Moreover, APRs vary depending on factors like the size of the transaction and duration of the loan, with the expedited fees making up the majority of costs paid by a customer.

Considering these factors, the agency proposed a rule on July 18 stating that earned wage products are essentially consumer loans. As such, these loan products fall under the Truth in Lending Act which requires lenders to provide consumers with accurate costs of these offerings.

“The proposal makes clear that if workers obtain money that they are required to repay through a paycheck deduction, that’s a loan under existing federal law,” CFPB director Rohit Chopra said.

“This means that lenders must disclose an accurate interest rate in accordance with longstanding rules covering loans. This will help people compare options across different products. And it will especially help those providers truly providing free products.”

The CFPB pointed out that some lenders requested “tips” in addition to monthly subscription fees in order to get their wages early. The agency’s proposal required that such tips and loan fees be added to the cost of the loan as required by the Truth in Lending Act.

The CFPB proposal was criticized by the American Fintech Council (AFC), a trade association representing the largest financial technology companies. AFC president Phil Goldfeder said that earned wage products are neither a loan nor an advance and thus should not be regulated as such.

“EWA is a safe, reliable alternative to high-cost debt products like predatory and payday loans and enables consumers to access the money they have already earned on their own terms, often at no charge,” he said.

“Unlike the provision of credit or a loan, EWA is non-recourse and does not require a credit check, underwriting, base fees on creditworthiness; charge a fee in installments, charge interest, late fees, or penalties; or impact a user’s credit score.”

Mr. Goldfeder further said that millions of American families relied on earned wage products and the CFPB’s new proposal would end up harming consumer access to credit and limit competition.

Need for Regulations

Almost three-quarters of workers in the United States receive wages biweekly or monthly. The need for earned wage products stems from the fact that people may require access to money days before their payday to meet certain urgent expenses.

The CFPB found that workers took out an average of 27 loans per year through such products, with the average transaction amount being $106. With such a high number of transactions, the interest rates, expedited fees, and tips can add up, eating into the monthly earnings.

“In recent years, workers have seen big increases in wages, but junk fees and high rates on financial products not only chip away at these gains—they take advantage of workers,” said Acting Secretary of Labor Julie Su.

“As part of the most pro-worker, pro-union administration in history, here at the Department of Labor, we proudly support efforts by the CFPB to guard against predatory lending in the workplace.”

The CFPB’s rule targeting earned wage products comes as the agency recently issued a proposed rule aimed at “buy now, pay later” loans. Such loans allow customers to buy products or services and pay for them in installments over a period of time without having to pay interest.

In May, the agency said that it was investigating such loan products and had received several consumer complaints related to disputed transactions and refunds.

The CFPB found that 13 percent of buy now, pay later transactions involved a return or dispute. In 2021, Americans disputed or returned $1.8 billion worth of transactions at five surveyed firms, the agency stated.

The proposed rule requires that buy now, pay later lenders “investigate disputes that consumers initiate.” In addition, “lenders must also pause payment requirements during the investigation and sometimes must issue credits.”

“When consumers return products or cancel services for a refund, buy now, pay later lenders must credit the refunds to consumers’ accounts.”