The Consumer Financial Protection Bureau (CFPB) has recently taken a stand against so-called paycheck advance programs, also known as earned wage access. These programs have become increasingly popular among workers, providing them with the ability to access their earnings before payday for a fee. The CFPB proposed an interpretive rule that categorizes these programs as “consumer loans” under the Truth in Lending Act. According to a CFPB analysis, more than 7 million workers accessed approximately $22 billion in wages before payday in 2022, indicating a significant increase in the usage of these programs from the previous year.
Although earned wage access services have been in existence for over 15 years, their popularity has surged in recent times due to the financial constraints faced by households during the Covid-19 pandemic and high inflation rates. Despite being marketed as a “free or low-cost solution,” users of these programs often encounter fees equivalent to a 109.5% APR, which escalates to more than 330% for some individuals, as highlighted by the California Department of Financial Protection and Innovation.
The financial industry is divided on the classification of earned wage access programs as traditional loans. While CFPB Director Rohit Chopra believes that the disclosure requirements introduced by the bureau will promote transparency and prevent exploitative business practices, some industry representatives, like Phil Goldfeder, CEO of the American Fintech Council, argue that earned wage access is closer to using an ATM machine and cannot be evaluated using APR calculations.
The CFPB is currently seeking public feedback on its proposal until Aug. 30, aiming to address the concerns raised by both consumer advocates and industry professionals. The proposed rule would mandate providers of paycheck advance programs to clearly disclose the fees associated with accessing earnings early. Moreover, the rule emphasizes the importance of expressing these costs as an annual percentage rate (APR) to facilitate better decision-making among users.
Consumers may encounter earned wage access under different names, such as daily pay, instant pay, accrued wage access, same-day pay, and on-demand pay. These programs operate through employer-sponsored models or third-party apps that track accrued earnings and provide early access to funds. While some providers offer these services for free, the majority of users incur fees ranging from $1 to $5.99 for expedited transfers of funds.
If the CFPB’s rule is finalized, companies failing to adhere to the disclosure requirements could face enforcement actions from the bureau or legal action from states, consumers, or through arbitration. Lauren Saunders, associate director of the National Consumer Law Center, emphasizes that companies must disclose fees transparently to avoid potential consequences, as mandated by the interpretive rule.
The debate surrounding paycheck advance programs continues to evolve, with stakeholders expressing varied opinions on whether these services constitute traditional loans. As regulatory bodies like the CFPB strive to enhance consumer protection and financial transparency, the future of earned wage access programs remains uncertain, pending further public feedback and potential revisions to existing regulations.