What CFPB’s rule on paycheck advance programs means for workers

The Consumer Financial Protection Bureau is cracking down on so-called paycheck advance programs, which have grown popular with workers in recent years.

Such programs, also known as earned wage access, allow workers to tap their paychecks before payday, often for a fee, according to the CFPB.

The CFPB proposed an interpretive rule on Thursday saying the programs — both those offered via employers and directly to users via fintech apps — are “consumer loans” subject to the Truth in Lending Act.

More than 7 million workers accessed about $22 billion in wages before payday in 2022, according to a CFPB analysis of employer-sponsored programs also published Thursday. The number of transactions jumped more than 90% from 2021 to 2022, the agency said.

Such services aren’t new: Fintech companies debuted them in their earliest form more than 15 years ago. But their use has accelerated recently amid household financial burdens imposed by the Covid-19 pandemic and high inflation, experts said.

If finalized as written, the rule would require companies offering paycheck advances to make additional disclosures to users, helping borrowers make more informed decisions, the CFPB said.

Perhaps most important, costs or fees incurred by consumers to access their paychecks early would need to be expressed as an annual percentage rate, or APR, akin to credit card interest rates, according to legal experts.

The typical earned-wage-access user pays fees that amount to a 109.5% APR, despite the service often being marketed as a “free or low-cost solution,” according to the CFPB.

The California Department of Financial Protection and Innovation found such fees to be higher — more than 330% — for the average user, according to an analysis published in 2023.

Such data has led some consumer advocates to equate earned wage access to high-interest credit like payday loans. By comparison, the average credit card user with a balance paid a 23% APR as of May, a historic high, according to Federal Reserve data.

“The CFPB’s actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices,” CFPB Director Rohit Chopra said in a written statement.

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However, the financial industry, which doesn’t consider such services to be a traditional loan, had been fighting such a label.

It’s inaccurate to call the service a “loan” or an “advance” since it grants workers access to money they’ve already earned, said Phil Goldfeder, CEO of the American Fintech Council, a trade group representing earned-wage-access providers.

“I would resemble it closer to utilizing an ATM machine and getting charged a fee,” Goldfeder said. “You can’t utilize a methodology like APR to determine the appropriate costs for a product like this.”

The CFPB is soliciting comments from the public until Aug. 30. It may revise its proposal based on that feedback.  

The proposal is the latest salvo in an array of CFPB actions aimed at lenders, like one seeking to rein in banks’ overdraft fees and popular buy now, pay later programs.

It’s also part of a broader Biden administration push to crack down on “junk fees.”

Consumers may encounter earned wage access under various names, like daily pay, instant pay, accrued wage access, same-day pay and on-demand pay.

Business-to-business models offered through an employer use payroll and time-sheet records to track users’ accrued earnings. When payday arrives, the employee receives the portion of pay that hasn’t been tapped early.

Third-party apps are similar but instead issue funds based on estimated or historical earnings and then automatically debit a user’s bank account on payday, experts said.

Branch, DailyPay, Payactiv, Dave, EarnIn and Brigit are examples of some of the largest providers in the B2B or third-party ecosystems.

Providers may offer various services for free, and some employers offer programs to employees free of charge.

The CFPB proposal’s requirements don’t apply in cases when the consumer doesn’t incur a fee, it said.

However, most users do pay fees, CFPB found in its analysis of employer-sponsored programs.

More than 90% of workers paid at least one fee in 2022 in instances when employers don’t cover the costs, the agency said. The vast majority were for “expedited” transfers of the funds; such fees range from $1 to $5.99, with an average fee of $3.18, the CFPB said.

Many are repeat users: Workers made 27 transactions a year and paid $106 in total fees, on average, said CFPB, which cautioned that consumers may “become financially overextended if they simultaneously use multiple earned wage products.”

The CFPB’s proposal marks the first time the agency has said “explicitly” that early paycheck access amounts to a loan, said Mitria Spotser, vice president and federal policy director at the Center for Responsible Lending, a consumer advocacy group.

“It is a traditional loan: It’s borrowing money at a cost from the provider,” she said.

Goldfeder, of the American Fintech Council, disagrees.

“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,” he said in a written statement.

The CFPB rule doesn’t prohibit providers from charging fees, Spotser said.

“It merely requires them to disclose it,” she added. “You have to ask yourself, why is the industry so afraid to disclose that they’re charging these fees?”

If finalized, the rule would allow the CFPB to bring enforcement actions against companies that don’t make the appropriate disclosures, for example, said Lauren Saunders, associate director of the National Consumer Law Center. States could also sue in court, as could consumers or via arbitration, she said.

Companies “ignore it at their peril, because it’s the CFPB’s interpretation of what the law is,” Saunders said of the interpretive rule. “They could try to argue to a court that the CFPB is wrong, but they’re on notice.”