The Consumer Financial Protection Bureau proposed Thursday to subject the burgeoning earned wage access industry to U.S. lending laws in an effort to impose more oversight on such payments to workers.
As part of a proposed interpretive rule, the federal agency labeled some early wage payments to workers that charge fees as “consumer loans.” The agency said it has studied the industry and found workers with access to the services tap them 27 times per year, on average, paying interest at an annual percentage rate or more than 100%.
“The CFPB's actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices,” the agency’s director, Rohit Chopra, said in the Thursday release.
The federal agency’s action follows the rapid expansion of the earned wage access industry over the past decade, with a pack of companies offering the services that let employees access their earned wages before a regularly scheduled payday. While some employers offer the service for free to their workers, typically via a third-party EWA provider, others may charge their employees for the service. Some EWA providers offer their services online directly to workers.
Under the proposed rule, some EWA payments would be subject to the Truth in Lending Act and other consumer loan protections. The move is part of a broader campaign by the Biden administration to crack down on junk fees imposed on consumers.
Payactiv, DailyPay, Earnin and Clair are some of the EWA providers that have been expanding their services to workers. Various players in the industry have different business models, with some charging employers and others charging employees.
Many EWA players have been working with state legislators nationwide to pass state laws that are friendlier to the industry in that they require licensing and other requirements that don’t subject the companies to lending laws. States that have passed such laws in the past two years include Kansas, Missouri, Wisconsin and Nevada.
By contrast, California and Connecticut took a different tack, moving to subject EWA payments to lending laws that have provisions for policing interest rates and dictating transparency.
The CFPB suggested at the beginning of this year that it was more likely to follow California’s lead in its approach to the evolving EWA market. The agency has been studying the issue to get a better understanding of how employers and employees are using the services. The agency said it concluded EWA programs are often designed more for employers, than employees.
The guidance laid out in the CFPB’s new interpretive rule “will ensure that lenders understand their legal obligations to disclose the costs and fees of these credit products to workers,” the press release said.
“The proposed interpretive rule makes clear that many paycheck advance products — whether provided through employer partnerships or marketed directly to borrowers — trigger obligations under the federal Truth in Lending Act,” the release said.
The federal agency said it analyzed EWA services data from eight EWA providers for 2021 and 2022 to gain insights on about half the market. It found that at workplaces where employers don’t cover the costs of the service, some 90% of workers “paid at least one fee” for the services in 2022, despite some of the providers marketing their services as free of charge.
The average transaction amount for workers was $106, and the average fee was $3.18, the agency said in the release.
For workers who tap EWA services outside their employer relationship, such direct-to-consumer services are likely to pay monthly subscriptions charges that might be $14.99, in addition to “tips” they may offer for the services, the CFPB said.
Under the proposed rule, such tips, along with other fees for EWA services, would count as finance charges under the agency’s application of the Truth in Lending Act. For services that are “truly free” to workers, requirements may not apply, the agency said.
The CFPB is also seeking to impose finance charge disclosure requirements on EWA providers to ensure that workers are aware of the costs of any services and to let them compare different offerings.
The Labor Department’s acting secretary, Julie Su, backed the CFPB’s proposal, saying in the release that the new rule would “guard against predatory lending in the workplace.”
Longtime proponents of more regulation of the industry, as well as those who have argued against consumer lending oversight weighed in Thursday on the CFPB’s action.
The National Consumer Law Center praised the CFPB’s proposal, saying in a Thursday release that it’s an appropriate measure to “address evasions by fintech payday lenders” that seek to hide the true costs of their services.
“We are deeply concerned that this proposed action by the CFPB will hurt millions of workers who rely on Earned Wage Access to tap into their already earned wages so they don’t have to depend on outdated monthly or biweekly pay periods to manage their expenses,” said Penny Lee, CEO of the Financial Technology Association, said in a Thursday release.
