NEW YORK (AP) — The Consumer Financial Protection Bureau said Thursday that apps that allow workers access your paychecks earlyOften for a fee, they make loans and are therefore subject to the Truth in Lending Act.
If enacted, the proposed rule would provide clarity to a rapidly growing industry known as Earned Wage Access, which has been compared to payday loans. The agency wants borrowers to be able to “easily compare products” and avoid “race-to-the-bottom business practices,” CFPB Director Rohit Chopra said on a conference call with reporters.
Applications to access earned salary they have been around for more than a decade, but gained popularity in the years before the pandemic and since. The apps give small, short-term loans to workers between paychecks so they can pay bills and meet daily needs. On payday, the user returns their salary money, along with any fees. Between 2018 and 2020, transaction volume tripled from US$3.2 billion to US$9.5 billion, according to Datos Insights.
The CFPB said its research shows that the average worker using Earned Wage Access takes out 27 of these loans a year, meaning one loan for almost every biweekly paycheck. This can be similar to a revolving credit card balance. But with rates that would equate to an average Annual Percentage Rate (APR) of over 100%, the loans have higher interest rates than the most expensive subprime credit card. Most of this interest comes from fees to speed up access to paychecks, the CFPB concluded.
The typical user of these apps also earns less than $50,000 a year, according to the Government Accountability Office, and has already experienced the pinch of two years of high inflation. Many of the apps charge monthly subscription fees, and most charge mandatory fees for instant fund transfers.
Christine Zinner, policy counsel at Americans for Financial Reform, said payday advance products are “nothing more than workplace loans, with consumers most easily victimized since money is just a tap away. a cell phone.”
“People can easily get trapped in a cycle of debt by taking out new loans, requesting advances 12 to 120 times a year, just to pay basic household expenses and make ends meet,” she said.
The CFPB also said it is paying close attention to the “tips” that many apps request when providing paycheck advances. On the conference call, Chopra called the practice strange, noting that many paycheck advance companies make “substantial revenue” from so-called tips.
In 2021, the California Department of Financial Protection and Innovation found that “users often feel compelled to leave (tips) due to pressure tactics applied, such as… claiming that tips are used to support other vulnerable consumers or for charitable purposes.”
With the interpretive rule, the CFPB clarifies that “if workers obtain money that they are required to repay with their paychecks, this is a loan under federal law, (and companies) must disclose an interest rate.”
This means that tips and fees for quick transfers must be incorporated into the cost of the loan under the disclosure scheme required by the Truth in Lending Act, and these costs cannot be treated as “incidental, even if the amount varies.” Chopra said.
Some earned wage access companies have argued that these fees should not be treated as part of the standard APR calculation on loans. When Connecticut passed a law limiting the fees apps could charge within state usury limits, at least one Earned Wage Access company, EarnIn, stopped operating in the state. Asked why, EarnIn CEO Ram Palaniappan said it was no longer “economically viable”.
The agency will receive comments on the proposed interpretive rule by the end of August.
“Today’s report and rule are important steps for the CFPB to ensure the market is functioning,” Chopra said. “We want to see the market compete to reduce costs for employees and employers.”
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