US agency says apps that give workers access to their paychecks before payday are giving out loans

NEW YORK — The Consumer Financial Protection Bureau said Thursday that apps that give workers advance access to their paychecks, often for a fee, are making loans and therefore fall under the Truth in Lending Act, a 1968 law that requires lenders to disclose all loan costs and fees.

If adopted, the proposed rule would provide clarity to a fast-growing industry known as Earned Wage Access, which has been compared to payday lending. 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 call with reporters.

Earned Wage Access apps have been around for more than a decade, but they’ve become popular in the years before the pandemic and after. The apps provide small, short-term loans to workers between paychecks so they can pay bills and meet their daily needs. On payday, the user repays the money from their wages, along with any fees.

According to the Consumer Finance Protection Bureau report, it was found that at least 5% of U.S. workers will use an earned wage product at least once in 2022. They estimated that 7 million workers were advanced $22 billion through apps that partnered with their employers, and 3 million workers were advanced $9.1 billion through direct-to-consumer apps.

The agency’s research found that the average worker using Earned Wage Access takes out 27 of these loans per year, meaning that for nearly every biweekly paycheck, there’s one loan. It may seem like a revolving balance on a credit card. But with fees that would equate to an average annual percentage rate (APR) of more than 100%, the loans carry higher interest rates than the most expensive subprime credit card. Most of that interest comes from fees to accelerate access to paychecks, the CFPB found.

The typical user of these apps also makes less than $50,000 a year, according to the Government Accountability Office, and has seen the pinch of two years of high inflation. Many of the apps charge monthly subscription fees, and most charge mandatory fees for direct money transfers.

Christine Zinner, a policy adviser at Americans for Financial Reform, said the paycheck advance products “are nothing more than workplace loans, with consumers becoming even more vulnerable because money is just a tap on a cell phone away.”

“People can easily get into a cycle of debt by borrowing again and asking for advances 12 to 120 times each year just to cover basic household expenses and get by,” the spokesperson said.

The CFPB also said it is paying close attention to the “gratuity” that many apps charge when providing paycheck advances. During the call, Chopra called the practice odd, noting that many companies that provide paycheck advances generate “substantial revenue” from the so-called tips.

In 2021, the California Department of Financial Protection and Innovation found that “users often feel coerced into (tipping) due to pressure tactics used, such as… claiming that tips will be used to support other vulnerable consumers or for charitable purposes.”

In the interpretive rule, the CFPB clarifies that “if employees receive money that they must repay out of their paychecks, this is a loan under federal law, (and) companies must disclose an interest rate.”

This means that tips and expedited transfer fees must be included in the cost of the loan, according to the disclosure schedule established by the Truth in Lending Act, and that these fees should not be treated as “incidental,” even if the amount is variable, Chopra said.

Some Earned Wage Access companies have argued that these fees should not be considered part of the standard APR calculation for the loans. When Connecticut passed a law limiting the fees the apps could charge under the state’s 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.”

Penny Lee, president of the Financial Technology Association, a trade association that includes many EWA firms, said her group is “very concerned” about the CFPB’s proposed action.

“Earned Wage Access should not be considered a loan because it is a no-cost, no-recourse product that provides access to money workers have already earned, not future wages,” she said in a prepared statement, adding that the proposed rule “would harm millions of workers who rely on Earned Wage Access to access their already earned wages.”

In its report, the CFPB found that despite companies marketing these services as free to employees in non-employer-subsidized transactions, “most employees paid at least one fee and nearly all employees chose to pay a fee for expedited access to their funds.” The CFPB said that with nearly 50% of earned wage product users using the service more than once per month, “costs can add up for workers who are frequently paid hourly, have cash flow constraints, and receive public benefits.”

The agency will consider comments on the proposed interpretive regulations until the end of August.

“Today’s report and regulations are important steps for the CFPB to ensure that the market works,” Chopra said. “We want the market to be competitive and to reduce costs for workers and employers.”

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