Federal agency wants regulation for paycheck advances

A proposed new Consumer Financial Protection Bureau rule would require companies to let consumers know that many paycheck advance products are actually loans subject to federal disclosure requirements.

The Consumer Financial Protection Bureau proposed an interpretive rule in July explaining that these loans, sometimes marketed as “earned wage” products, fall under the Truth in Lending Act.

The federal agency is taking public comments on the proposed rule through the end of August.

Robert Duff, a solo consumer law attorney with Indiana Consumer Law Group, said he is typically in favor of anything the CFPB does.

“I think they do great work for consumers,” Duff said.

Duff said the proposed rule requires companies to disclose the cost of their loan product to consumers.

He said it is a positive that more information will be provided to consumers before they decide to take out an advance loan.

According to the CFPB, the guidance will ensure that lenders understand their legal obligations to disclose the costs and fees of these credit products to workers.

The CFPB also published a report examining employer-sponsored paycheck advance loans, which found that workers using these employer-sponsored products take out an average of 27 such loans per year and that the typical employer-sponsored loan carries an annual percentage rate of more than 100%.

“Paycheck advance products are often marketed to and designed for employers, rather than employees,” said CFPB Director Rohit Chopra in a news release. “The CFPB’s actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices.”

CFPB rule looks to disclose paycheck advance fees

In announcing the proposed rule, the CFPB noted that almost three-quarters of workers receive their wages every two weeks or monthly.

The agency reported that while lenders have long offered credit for consumers to pay expenses in advance of a payday, “a new market for paycheck advance products has emerged and is growing rapidly.”

Paycheck advance products are offered through two primary models: employer-partnered and direct-to-consumer.

“While employers can often make these fee-free, some of these products can come with fees for expedited service, subscriptions or requested ‘tips,’” according to the CFPB.

More than 90% of workers paid at least one fee in 2022 when employers do not cover the costs. Most fee revenue, 92.5%, was for expedited transfers. Expedited fees range from $1 to $5.99, with an average fee of $3.18.

Workers who use direct-to-consumer paycheck advance products may pay monthly subscription fees (as much as $14.99) and often make payments that providers characterize as “tips,” the CFPB reported.

Christine Hines is senior policy director at the National Association of Consumer Advocates.

Hines said she thought the proposed rule would boost consumer protection to borrowers.

“It will give more information to borrowers about the clear fees attached to the product,” Hines said.

Hines said the proposed rule will help ensure everybody’s on a level playing field.

“The CFPB has over the last few years really taken strong steps to protect consumers from the worst conduct out there,” Hines said.

Hines said NACA will support the rule and likely submit public comments before the end of the month.

Attorneys weigh in on proposed rule

The rule also makes clear, according to the CFPB, that:

◗ Many loan costs are finance charges: Fees for certain “tips” and expedited delivery meet the Truth in Lending Act’s standard for being finance charges. When the paycheck advance product is no-fee and truly free to the employee, many requirements would not apply.

◗ Borrowers must receive key disclosures: Among other requirements, earned wage lenders must provide workers with appropriate disclosures about the finance charges. Clear disclosures help borrowers understand and compare loan options, sharpen price competition, and ultimately benefit companies that offer competitive products.

Vess Miller, a Cohen & Malad partner and consumer class action attorney, said he has only run into one case similar to those referenced in the proposed CFPB rule.

Miller said that case wasn’t related to fees or tips and involved a misconduct issue.

He said he knows the earned wage products are fairly new, adding that there are some venture capital startup companies that are trying to enter that market.

“I haven’t seen a lot of it yet,” Miller said, adding, “I think it’s an emerging area and I think the rule is good.”

Duff said he has not had a specific case that dealt with earned wage products.

The only similar case he could recall involved a client and their employer taking a portion of that employee’s wages to cover losses for merchandise shoplifted on their watch.

Duff said the CFPB has been more aggressive under the Biden Administration than it had been during former President Donald Trump’s four years in office.

“For the most part, they stopped helping consumers,” Duff said.

Duff said most employers are not going to have a problem with the proposed rule.

“The real benefit to this rule is it gets the information out there and hopefully helps consumers,” Duff said.

He noted that in the CFPB report, there was stark contrast reported in the average company’s cost per transaction, with the gap ranging from 61 cents to $4.50 per transaction.

“That tells me some companies are making a lot more off consumers than others,” Duff said.

Miller said he’s not surprised some consumers are using the products, particularly if they are living paycheck-to-paycheck.

He said he thought it was good the CFPB was getting out ahead of the issue with the proposed rule.

The consumer attorney said he thought there might be an industry challenge to the rule. Like Duff, Miller said he thought the CFPB under the current administration had been more focused on protecting consumers.•