RSSMany paycheck advance products are consumer loans subject to the Truth in Lending Act, according to the Consumer Financial Protection Bureau.
Announced July 18, the guidance stipulates that paycheck advance fees for certain tips and faster deliveries meet the Truth in Lending Act’s standard for finance charges. The rule would also require earned wage lenders to “provide workers with appropriate disclosures about the finance charges. Clear disclosures help borrowers understand and compare loan options, sharpens price competition, and ultimately benefits companies that offer competitive products.”
Paycheck advance products, which are usually offered online, provide paycheck advances before payday. Such advances are offered through employer-partnered and direct-to-consumer models. Though employers can make those products fee-free, some can include fees for faster service, subscriptions or requested tips.
The CFPB analyzed eight companies that partnered with employers to offer earned wage loans based on 2021-22 data. The vast majority of fee revenue was reportedly for expedited transfers, with an average fee of $3.18. The number of transactions processed by those companies increased more than 90 percent from 2021-22, with more than 7 million workers accessing $22 billion in 2022. The vast majority of workers paid at least one fee in 2022 when employers did not cover the cost, according to the bureau.
According to the bureau, workers who use employer-sponsored products take out on average 27 such loans on an annual basis, and the usual employer-sponsored loan includes an annual percentage rate of nearly 110 percent.
According to the CFPB, the proposal followed investigations, market monitoring, coordination with state regulators, and fact-finding with consumer advocacy groups, employers and lenders.
“Paycheck advance products are often marketed to and designed for employers, rather than employees,” said CFPB Director Rohit Chopra. “The CFPB’s actions will help workers know what they are getting with these products and prevent ‘race-to-the-bottom’ business practices.”
U.S. Acting Secretary of Labor Julie Su said “junk fees and high rates on financial products” have chipped away at large wage increases.
Comments on the proposal will be accepted until Aug. 30.
