U.S. agency says apps that let workers access their paychecks before payday are providing loans

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

If adopted, the proposed rule would bring clarity to a growing sector 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 gained popularity in the years before and after the pandemic. The apps provide small, short-term loans to workers between paychecks so they can pay bills and meet daily needs. On payday, the user repays the money from their paycheck, along with any fees.

According to its report, the Consumer Finance Protection Bureau found that in 2022, at least 5% of American workers used a payroll product at least once. They estimate that 7 million workers received an advance of $22 billion through apps that work with their employers, and 3 million workers received an advance of $9.1 billion through direct-to-consumer payment apps.

The agency’s research shows that the average worker who uses Earned Wage Access takes out 27 of these loans per year, which means a loan for nearly every biweekly paycheck. That may sound like a revolving credit card balance. But with fees that would amount to an average annual percentage rate (APR) of more than 100%, the loans have higher interest rates than the most expensive subprime credit card. Most of that interest comes from fees to speed up access to paychecks, the CFPB found.

The average user of these apps also earns less than $50,000 a year and has been hurt by two years of high inflation, according to the Government Accountability Office. Many apps charge monthly subscription fees, and most charge mandatory fees for instant money transfers.

Christine Zinner, a policy adviser at Americans for Financial Reform, said payday advance products are nothing more than payday loans in the workplace, with consumers more easily exploited since the money is at their fingertips on a cell phone.

People can easily get trapped in a cycle of debt by borrowing again, asking for advances 12 to 120 times a year, just to pay basic household expenses and make ends meet, she said.

The CFPB also said it pays close attention to the tips that many apps ask for when providing payday advances. On the call, Chopra called the practice odd, noting that many payday advance companies make substantial revenue from what are called tips.

In 2021, the California Department of Financial Protection and Innovation found that users often feel pressured to leave tips due to pressure tactics such as… pretending that tips are used to support other vulnerable consumers or for charitable purposes.

With this interpretive rule, the CFPB is clarifying that if workers get money that they are required to repay from their paycheck, it is a loan under federal law (and companies) must disclose an interest rate.

This means that tips and fees for expedited transfers must be built into the cost of the loan, in accordance with the disclosure system required by the Truth in Lending Act, and these costs cannot 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 treated as part of the standard APR calculation on loans. When Connecticut passed a law limiting the fees apps could charge under the state’s usury limits, at least one Earned Wage Access company, EarnIn, ceased operations in the state. When asked why, EarnIn CEO Ram Palaniappan said it was no longer economically viable.

Penny Lee, president of the Financial Technology Association, an industry group that counts many EWA companies among its members, said her group was deeply concerned by the CFPB's proposed action.

Earned Wage Access should not be considered a loan because it is a no-cost, non-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 draw on their already earned wages.

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

The agency will collect comments on the proposed interpretive rule through the end of August.

Today’s report and rulemaking are important steps for the CFPB to ensure the marketplace works well, Chopra said. “We want to see the marketplace drive down costs for employees and employers.”

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The Associated Press receives support from the Charles Schwab Foundation for its educational and explanatory reporting aimed at improving financial literacy. The foundation is independent and separate from Charles Schwab and Co. Inc. The AP is solely responsible for its reporting.

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