Are you one of the millions of workers who have utilized paycheck advance programs? If so, you might want to pay attention to the latest crackdown by the Consumer Financial Protection Bureau (CFPB).
The CFPB is taking aim at paycheck advance programs, also known as earned wage access, which allow workers to access their paychecks before payday for a fee. According to the CFPB, these programs are considered “consumer loans” and are subject to the Truth in Lending Act.
In 2022, more than 7 million workers accessed about $22 billion in wages before payday, with the number of transactions increasing by over 90% from the previous year. The surge in usage of these services can be attributed to the financial strain caused by the Covid-19 pandemic and high inflation.
If the CFPB’s interpretive rule is finalized, companies offering paycheck advances will be required to provide additional disclosures to users, including expressing costs and fees as an annual percentage rate (APR). Despite being marketed as a “free or low-cost solution,” the typical earned-wage-access user pays fees that amount to a 109.5% APR. In some cases, fees can be even higher, exceeding 330%.
Many consumer advocates equate earned wage access to high-interest credit like payday loans, with the average credit card user paying a 23% APR as of May. However, the financial industry disputes this classification, arguing that earned wage access is more akin to utilizing an ATM and incurring a fee.
The CFPB is accepting public comments on the proposal until August 30, with the possibility of revisions based on feedback. This action is part of a broader effort by the Biden administration to crack down on “junk fees” and protect consumers from predatory financial practices.
Providers of earned wage access services, such as Branch, DailyPay, and EarnIn, may offer various programs for free, with employers often subsidizing the costs. However, most users end up paying fees, with more than 90% of workers incurring at least one fee in 2022. The average user made 27 transactions a year and paid $106 in total fees.
While the CFPB’s proposal wouldn’t prohibit providers from charging fees, it would require them to disclose fees more transparently. Failure to comply could result in enforcement actions by the CFPB and potential legal action by states or consumers.
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