Proposed rule also addresses unusual practice of workers “tipping” their lender or employer
The Consumer Financial Protection Bureau (CFPB) today proposed an interpretive rule explaining that many paycheck advance products, sometimes marketed as “earned wage” products, are consumer loans subject to the Truth in Lending Act. 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. The report finds 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 (APR) over 100%.
“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.”
“In recent years, workers have seen big increases in wages, but junk fees and high rates on financial products not only chip away at these gains – they take advantage of workers,” said Acting Secretary of Labor Julie Su. “As part of the most pro-worker, pro-union administration in history, here at the Department of Labor, we proudly support efforts by the CFPB to guard against predatory lending in the workplace.”
Almost three-quarters of workers receive their wages every two weeks or monthly. One major source of demand for consumer credit stems from the mismatch of when people receive compensation for the work they perform and when they incur expenses. 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.
In recent years, financial providers have developed new products in the worker-credit marketplace. Typically offered online, these products provide paycheck advances before payday. 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.”
CFPB’s Findings on the Emerging Market for Paycheck Advance Products
The CFPB analyzed 2021-2022 data from eight companies that partner with employers to offer loans based on earned wages. The eight companies represent slightly less than 50% of the employer-partnered market.
Among the findings in today’s spotlight:
- More workers are paying fees to get wages early: 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 market for employer-partnered paycheck advance products is growing rapidly: The CFPB estimates that the number of transactions processed by these providers grew by over 90% from 2021 to 2022, with more than 7 million workers accessing approximately $22 billion in 2022.
- Workers access paycheck advance loans frequently and repeatedly: Workers took out an average of 27 loans per year. The average transaction amount was $106.
- Paycheck advance product’s cash advances can be costly: The APR for a typical employer-partnered earned wage cash advance is 109.5%.
Proposed Rule
To ensure fair competition in this market, the proposed interpretive rule explains how existing law applies to this emerging product market, and replaces a 2020 advisory opinion that addressed a very specific paycheck advance product that is not common in the real market. The proposed interpretive rule makes clear that many paycheck advance products – whether provided through employer partnerships or marketed directly to borrowers – trigger obligations under the federal Truth in Lending Act. In addition, the CFPB’s proposed interpretive rule makes clear 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, sharpens price competition, and ultimately benefits companies that offer competitive products.
Today’s actions follow a range of in-depth analysis by the CFPB, including investigations, market monitoring, coordination with state regulatory bodies, and fact-finding with lenders, employers, and consumer advocacy groups. The CFPB encourages the public to submit comments on today’s interpretive rule to inform whether additional clarifications are needed. Comments will be accepted until August 30, 2024.
The CFPB is also analyzing options for workers to more easily access and permission their payroll data. This could facilitate more competition for paycheck advance products and other loans, since workers would not be locked into the provider that have a financial relationship with their employer. This is part of a broader effort to jumpstart competition and protect personal data in the United States.
The CFPB has been working to ensure the workers are protected when using employment-related financial products and services. In July 2023, the CFPB issued a report on the risks workers face from employer-driven debt. In March 2023, the CFPB and the National Labor Relations Board announced an information sharing agreement to protect American workers from illegal practices. In June 2022, the CFPB launched an inquiry into practices and financial products that leave workers indebted to employers.
Read the CFPB’s data spotlight.
Read the CFPB’s proposed interpretive rule.
Read Director Chopra’s remarks on paycheck advance products.
Consumers can submit complaints about financial products or services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).