WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) has introduced a new rule to regulate paycheck advance products, often marketed as “earned wage” products. The proposal aims to ensure these products are treated as consumer loans under the Truth in Lending Act, requiring lenders to disclose costs and fees to workers.
CFPB Director Rohit Chopra emphasized the importance of transparency, stating that the CFPB’s actions will help workers understand these products and prevent exploitative practices. Acting Secretary of Labor Julie Su echoed this sentiment, highlighting the need to protect workers from high rates and hidden fees that undermine wage increases.
The CFPB’s move follows a report examining employer-sponsored paycheck advance loans. The findings are striking: workers using these products take out an average of 27 loans per year, and the typical employer-sponsored loan carries an annual percentage rate (APR) exceeding 100%. This rapid market growth underscores the urgent need for regulation.
Paycheck advance products are gaining popularity due to the gap between when workers receive their wages and when they need to pay expenses. These loans provide early access to earned wages, offered through employer partnerships or directly to consumers. While some products are fee-free when offered through employers, others come with fees for expedited services or subscriptions.
The CFPB analyzed data from eight companies representing nearly half of the employer-partnered market. The data revealed that more than 90% of workers paid at least one fee in 2022, primarily for expedited transfers. The average expedited fee was $3.18, but fees can range up to $5.99. Direct-to-consumer products often charge monthly subscriptions up to $14.99, with additional “tips” requested.
The proposed rule clarifies that many of these fees are considered finance charges under the Truth in Lending Act, requiring lenders to provide clear disclosures about the costs. This transparency will help workers compare loan options and promote fair competition.
The CFPB is also exploring ways to improve workers’ access to their payroll data, which could foster more competition in the paycheck advance market. Public comments on the proposed rule are open until August 30, 2024, and the CFPB encourages feedback to refine the regulations further.
This initiative is part of a broader effort to protect workers from predatory lending practices and ensure that financial products are fair and transparent.
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