Paycheck advance programs face stricter regulations from the CFPB.

• If paycheck advance programs are labeled as loans by the Consumer Financial Protection Bureau, users will be charged a fee.
• Earned wage access, daily pay, instant pay, accrued wage access, same-day pay, and on-demand pay are sometimes referred to as these programs.
• The proposed rule would require users to view fees as an annual percentage rate (APR), similar to credit card interest rates.

Paycheck advance programs are facing increased scrutiny from the Consumer Financial Protection Bureau.

Programs that enable workers to access their paychecks before payday, known as earned wage access, are available, according to the CFPB.

On Thursday, the CFPB issued an interpretive rule stating that consumer loans offered through both employer-sponsored programs and fintech apps are subject to the Truth in Lending Act.

In 2022, over 7 million workers received about $22 billion in wages before payday through employer-sponsored programs, according to a CFPB analysis. This represents a 90% increase from the previous year.

Fintech companies have been offering such services for more than 15 years, but their use has increased recently due to financial burdens caused by the Covid-19 pandemic and high inflation, experts said.

Is it a loan or 'utilizing an ATM'?

The CFPB stated that companies providing paycheck advances must make additional disclosures to users to aid borrowers in making more informed decisions.

Legal experts suggest that the costs or fees incurred by consumers to access their paychecks early should be expressed as an annual percentage rate (APR), similar to credit card interest rates.

Despite being advertised as a "free or low-cost solution," the typical user of earned-wage-access services pays fees that result in an annual percentage rate of 109.5%, according to the CFPB.

An analysis published in 2023 revealed that the fees charged by the California Department of Financial Protection and Innovation were more than 330% higher than the average user, on average.

The average credit card user with a balance paid a 23% APR as of May, a historic high, according to Federal Reserve data. This has led some consumer advocates to view earned wage access as a form of high-interest credit similar to payday loans.

CFPB Director Rohit Chopra stated that the bureau's actions would ensure workers understand the products they are purchasing and prevent unethical business practices.

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The financial industry has been resisting the classification of such services as traditional loans.

Phil Goldfeder, CEO of the American Fintech Council, stated that it is incorrect to refer to the service as a "loan" or an "advance" because it allows workers to access money they have already earned.

"I would resemble it more closely to using an ATM machine and being charged a fee," Goldfeder stated. "You cannot use a methodology like APR to determine the appropriate costs for a product like this."

The CFPB is seeking public comments until Aug. 30 and may modify its proposal based on the feedback received.

Part of broader 'junk fee' crackdown

The latest proposal from the CFPB is part of a series of actions targeting lenders, including a move to limit overdraft fees and regulate buy now, pay later programs.

The Biden administration aims to reduce "junk fees" as part of a broader effort.

Earned wage access can be referred to under different names, such as daily pay, instant pay, accrued wage access, same-day pay, and on-demand pay.

Employers offer business-to-business models that track users' accrued earnings using payroll and time-sheet records, and on payday, employees receive the portion of pay that hasn't been tapped early.

Experts stated that third-party apps are similar, but instead of providing funds based on estimated or historical earnings, they automatically debit a user's bank account on payday.

Some of the largest providers in the B2B or third-party ecosystems include Branch, DailyPay, Payactiv, Dave, EarnIn, and Brigit.

Employers and providers may offer free services to employees and customers, respectively.

The CFPB proposal's requirements do not apply when the consumer does not incur a fee, according to the statement.

Employer-sponsored programs are typically associated with fees, according to a CFPB analysis.

In 2022, over 90% of workers paid at least one fee when their employers did not cover the costs. These fees were primarily for expedited transfers, ranging from $1 to $5.99, with an average fee of $3.18, according to the CFPB.

According to the CFPB, on average, workers made 27 transactions a year and paid $106 in total fees. However, the CFPB warned that consumers may become financially overextended if they simultaneously use multiple earned wage products.

CFPB rule wouldn't prohibit fees

The CFPB's proposal marks the first time the agency has stated explicitly that early paycheck access is equivalent to a loan, according to Mitria Spotser, vice president and federal policy director at the Center for Responsible Lending, a consumer advocacy group.

"The provider is lending money at a cost," she stated.

Goldfeder, of the American Fintech Council, disagrees.

Unlike credit or loans, EWA does not require a credit check, underwriting, or base fees on creditworthiness. It charges a fee in installments, interest, late fees, or penalties, and does not affect a user's credit score.

The CFPB rule doesn't prohibit providers from charging fees, Spotser said.

"She added that it only requires them to disclose it. You must ask yourself, why is the industry so afraid to disclose that they're charging these fees?"

The CFPB could enforce actions against companies that fail to make the required disclosures, as stated by Lauren Saunders, associate director of the National Consumer Law Center. Additionally, states, consumers, and arbitration could also initiate legal proceedings against these companies.

According to Saunders, companies should take heed of the CFPB's interpretation of the law, or risk facing consequences. While they may attempt to challenge the CFPB's interpretation in court, they are aware of the potential consequences.