The Consumer Financial Protection Bureau (CFPB) has recently targeted so-called paycheck advance programs, also known as earned wage access, which have become increasingly popular among workers in recent years. These programs allow individuals to access their paychecks before the designated payday, often levying a fee for this service. The CFPB’s proposed interpretive rule suggests that these programs, both those provided by employers and those offered directly to users through fintech apps, should be classified as “consumer loans” and thus be subjected to the regulations outlined in the Truth in Lending Act.
It has been reported that over 7 million workers accessed approximately $22 billion in wages before payday in 2022, a significant increase from previous years. The utilization of these services has surged, particularly due to the economic challenges imposed by the COVID-19 pandemic and high inflation rates. While earned wage access programs have been around for over 15 years, their popularity has skyrocketed more recently.
If the CFPB’s rule is finalized in its current form, companies offering paycheck advances will be required to provide additional disclosures to users. This includes expressing any costs or fees associated with early paycheck access as an annual percentage rate (APR), similar to credit card interest rates. Despite many of these services being marketed as “free or low-cost solutions,” users often end up paying fees that equate to a high APR, such as 109.5%. This becomes a point of contention, as some consumer advocates liken earned wage access to high-interest credit,
While the CFPB and consumer advocates argue for enhanced transparency and regulation regarding paycheck advance programs, the financial industry, particularly earned-wage-access providers, contests the notion that these services should be classified as loans. Executives such as Phil Goldfeder, the CEO of the American Fintech Council, believe that these services are more akin to utilizing an ATM machine and should not be subject to traditional loan-related regulations. The industry has pushed back against the idea of labeling early paycheck access as loans.
Different Models of Earned Wage Access
Business-to-business models administered through employers track users’ accrued earnings based on payroll and time-sheet records, releasing the accumulated amount to employees on or before payday. Third-party apps function similarly but rely on estimated or historical earnings to disburse funds and later deduct the amount from the user’s bank account on the payday. Various providers, such as Branch, DailyPay, Payactiv, Dave, EarnIn, and Brigit, operate within this ecosystem and offer services either for free or at a minimal cost.
The CFPB’s proposal indicates that while the requirements regarding fee disclosure may not apply when no fees are charged, the majority of earned-wage-access users do, in fact, incur fees. The agency’s analysis of employer-sponsored programs revealed that more than 90% of workers paid fees, mostly for expedited transfers. These fees, ranging from $1 to $5.99, resulted in consumers paying an average fee of $3.18 per transaction. Many users engage in multiple transactions throughout the year, accumulating fees that may lead to financial strain.
The controversy surrounding paycheck advance programs and earned wage access remains a complex issue. The CFPB’s proposal has elicited mixed reactions from different stakeholders, with the financial industry challenging the classification of these services as loans. Consumer advocates raise concerns about the potential financial burden imposed on users due to high fees and lack of transparency. If the rule is finalized, companies failing to comply with the disclosure requirements may face enforcement actions from the CFPB or legal challenges from states, consumers, or arbitration. As the debate continues, the ultimate goal is to ensure transparency, fairness, and consumer protection within the realm of paycheck advance programs.