The Consumer Financial Protection Bureau (CFPB) has proposed an interpretive rule explaining that many paycheck advance 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 — sometimes marketed as “earned wage” products — to workers.
“Paycheck advance products are often marketed to and designed for employers, rather than employees,” CFPB Director Rohit Chopra said. “The CFPB’s actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices.”
Roughly 75 percent 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 get paid 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.
“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,” Acting Secretary of Labor Julie Su said. “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.”
In recent years, financial firms have created new products in the worker-credit marketplace. These products provide paycheck advances before payday and they 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.”
The proposed interpretive rule explains how existing law applies to this emerging product market and replaces a 2020 advisory opinion that addressed a specific paycheck advance product that is not common in the real market. Further, 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.
The rule also makes clear that many loan costs are finance charges and borrowers must receive key disclosures. Further, earned wage lenders must provide workers with appropriate disclosures about the finance charges.
The CFPB encourages the public to submit comments on the interpretive rule to inform whether additional clarifications are needed. Comments will be accepted until Aug. 30.
Along with this rule, the CFPB published a report examining employer-sponsored paycheck advance loans. It found that 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 percent.