Earned-Wage Access Firms Hit With Loan Disclosures in CFPB Plan

Earned-wage access providers would have to count “tips” and expediting fees as finance charges, significantly raising the advertised costs of payroll advances, under a proposal from the Consumer Financial Protection Bureau.

Earned-wage access products allow customers, typically hourly workers, to access a portion of their paychecks prior to payday. Some of the nation’s largest employers, including Walmart Inc. and Amazon.com Inc., offer early-pay options as a way to attract and retain workers.

Many earned-wage access providers also give customers the option to pay a tip for their services. Consumer advocates have raised concerns that those tips, as well as expediting fees, conceal the true cost of early-pay products.

Tips and expediting fees would be covered by the Truth in Lending Act, a 1968 law governing disclosures on consumer finance contracts, and earned-wage access providers would have to disclose those costs to consumers under a proposed interpretive rule the CFPB released Thursday.

“The CFPB’s actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices,” CFPB Director Rohit Chopra said in a statement.

Rapid Growth

Earned-wage access products—or as the CFPB calls them, “paycheck advance” products—can be offered either in partnership with a customer’s employer, such as services provided by DailyPay and Payactiv, or through direct-to-consumer offerings from companies such as Dave Inc. and EarnIn.

Customers give direct-to-consumer providers access to their bank accounts, allowing them to withdraw money to cover advances.

Direct-to-consumer providers have drawn scrutiny from consumer advocates for their use of the tipping model and other fees. But people who get early access to portions of their paycheck through their employers are also socked with fees, a CFPB report released Thursday found.

Many employers cover the costs of earned-wage access services, but not all, the agency said.

The CFPB’s review of eight companies representing just under 50% of the employer-partnered market found that employees using the services from 2021 to 2022 took out an average of 27 advances per year, with an average transaction amount of around $106.

The number of employer-partnered transactions processed grew by more than 90% from 2021 to 2022, with more than 7 million workers getting $22 billion in advances in 2022, the CFPB said.

Employer-sponsored earned-wage access programs typically carry an annual percentage rate of nearly 110%, the study found.

Expediting fees, averaging around $3.18, made up 92.5% of total fee revenue for earned-wage access products, the CFPB found. Direct-to-consumer providers sometimes charge additional subscription fees, which can range as high a $14.99 per month, the CFPB said.

The CFPB’s proposed interpretive rule would replace a 2020 advisory opinion that applied to only one paycheck advance product, the agency said.

State Efforts

Several states moved ahead with their own legislation on earned-wage access while the CFPB developed its proposal.

Legislators in Nevada, Missouri, Wisconsin, and South Carolina have enacted laws in recent years declaring that earned-wage access advances aren’t loans and aren’t subject to the same disclosures and other rules applied to payday and other nonbank lenders.

Regulators in California are working on rules that would treat the advances as loans. Connecticut has also put in place tough rules for earned-wage access products.

How the CFPB’s interpretive rule would interact with more permissive state laws is unclear at this point. Fintechs had called on the CFPB to adopt a federal policy to resolve contradictory state laws.

“This proposal is intended to answer that call for further clarity,” Chopra said on a July 17 call with reporters.

The GOP-led House Financial Services Committee in April approved a measure (H.R. 7428) along party lines to stipulate that early-pay products aren’t credit and that fees and tips aren’t finance charges, but the measure is unlikely to overcome Democratic opposition in the Senate.

The comment period on the CFPB’s proposal closes Aug. 30.