CFPB Clarifies That Paycheck Advances Must Follow Truth In Lending Act

The Consumer Financial Protection Bureau (CFPB) has recently suggested a new rule. This rule clarifies that many paycheck advance products, which are sometimes called “earned wage” products, are loans and must follow the Truth in Lending Act.

The guidance will make sure that lenders know they must clearly show the costs and fees of these credit products to workers. The CFPB also released a report looking into paycheck advance loans offered by employers.

CFPB Wants To Regulate The Market To Keep Competition Fair

The report shows that workers who use these employer-sponsored loans take out about 27% each year. It also reveals that most loans have an annual percentage rate (APR) of over 100%.

CFPB Director Rohit Chopra said Paycheck advance products are usually aimed at employers, not employees. The CFPB’s actions will help workers understand what they’re getting with these products and stop lousy business practices.

Acting Secretary of Labor Julie Su remarked on the increases in recent years. Although workers have seen significant wage increases recently, high fees and interest rates on financial products reduce these earnings and exploit workers.

She added that the Department of Labor strongly supports the CFPB’s efforts to protect against unfair lending practices in the workplace.

Nearly 75% of workers get paid every two weeks or monthly. A big reason people need credit is because there is a gap between when they get paid and when they have to pay for items. Although lenders have always provided credit to help cover expenses before payday, a new and fast-growing market for paycheck advance products has recently appeared.

CFPB Seeks To Ensure Transparent Practices In The Paycheck Advance Market

Recently, financial companies have created new products for workers needing credit. Usually available online, these products offer paycheck advances before payday. There are two main types of these products: ones that work with employers and ones that are available directly to consumers. While some employer-partnered options might not have fees, others might charge for faster service, subscriptions, or even “tips” that users request.

The CFPB reviewed data from 2021-2022 from eight companies that work with employers to provide loans based on earned wages. These eight companies make up just under half of the market for employer-partnered loans.

To keep competition fair in this market, the proposed rule explains how current laws apply to these new types of products. It replaces a 2020 advisory opinion that only covered a specific paycheck advance product that isn’t widely used.