This article has been updated to include a link to the Federal Register notice and comment deadline.
Ensuring workers know the cost and fees of “paycheck advance” products is the aim of an interpretive rule proposed Thursday by the federal consumer financial protection agency.
The proposed rule, according to the Consumer Financial Protection Bureau (CFPB), would explain that many paycheck advance products, which the agency said are sometimes called “earned wage” products, are consumer loans subject to the Truth in Lending Act (TILA).
“The guidance will ensure that lenders understand their legal obligations to disclose the costs and fees of these credit products to workers,” CFPB said.
The proposed rule, CFPB said, clarifies that many paycheck advance products – whether provided through employer partnerships or marketed directly to borrowers – trigger obligations under TILA. The proposal replaces a 2020 advisory opinion that addressed a very specific paycheck advance product that is not common in the real market, the agency said.
CFPB defined the programs that are the target of the proposal as typically online offerings that provide paycheck advances before payday. The bureau said the products 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,’” CFPB said.
The agency said the proposal makes clear that costs incurred through paycheck advanced programs, which CFPB termed as loans, amount to finance charges. “Fees for certain ‘tips’ and expedited delivery meet the Truth in Lending Act’s standard for being finance charges,” CFPB said. “When the paycheck advance product is no-fee and truly free to the employee, many requirements would not apply.”
The proposal also requires that borrowers (program participants) must receive key disclosures. “Earned wage lenders must provide workers with appropriate disclosures about the finance charges,” the agency said. “Clear disclosures help borrowers understand and compare loan options, sharpens price competition, and ultimately benefits companies that offer competitive products.”
In conjunction with the proposal, the agency released an analysis of data from companies providing the programs. CFPB said that analysis found:
- More workers are paying fees to get wages early;
- The market for employer-partnered paycheck advance products is growing rapidly;
- Workers access paycheck advance loans frequently and repeatedly;
- Paycheck advance product’s cash advances can be costly, with an annual percentage rate (APR) for a typical employer-partnered earned wage cash advance at 109.5%.
Comments are due Aug. 30.