The New York State Department of Financial Services (NYDFS) has announced it will lead a multi-state investigation into alleged violations of state regulations of the short term lending industry, specifically in the area of payroll advances. On Tuesday (August 6), Financial Services Superintendent Linda Lacewell formally announced that she, along with banking regulators from nine other states and in Puerto Rico, want to understand whether payroll advance firms are charging illegal interest rates by retitling them as “tips” or “membership fees.”
The probe will specifically focus on if those companies involved in short term lending are in violation of state usury, licensing and other laws.
"High-cost payroll loans are scrutinized closely in New York, and this investigation will help determine whether these payroll advance practices are usurious and harming consumers," Lacewell noted in a statement.
Traditional high-cost payday lending is strictly illegal in New York state, and has been for a very long time; within the state it is illegal to make a make payday loan, whether in person, by telephone, or over the internet. It also illegal to attempt to collect one.
The firms under investigation at present, however, arguably aren’t payday lenders — at least under the strict legal definition of the term. Instead of “loans,” these firms instead offer “payroll advances” which are designed to give consumers access to wages they have already earned ahead of their next paycheck. The NYDFS, however, is concerned that some of these firms have swapped out high interest for membership fees and “tips” that ultimately add up to being the equivalent of usurious and other illegal interest rates.
The firm best known for this business model is Earnin’, which has been the subject of an investigation by NYDFS since March of this year. A California-based FinTech firm, Earnin’ offers consumers up to $100 of their paycheck per day in advance of their next payday. For that privilege, it says, it doesn’t charge fees or interest, or have hidden costs to use the app.
Instead, Earnin’ (and a few of its follow-on fellows) encourage users to leave a tip as a sign of gratitude for being able to be paid when they need. No one has to leave a tip, according to the site — and users who can’t afford to are often covered by those who choose to “pay it forward” and pay more for their early access to funds than is suggested in order to cover someone who can not.
The app, according to reviews, has been mostly popular with consumers. However, there have been some comments and even complaints that Earnin’s suggested base time ($14) is high on a $100 advance — and that it is only by tipping that customers can really use Earnin’s other value-added features.
An Earnin’ spokesman said in a statement on Tuesday, after the New York state announcement, that the company “is a brand new model.”
“So we expect, and welcome questions from regulators like the New York Department of Financial Services.”
And though Earnin’ is the most recent firm to catch the eye of regulators, it is far from the only player in the pay advance game.
Over a year ago, Walmart announced its partnership with Even to help employees gain low-cost access to their wages in advance. Even has a slightly different business model than Earnin’ — it works directly with employers to provide this service to employees (as opposed to being purely consumer-facing like Earnin’). But at best it provides a similar service — access to subsection of employee wages before payday without having to resort to a payday loan.
Regulators in nine states (and Puerto Rico) may view payday advance firms as inherently similar — but as Even CEO Jon Schlossberg’s conversation with Karen Webster last summer demonstrates, firms like his do not see themselves as a technologically improved version of the payday loan.
They see themselves as offering up an entirely different product from stem to stern.
“All of the things that [a customer] can do to solve the problem of making it to the next payday makes it worse, and customers go into these arrangements with open eyes knowing that, but having no choice but to make it work,” Schlossberg noted.
Firms like Even and Earnin,’ in theory, are designed to create that better choice.
Not all critics complain that payroll advance products are a tricky end-run around payday loan laws — some complain that they are a surface-level solution that does a lot to obscure a problem caused by low wages, but not a lot to actually solve it.
"The smoothing of pay availability over a pay period is advantageous to people who have very little savings,” Chris Tilly, a labor economist at the University of California Los Angeles, told Bloomberg Law. “What it doesn’t address is why those people have very little savings in the first place. Low pay is low pay, and this is being intensified by increasing housing, health care, and other costs in many places.”
But Even's Schlossberg has pushed back on that idea, noting that while low wages and income smoothing are connected concepts, they aren't identical. Consumers' need for faster access to funds they've earned, he said, is not entirely dependent on the level of wage they make.
“Pretending that we’re going to magically solve this problem by just increasing pay is overstating the impact of raising wages,” Schlossberg says. “Many people living paycheck to paycheck already make more than median income.”
The question, however, remains for regulators — are firms offering an advance on pay really working to build a better financial system and disrupt payday lending, or are they themselves high-cost lenders that have simply found a way to move the costs to things like voluntary tips that aren’t really voluntary?
In its announcement, the NYDFS confirmed it is sending requests for information to payroll advance companies but did not specify which ones when asked directly by media.
The DFS' investigation will be conducted alongside regulators in Connecticut, Illinois, Maryland, New Jersey, North Carolina, North Dakota, Oklahoma, Puerto Rico, South Carolina, South Dakota and Texas.
"We will use all the tools at our disposal, including partnering with peer regulators, to safeguard consumers from predatory lending and scams that ensnare families in endless cycles of debt," Lacewell said.