CFPB Says Earned Wage Access Programs Are Consumer Loans

Regulators are painting several types of lending products with a broad brush, bringing an ever-widening swath of lenders under federal purview.

Fresh off its rulemaking on buy now, pay later (BNPL) loans, the Consumer Financial Protection Bureau has proposed a new classification for paycheck advance and earned wage access (EWA) products — and at least some critics charge that would curtail access to credit.

The CFPB on Thursday (July 18) set out a new rule that would classify paycheck-related offerings as consumer loans — with a commentary period that lasts into the end of August.

What’s Changing

Under the new rule, these lenders would have to disclose more information to borrowers, more extensively detailing fees, interest and the total costs inherent in accessing wages early.

In its announcement, the CFPB has said employees take an average of 27 employer-sponsored paycheck advance loans each year. The Bureau has estimated that the loans carry an average annual percentage rate of 109.5%. The average fee is more than $3.

“Many loan costs are finance charges: Fees for certain “tips” and expedited delivery meet the Truth in Lending Act’s standard for being finance charges. When the paycheck advance product is no-fee and truly free to the employee, many requirements would not apply,” the CFPB charged. The tips and the fees tied to expedited fund flows would be calculated into the cost of the loan itself and would impact the calculation of an annual interest rates.

Transaction Level Details — and Some Criticism

A report released in tandem with the rule announcement found that for employer-partnered firms the average transaction amount ranged from $35 to $200, with an overall average transaction size of $106. The average worker accessed $3,000 in funds per year, the data show.

PYMNTS Intelligence data has shown that 83% of workers between the ages of 18 and 44 say they should have access to wages at the end of each day. The interest in early access comes as the majority of consumers — more than 60% — live paycheck to paycheck, per PYMNTS research. Surveys show that 56% of those with earned wage access said they had used it. As many as 75% of millennials said earned wage access availability would influence their acceptance of a job offer. Additionally, 96% of corporates that offered earned wage access said their employees liked it and the offering helped attract talent.

In a statement emailed to PYMNTS, the Innovative Payments Association said that the CFPB’s changes
“misclassify” EWA products and “could affect nearly 56 million Americans who rely on EWA services to securely access a portion or all of their already earned wages before payday.”  The CFPB’s research has been limited to only eight firms.

In the actual proposed interpretive rule, the CFPB noted that “Speed of access to funds is an integral and defining aspect of earned wage products. They are designed to address—and marketed as addressing—the liquidity problem that arises between the accrual of wages and their actual payment.”

Who’s Using EWA

A separate report from the Government Accountability Office has found that EWA offerings are mostly used by consumers earning $50,000 or less, annually. That cohort, PYMNTS has found, is among the hardest hit in the paycheck-to-paycheck economy, and 1 in 10 of those earners live paycheck to paycheck with issues paying their bills. “The lack of a cash cushion means that these consumers are always living on a knife’s edge. In the event of any financial emergency, they often lack access to credit, so are 30% more likely to be forced to sell assets or turn to family, friends or predatory lenders than the average consumer,” Karen Webster wrote last month.

And, the CFPB contended, “The CFPB has determined that this proposed interpretive rule, if finalized, would not impose any new or revise any existing recordkeeping, reporting, or disclosure requirements on covered entities or members of the public.”

But a separate statement provided to PYMNTS on Thursday by DailyPay Chief Legal and Strategy Officer Jared DeMatteis, said that “characterizing employer-integrated Earned Wage Access products as loans or credit displays a fundamental misunderstanding of what we do.

“DailyPay’s EWA does not have the hallmarks of a loan — no origination fees, no consumer credit checks or approvals, no applications or underwriting, no risk-based pricing, no interest or charges based on the time value of money, no late fees, no reporting to consumer credit agencies, and no recourse to the consumer,” DeMatteis wrote.