The CFPB has announced a new rule aimed at increasing transparency around paycheck advance products, also known as “earned wage” products.
This initiative falls under the jurisdiction of the Truth in Lending Act, underscoring the CFPB’s commitment to ensure lenders disclose all associated costs and fees to consumers effectively. The proposed guidelines were accompanied by a report focusing on the nature of employer-sponsored paycheck advance loans.
It revealed a significant insight: users of these products typically engage in 27 transactions per year, with the average annual percentage rate (APR) soaring above 100%.
CFPB Director Rohit Chopra highlighted the importance of these measures in protecting workers. “Paycheck advance products are often marketed to and designed for employers, rather than employees,” he stated. “The CFPB’s actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices.”
The CFPB’s research, which examined data from 2021-2022 involving eight companies that collaborate with employers to offer these loans, paints a concerning picture. Over 90% of workers incurred at least one fee in 2022 when such costs weren’t covered by employers. A staggering 92.5% of the fee revenue came from charges for expedited transfers.
This rapid growth in the employer-partnered paycheck advance market is noted by a 90% increase in transaction volume from 2021 to 2022, engaging over 7 million workers and moving about $22bn.
Furthermore, Acting Secretary of Labor Julie Su remarked on the broader impact of such financial products on workers’ financial stability. “In recent years, workers have seen big increases in wages, but junk fees and high rates on financial products not only chip away at these gains – they take advantage of workers,” she said. “As part of the most pro-worker, pro-union administration in history, here at the Department of Labor, we proudly support efforts by the CFPB to guard against predatory lending in the workplace.”
The CFPB is also considering broader measures to enhance competition in the financial services market by making it easier for workers to access and permit use of their payroll data. This would provide workers with more options and prevent them from being tethered to any single financial service provider.
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