The Consumer Financial Protection Bureau (CFPB) on Thursday proposed new rules to classify popular paycheck advance products as consumer loans, a move the bureau said would ensure lenders provide borrowers with important information about costs and fees.
Nearly three-quarters of workers get paid every two weeks or monthly, according to the CFPB, and lenders have long made up the number of days between when expenses are due and when workers get paid.
As inflation eats into Americans’ savings and paychecks, the market for paycheck advance products — employer-partnered or direct-to-consumer loans that allow employees to receive their paychecks days before they’re scheduled to be deposited in their accounts — is growing rapidly.
The CFPB’s review of data from eight employer-affiliated companies found that the number of transactions processed by these companies surged 90% from 2021 to 2022, with more than 7 million transactions accessing roughly $22 million. The CFPB said these companies account for just under half of the employer-affiliated market.
“Payroll advance products are often marketed to and designed for employers, not employees,” said CFPB Director Rohit Chopra. “The CFPB’s action will help workers know what they’re getting into with these products and prevent a race-to-the-bottom business practice.”
Under the proposed rule, many of these products are subject to federal law that requires lenders to disclose information to borrowers about fees, interest, total costs incurred using the product, and other information.
Workers typically pay fees to receive their pay faster, especially for faster transfers.
According to CFPB data, the average expedited processing fee is $3.18, but typically ranges from $1 to $5.99. Meanwhile, workers who use payroll advance services offered directly to consumers may pay up to $14.99 in monthly subscription fees.
“Workers’ wages have increased significantly in recent years, but junk fees and high interest rates on financial products not only cut into those benefits, but exploit workers,” said Acting Labor Secretary Julie Su.
Some lenders are also offering borrowers the opportunity to “tip,” a trend the CFPB said it is watching closely.
agency Sued Chopra filed a lawsuit in May against online lending platform SoLo Funds, alleging that it used “digital trickery to hide interest and fees on online loans” by offering tipping and donation options, none of which were zero-sum.
