Consumer Reports praises CFPB proposal designating paycheck advance products as loans subject to the Truth in Lending Act
WASHINGTON, D.C. – Under a proposed Interpretive Rule issued by the Consumer Financial Protection Bureau today, paycheck advance products would be considered loans subject to the consumer protections provided by the Truth in Lending Act. Consumer Reports applauded the Bureau for the proposed rule, which would require providers to clearly disclose all of the fees and costs associated with paycheck advances, which have gained popularity in recent years.
“Paycheck advances can come with costly fees that can amount to extremely high interest rates for low-wage workers who are least able to afford it,” said Jennifer Chien, senior policy counsel for Consumer Reports. “Even though paycheck advances operate like loans, they are not currently subject to the same fee disclosure requirements that apply to other similar forms of credit. The CFPB’s proposed rule will ensure that workers are fully informed of the costs associated with these loans and help foster greater competition among providers.”
Paycheck advances (also known as “earned wage access”) are short term, small dollar loans that enable workers to access a portion of their wages before their payday. Some paycheck advances are offered by an employer or a company that contracts with an employer that workers can take out against their earnings on a future paycheck. A report issued by the CFPB today found that workers using employer-sponsored paycheck advances took out an average of 27 loans per year and that the typical advance carried an annual percentage rate over 100 percent.
Some lenders also offer direct-to-consumer cash advances that are not tied to a borrower’s paycheck. Instead, borrowers apply for these loans by providing lenders access to their bank account transactions, running balances, and direct deposit activity and authorize lenders to debit their bank accounts to repay the loans. These direct-to-consumer products pose an additional risk of incurring costly overdraft and non-sufficient funds fees.
While providers market paycheck advances as free or zero percent interest, some of them charge borrowers a variety of mandatory and optional fees, such as fees charged for each transaction, fees for instant access to loan funds, a monthly subscription fee to receive multiple loans per month, or fees in the form of tips. Some providers use deceptive designs and manipulative measures to induce consumers to tip, including disabling services if borrowers do not tip, setting default tips, making it difficult to set a $0 tip, or claiming that tips help other vulnerable consumers.
These fees can add up to significant costs for low income consumers. The California Department of Financial Protection and Innovation calculated the annual percentage rate on paycheck advance products, including mandatory fees, tips and other optional fees, and found an average APR of more than 330 percent. A study from the Harvard Kennedy School found examples of even higher APRs, as much as 578 percent. The California DFPI found that the average number of times a borrower used advances was 36 times per year with eighty percent of advances ranging between $40-100.
Michael McCauley, michael.mccauley@consumer.org