CR highlights additional safeguards needed to ensure borrowers are treated fairly
WASHINGTON – Companies that offer paycheck advance products (also known as “earned wage access”) would be required to abide by the Truth in Lending Act (TILA) under an Interpretive Rule proposed by the Consumer Financial Bureau earlier this summer. Paycheck advances would be considered loans and providers would have to clearly disclose all of the fees and costs associated with them. In a comment letter submitted to the CFPB today, Consumer Reports offered its strong support for the proposed rule and called on the CFPB to consider some additional protections for workers who take out paycheck advances.
“While paycheck advances provide workers with early access to their money, they can come with costly fees that add up quickly for those least able to afford it,” said Jennifer Chien, senior policy counsel for Consumer Reports. “Paycheck advances are marketed as interest-free, but many borrowers end up paying a variety of fees that can make them just as costly as predatory payday loans. By requiring clear, upfront disclosure of fees, the CFPB’s proposed rule will help consumers understand the true cost of paycheck advances and help them find the best option among providers.”
Paycheck advances are short term, small dollar loans that enable workers to access a portion of their wages before their payday. Some companies contract with employers to offer paycheck advances to workers which are taken out against their earnings on a future paycheck. Other lenders offer direct-to-consumer cash advances that are not tied to a borrower’s paycheck. Instead, these providers draw directly from borrowers’ bank accounts for repayment of the advance.
While providers market paycheck advances as free or zero percent interest, some 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 tip amounts, making it difficult to send a $0 tip, or claiming that tips help other vulnerable consumers.
These fees can add up to significant costs for borrowers. The California Department of Financial Protection and Innovation calculated annual percentage rates (APRs) on paycheck advances, including in its formula mandatory fees as well as tips and other optional fees. It found an average APR of 334 percent for providers that solicit tips and 331 percent for those that do not. A recent study from the Harvard Kennedy School found examples of even higher APRs for paycheck advances, going up to 578 percent. Borrowers also run the risk of incurring unexpected overdraft or non-sufficient funds fees with direct-to-consumer advances, including multiple fees for repeated failed attempts to debit consumers’ bank accounts.
In its letter to the CFPB, CR called on the Bureau to consider some additional clarifications and safeguards to ensure that consumers can use paycheck advance products safely, including:
- Guidance for providers to calculate finance charges and APR in a consistent manner, particularly with respect to expedite fees and tips
- Carefully consider how de minimis fees that fall below TILA’s current disclosure requirements can be presented and/or require upfront disclosure of smaller fees separately from and in addition to APR
- Investigate structural problems in the pricing model for paycheck advances that may force users to pay higher fees than necessary for multiple advances when they could qualify for a larger advance in a single transaction
- Prevent the use of deceptive designs by providers that coerce some borrowers into providing unnecessary tips
- Examine the broader wage-payment ecosystem to identify additional policy options that would benefit workers and consumers
See CR’s letter to the CFPB for a more detailed explanation of these policy recommendations.
Michael McCauley, michael.mccauley@consumer.org