CFPB says paycheck advance products should be classified as loans

Here comes the crackdown.

Last week, the Consumer Financial Protection Bureau proposed a rule that would require paycheck advance products, which allow workers to access paychecks before payday, to be categorized as consumer loans, making them subject to a 1968 law requiring lenders to disclose all associated charges and fees.

While paycheck advance products usefully allow workers to cover bills and other necessary expenses before payday via short-term loans, the aim of the new proposal is to ensure lenders “understand their legal obligations” to disclose costs and fees to workers, the CFPB said. In short: This is fundamentally a worker protection issue, in the agency’s eyes.

CFPB Director Rohit Chopra noted that these products “are often marketed to and designed for employers, rather than employees,” and that the rule was designed to “prevent race-to-the-bottom business practices.”

“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,” Julie Su, the Department of Labor’s acting secretary, said in a statement of support for the proposed rule, adding that the DOL encourages “efforts by the CFPB to guard against predatory lending in the workplace.”

Alongside the newly proposed rule, the CFPB published a report analyzing developments in the paycheck advance market, which found that workers who used paycheck advance products took out an average of 27 loans per year, and that the typical loan carried an APR of 109.5%. The bulk of that interest comes from fees for expedited paycheck access.

In addition to the fee disclosure elements of the crackdown, the CFPB’s rule would also target the “unusual practice” of workers tipping their lender or employer, the agency said.

“Paycheck advance products are offered through two primary models: employer-partnered and direct-to-consumer. While employers can often make these fee-free, some of these products can come with fees for expedited service, subscriptions, or requested ‘tips,’” the CFPB noted.

The California Department of Financial Protection and Innovation found in 2021 that “users often feel compelled to leave [tips] due to applied pressure tactics like...claiming tips are used to support other vulnerable consumers or for charitable purposes,” per the Associated Press.

Under its new rule, the CFPB would include loan costs like fees for expedited delivery or certain “tips” as finance charges under the Truth in Lending Act.