CFPB Says Earned Wage Access Apps are Providing Loans

Last week, the Consumer Financial Protection Bureau (CFPB) said that apps that allow workers to access their paychecks early—and usually for a fee—are actually providing loans, thus making them subject to the Truth in Lending Act. If finalized and enacted, the Bureau’s proposed rule would provide clarification to the Earned Wage Access industry, which has been compared to payday lending.

“Paycheck advance products are often marketed to and designed for employers, rather than employees,” said Rohit Chopra, CFPB Director. “The CFPB’s actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices.” CNBC noted that the Bureau found in 2022 that over 7 million workers accessed about $22 billion in wages before payday.

CFPB research found that the average employee who uses Earned Wage Access takes out 27 of those loans annually, which equates to one loan for nearly every biweekly paycheck, according to ABC News. The fees on these loans would equal an average Annual Percentage Rate (APR) of over 100 percent, and interest rates higher than subprime credit cards. 

Alternatively, many in the financial industry argue that Earned Wage Access products aren’t considered a traditional loan, but rather akin to using an ATM. “It’s inaccurate to call the service a ‘loan’ or an ‘advance’ since it grants workers access to money they’ve already earned,” said Phil Goldfeder, CEO of the American Fintech Council.

The Bureau’s interpretive rule is part of its broader “junk fee” crackdown alongside the Biden administration, which include its efforts to rein in banks’ overdraft fees and buy now, pay later (BNPL). The CFPB will take comments on the proposed rule until the end of August.