CFPB cracks down on paycheck advance products

The Consumer Financial Protection Bureau (CFPB) proposed a new rule Thursday that would categorize popular paycheck advance products as consumer loans, which the agency says will ensure lenders provide borrowers with key information about costs and fees.

Nearly three-quarters of workers are paid biweekly or monthly, according to the CFPB, and lenders have long bridged the days between when an expense comes due and a worker’s paycheck comes in. 

As inflation has eaten into Americans’ savings and paychecks, there has been rapid growth in the market for paycheck advance products, employer-partnered or direct-to-consumer loans that allow employees to receive their paycheck days before it’s scheduled to hit their account.

The number of transactions processed by these companies ballooned 90 percent from 2021 to 2022, when more than 7 million accessed around $22 million, according to a CFPB study of data from eight employer-partnered companies, which it says make up just under half of the employer-partnered market.

“Paycheck advance products are often marketed to and designed for employers, rather than employees,” said CFPB Director Rohit Chopra. “The CFPB's actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices.”

Under the proposed rule, many of these products trigger a federal law that requires lenders to disclose information to borrowers including fees, interest and the total costs they incur by using the product.

Workers usually pay a fee to access their paychecks early, particularly for expedited transfers. 

The average expedited fee is $3.18, but typically ranges from $1 to $5.99, according to CFPB data, while workers who utilize direct-to-consumer paycheck advance products can pay as much as $14.99 in monthly subscription fees.

“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,” said Acting Secretary of Labor Julie Su.

Some lenders also offer opportunities for the borrower to “tip” them, a trend the CFPB says it has been watching closely.

The agency sued online lending platform SoLo Funds in May for what Chopra called “digital trickery to hide interest and fees on its online loans” by giving options for a “tip” or “donation,” none of which were zero.