US agency says apps that let workers access paychecks before payday are providing loans
The Consumer Financial Protection Bureau says apps that allow workers to access their paychecks in advance, often for a fee, are providing loans and therefore subject to the Truth in Lending Act
NEW YORK — The Consumer Financial Protection Bureau said Thursday that apps that allow workers to access their paychecks in advance, often for a fee, are providing loans and therefore subject to the Truth in Lending Act.
If enacted, the proposed rule would provide clarity to a fast-growing industry known as Earned Wage Access, which has been compared to payday lending. The agency wants borrowers to be able to “easily compare products” and to prevent “race-to-the-bottom business practices,” CFPB Director Rohit Chopra said on a call with reporters.
Earned Wage Access apps have been around for more than a decade, but they gained popularity in the years prior to the pandemic and since. The apps extend small short-term loans to workers in between paychecks so they can pay bills and meet everyday needs. On payday, the user repays the money out of their wages, along with any fees. Between 2018 and 2020, transaction volume tripled from $3.2 billion to $9.5 billion, according to Datos Insights.
The CFPB said their research shows the average worker who uses Earned Wage Access takes out 27 of these loans a year, meaning one loan for almost every biweekly paycheck. This can look similar to a revolving credit card balance. But with fees that would equal an average Annual Percentage Rate (APR) of over 100%, the loans have interest rates higher than the most expensive subprime credit card. Most of this interest comes from fees to expedite access to paychecks, the CFPB found.
The typical user of these apps earns also less than $50,000 a year,
Read more on abcnews.go.com
