Paycheck advance providers are gearing up to sue the Consumer Financial Protection Bureau over a proposed
The $22 billion-dollar "earned wage access" industry is vigorously defending itself from the CFPB's proposed federal regulations that would
"The industry will file a lawsuit because there are billions of dollars at stake," said Dan Quan, a fintech investor, co-founder and general partner at NevCaut Ventures, and a former CFPB senior advisor.
Last month, the
Industry trade groups are exploring their legal options and looking at specific ways to challenge the CFPB's rule once it is finalized. Michele Alt, co-founder and managing director at Klaros Group, said the CFPB's interpretive rule will be subject to challenge in light of
"I think we're going to see an APA challenge that the rule is arbitrary and capricious with no deference being given," said Alt, adding that the CFPB's 20-page proposal was "thin" in its legal analysis.
Earned wage access providers will find themselves facing a patchwork of both state and federal regulations going forward, experts said.
Phil Goldfeder, CEO of the American Fintech Council, called the CFPB's interpretive rule "incorrect," and said it creates uncertainty, limits competition and harms consumers by pushing them to get loans from payday lenders.
"The industry is going to need time to understand the nuances of the proposed rule, but we will do everything to ensure consumers are safe and are not losing access," Goldfeder said.
Brian Tate, president and CEO of the Innovative Payments Association, said earned wage access products are "an important tool for American workers" to manage income volatility and mismatches between their bills and paydays.
"While we can support some aspects of the proposed rule, such as meaningful disclosure for consumers, we remain very concerned about the details of the interpretive rule, which could lead to curtailed access for vulnerable workers," he said.
The industry has been lobbying state lawmakers, regulators and even governors to get paycheck advances excluded from state licensing and disclosure requirements by arguing that the products are not loans and should not be subject to state usury caps. Consumer advocates said the CFPB's plan will level the playing field and promote competition among short-term, small-dollar lenders.
"Policymakers should be skeptical whenever lenders insist on regulatory exemptions from rules that apply to their competitors," said Adam Rust, director of financial services for the Consumer Federation of America.
The CFPB also took particular issue with an industry practice of asking consumers to pay "tips" — that is, voluntary payments — rather than calling them fees. The CFPB said tips constitute a payment "imposed directly or indirectly by the creditor" and therefore are part of a finance charge.
Lauren Saunders, associate director of the National Consumer Law Center, said earned wage access products are digital payday loans. She claims fintech providers have been trying to evade state interest rate caps by winning carve-outs from state legislatures because the fees translate into annual percentage rates of 300% or more.
"It is not a legitimate way to disguise the cost of predatory loans," Saunders said. "A payday advance that is repaid on payday is a payday loan, and fintech cash advance apps that call themselves 'earned wage access' are just high-cost lending in disguise."
But earned wage access providers say consumers are willing to pay a fee of between $2 and $5 to get quick cash. Most providers offer a free option that usually takes a few days for the funds to arrive by traditional ACH transfer. Another free option requires the user to link their wages to a debit card with the provider making money on the debit card interchange and other fees. The industry markets itself as pro-worker and claims providers are giving cash-strapped consumers an alternative to more expensive payday loans.
"This proposed action by the CFPB will hurt millions of workers who rely on Earned Wage Access to tap into their already earned wages so they don't have to depend on outdated monthly or biweekly pay periods to manage their expenses," said Penny Lee, president and CEO of the Financial Technology Association, in a press release.
Some groups couched the CFPB's proposal in political terms, claiming Democrats are hurting workers with a plan that would potentially raise costs on a popular product.
"Democrats have rightly criticized predatory payday loans, and earned wage access has emerged as a lower-cost way for workers to obtain their wages," said Adam Kovacevich, CEO of Chamber of Progress, which bills itself as a center-left coalition of technology companies. "With this rule, Democrats are going to drive consumers back towards payday lending. Payday loan predators are this rule's biggest winners. It's sad to see a nominally progressive agency ignore the many reasons why millions of workers have flocked to earned wage access services."
However, Saunders cited several companies that evade disclosing the true costs. Earnin, a fintech earned wage access firm based in Palo Alto, Calif., for example,
The CFPB released
The CFPB's proposal rescinded an
The bureau said it conducted an in-depth analysis of the industry that included investigations, market monitoring, coordination with state regulators and fact-finding with lenders, employers and consumer advocacy groups. Comments on the proposed interpretive rule must be received by August 30.
Earned wage access products have a number of unique features that the industry claims makes them distinct and not easily categorized as loans. They are non-recourse products — meaning the provider will not seek to collect if the consumer fails to repay. And several states have recently enacted laws to prohibit providers from compelling consumers to repay via lawsuits or third-party debt collection. Some state laws also exempt products that are fully non-recourse, the CFPB said.
"At the end of the day, an advance on wages is still a loan that has to be repaid, and no amount of hair-splitting can change it," said Rust at the Consumer Federation of America.
Paycheck advances also do not require a credit check or underwriting and because they are non-recourse, any missed payment or delinquency is not reported to the credit bureaus. The fees also are not based on creditworthiness but rather constitute a "fee for service," Goldfeder said. He criticized the CFPB for choosing to issue an interpretive rule, which technically is nonbinding, and does not carry the same effect as a formal rulemaking.
The CFPB said that existing law applies to both employer-partnered paycheck advance products and to those marketed directly to consumers. The CFPB's proposal would require clear disclosures about finance charges that the CFPB said would "help borrowers understand and compare loan options," to spur more competition.
