Paycheck Advances Are Consumer Loans, CFPB Says in Proposed Rule

Many paycheck-advance products, such as earned-wage access, are consumer loans, the Consumer Financial Protection Bureau (CFPB) recently stated.

Under a proposed interpretive rule released July 18, 2024, the CFPB also announced the Truth in Lending Act and Regulation Z would apply to these consumer loans.

If finalized, the rule would replace a 2020 CFPB advisory opinion.

That advisory opinion addressed one specific earned-wage product, saying it wasn’t credit if it met a list of conditions. However, the 2020 opinion was silent regarding whether earned-wage products that didn’t meet all the conditions were credit. Plus, it didn’t address what counts as a finance charge. The advisory opinion resulted in “significant regulatory uncertainty,” the CFPB said.

Can’t Wait for a Paycheck

According to the proposed interpretive rule, paycheck-advance products would be considered credit. That’d be the case for both:

• employer-partnered products (where providers partner with employers, and funds are recovered through payroll deductions, among other options), and
• direct-to-consumer products (where funds are provided directly to individuals, and funds are recovered via automated withdrawal from the consumer’s bank account).

With either set up, employees whose finances are tight don’t have to wait until paychecks are prepared to access their earnings.

The proposed interpretive rule also covers finance charges, stating that the following items are considered finance charges:

• certain tips, and
• expedited delivery fees.

The proposed rule includes several factors that indicate when a tip has been imposed as part of the finance charge – e.g., when the creditor has set up a default tip amount.

As for expedited-delivery fees, some providers of earned-wage products offer slower and faster loans, the rule pointed out. Individuals who choose the faster option – which they often do – must pay expedited-delivery fees, sometimes called instant-funds fees. They’ll be seen as finance charges if the rule is finalized.

Any comments must be submitted to the CFPB by August 30, 2024.