Prepared Remarks of CFPB Director Rohit Chopra on Emerging Paycheck Advance Products

Today, the Consumer Financial Protection Bureau is proposing an interpretive rule regarding the fast-growing market for paycheck advance products, often offered through employers. The CFPB is also publishing a detailed analysis of these products, which are sometimes marketed as “earned wage access.” We are issuing this proposal and report to ensure that borrowers can easily compare different loan options and prevent race-to-the-bottom business practices.

I want to offer some background on how employers think about paying their employees and how payment delays drive demand for debt. Then, I want to share some findings from our report on paycheck advance products. I’ll close by explaining the new proposed interpretive rule and further steps we are taking.

Delays in Pay Drive Demand for Debt

Decades ago, many workers across the economy would get paid at the end of their shift or after performing the task they were hired for. But in today’s economy, most people don’t get paid until days or weeks later. That means that American workers are essentially giving a free loan to their employers.

Big employers have an incentive to delay payment to workers. Delaying pay reduces costs and what Wall Street calls “working capital.” While some delays might be explained away for a number of reasons, they typically work in favor of the employer and against the worker.

One result of delays in employee pay: lots more household debt. Because Americans have daily and unexpected expenses, those without a substantial stash of savings can’t always cover expenses without resorting to borrowing or getting hit with junk fees. And, of course, while employees get paid after their work, many of their expenses require prepayment

Unlike mortgages or auto loans that consumers use to finance a specific one-time purchase, delays between work and pay can drive consumer demand for other forms of debt, including credit card debt, payday loans, and other costly credit. When interest rates and fees on these loans are high, this can lead to a treadmill of debt that keeps getting faster and faster. When delays in payment to workers get longer, it can exacerbate the problems workers face and trap them in cycles of debt.

Emerging Paycheck Advance Products

While employers have typically shied away from pushing financial products, many realized that they could gain an advantage by finding ways to pay some of their workers faster. Around a decade ago, a nascent industry emerged that allowed workers to get paid with a loan ahead of their paycheck by working through the employer.

Here’s how it works: big employers partner with a company that can access the employee’s relevant records, like their timesheet. If an employee needs funds, they go to an online interface to initiate a paycheck advance. The advance is provided, which is then deducted from their regularly scheduled paycheck.

All of this works relatively well when it’s free for the employee. However, the CFPB’s research has uncovered that some financial companies impose fees that can really add up. For example, our research shows that the average worker takes out 27 loans a year—meaning almost every bi-weekly paycheck. That means for the majority of workers, these paycheck advance loans look similar to a revolving credit card balance or to a series of payday loans that have to be refinanced every paycheck. We also found that for these workers, the price tends to be over 100% APR, which is lower than payday loans but higher than the most expensive subprime credit cards.

Our analysis showed that the majority of the cost comes from fees charged to get “expedited” access to funds. For workers who can’t wait for their paychecks, it is often because they need funds immediately. This means that workers are paying fees for these paycheck advances.

“Tipping”

While the focus of our analysis was on employer-partnered products, the CFPB has also observed that direct-to-consumer paycheck advance product providers seek to convince borrowers to “tip” them.

A large portion of Americans are confused about the changing nature of tipping in America, and tipping your lender or tipping your employer is especially odd. However, some direct-to-consumer providers may obtain substantial revenues from so-called “tips.”

The CFPB has been paying close attention to illegal tricks on tips. The CFPB sued a lender for providing several options for a tip to the borrower, none of which were zero.

Today’s Rule

Our study of the market, and today’s report, helped to set a foundation for a new proposed interpretive rule to address these emerging paycheck advance products.

The proposal would not impose any new requirements, but it would help to ensure that consumers can compare options and that companies compete on clarity, not confusion. The interpretive rule would replace and expand upon a previous CFPB advisory opinion that focused on fee-free products. We have heard that the prior advisory opinion caused confusion in the marketplace, since it addressed only free products, so this proposal is intended to answer that call for further clarity.

The proposal makes clear that if workers obtain money that they are required to repay through a paycheck deduction, that’s a loan under existing federal law. This means that lenders must disclose an accurate interest rate in accordance with longstanding rules covering loans. This will help people compare options across different products. And it will especially help those providers truly providing free products.

The rule also addresses the unusual practice of “tipping” or charging for “expedited” access to loan proceeds. The rule details how federal law treats incidental costs, even if the amount is variable, and how they must be incorporated into the cost of loans.

The action we are taking today will help to ensure that paycheck advance products can remain a viable option for workers and their families, ideally by giving them a cheaper way to access credit compared to the alternatives. We want to see the market compete down costs for employees and employers, rather than innovate on ways to harvest junk fees and push people into cycles of debt.

Next Steps

Today’s report and rule are important steps for the CFPB to ensure that this market is working. We also plan to take additional steps to spur competition and increase transparency.

First, the CFPB will be looking for more ways that workers can gain access rights to their payroll and financial records. This October, the CFPB will finalize rules that give life to a dormant legal authority that will allow consumers to access and permission their financial data for their bank accounts, credit cards, and more. Many commonly used payroll providers are building capabilities for data sharing. If workers can access this data, this might open new possibilities for obtaining credit and other services more cheaply.

Second, the CFPB will work with federal and state partners to ensure that these emerging paycheck advance companies are playing by the rules. For those that cheat or egregiously violate the law, we will not hesitate to take enforcement actions.

Third, the CFPB will work with employers to ensure they are not inadvertently spawning predatory lending through their paycheck advance partners. Many of the nation’s largest employers, especially in retail and quick-serve restaurants, partner with paycheck advance companies. We hope to explain the benefits of fee-free access, and we intend to caution them about accepting kickbacks that paycheck advance providers may someday offer.

Finally, we will deepen our work with the U.S. Department of Labor on all aspects of employer-driven debt, the future of payments, and retirement savings. I appreciate all the work by Acting Secretary Su and her team for working with us to safeguard the financial futures of American workers and their families. Consumers and workers are the same people, so it is critical that use all of our tools together.