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Federal Rule Would Crack Down on Paycheck Advance Loans
AARP supports proposal to protect consumers from hidden fees
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With prices rising over the last few years, many Americans live paycheck to paycheck. To cover shortfalls, some are turning to new financial platforms that promise early access to their wages. But often, these pay advances come with high and hidden fees — and can trap borrowers in an endless cycle of debt.
That’s why AARP is supporting a proposed federal rule that would strengthen regulation of these paycheck advance platforms, also known as Earned Wage Access products.
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We wrote to the head of the Consumer Financial Protection Bureau last week in support of an agency proposal that would subject these products to the same federal regulations as any other loan.
“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,” CFPB Director Rohit Chopra said in a statement announcing the proposal in July. “This means that lenders must disclose an accurate interest rate in accordance with longstanding rules covering loans.”
Loans often lead to repeat borrowing
Employees can access early wage access products in two ways. The first way is through an employer that contracts with a third party offering the service. The second is by opening an account with a paycheck advance app.
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With work-sponsored programs, the financial platform advances the funds to the worker and then recovers the amount plus any fees out of the worker’s next paycheck, either through a payroll deduction or direct deposit. With direct-to-consumer apps, workers repay the advance by linking their bank account, similar to a payday loan.
Although some employers cover the cost of the service, many paycheck advance products charge transaction fees or encourage borrowers to “tip” them through the app.
“As with payday loans, charges that may appear small in isolation often add up to high interest rates and high costs as the loans advance a small amount of money and are repaid in full in a short period of time,” wrote David Certner, AARP legislative counsel and legislative policy director. “This often triggers a cycle of repeat borrowing as the cost of the loan interferes with borrowers’ ability to meet new expenses.”
More than 7 million workers took out roughly $22 billion in employer-partnered paycheck advance loans in 2022, according to the CFPB. Research conducted by the bureau found workers took out an average 27 loans per year – or one loan for almost every biweekly paycheck. These loans often come with a high annual percentage rate, the bureau found. The rule would require lenders to clearly disclose the cost to borrowers.
Our support of the federal proposal is the latest effort in AARP’s fight for laws and policies that better protect older consumers. Last month, we endorsed a plan to strengthen federal oversight of “buy now, pay later” services, which are growing in popularity.
We also pushed states this year to crack down on crypto ATMs to prevent their use in fraud, and successfully advocated for a new “bad actor” registry to help protect older adults from unscrupulous financial companies.
Read our comments to the CFPB and keep up with AARP’s financial coverage.
Consumers can submit complaints about financial products or services on the CFPB’s website or by calling (855) 411-CFPB (2372).
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