In a recent announcement, the Consumer Financial Protection Bureau (CFPB) revealed that apps offering early access to paychecks for a fee are considered loans and subject to the Truth in Lending Act. The proposed rule aims to bring clarity to the fast-growing industry known as Earned Wage Access, which has drawn comparisons to payday lending.

Earned Wage Access apps, which have been around for over a decade but gained popularity in recent years, provide small short-term loans to workers between paychecks to help meet immediate financial needs. On payday, the borrowed amount, along with any fees, is deducted from the user's wages.

According to the CFPB's report, at least 5% of American workers used an earned wage product in 2022, with 7 million workers receiving advancements of $22 billion through employer-affiliated apps, and 3 million workers receiving advancements of $9.1 billion through direct-to-consumer apps.

The CFPB's research also revealed that the average user of Earned Wage Access takes out 27 loans a year, essentially borrowing almost every other biweekly paycheck. While the interest rates on these loans can exceed 100% APR, the main component of the interest is derived from fees associated with expediting paycheck access.

Furthermore, the CFPB highlighted that these apps primarily target workers earning less than $50,000 a year, many of whom have been impacted by two years of high inflation. Monthly subscription fees and mandatory fees for instant fund transfers are common among these apps, further burdening the financially vulnerable individuals.

Consumer protection advocates have expressed concern over these earned wage products being akin to workplace payday loans. Christine Zinner, policy counsel at Americans for Financial Reform, emphasized that users can become trapped in a cycle of debt, resorting to frequent advances just to cover basic household expenses.

The CFPB is also closely monitoring the "tips" requested by these apps when providing paycheck advances. Paycheck advance companies often generate substantial revenues from these tips, leading the CFPB to deem the practice as unusual.

To address these concerns, the CFPB proposes that if workers obtain money that they must repay from their paychecks, it should be regarded as a loan under federal law. The agency asserts that interest rates, including fees for expedited transfers, must be disclosed and incorporated into the loan costs.

Earned Wage Access companies, on the other hand, argue that these fees should not be factored into the standard APR calculation. In response to Connecticut's law that placed a cap on fees, at least one earned wage access company, EarnIn, ceased operations, citing economic inviability.

While the Financial Technology Association, an industry group representing many Earned Wage Access companies, expressed concern over the proposed rule, stating that it would harm millions of workers reliant on such services, the CFPB maintains that it aims to ensure fair competition and cost reduction in the market.

The CFPB is accepting public comments on the proposed interpretive rule until the end of August. CFPB Director Rohit Chopra emphasized the importance of the rule in ensuring the market works effectively and benefits both employees and employers.

This report and proposed rule by the CFPB mark significant steps toward regulating the Earned Wage Access industry and promoting transparency in loan practices.