CFPB introduced a new rule to categorize popular pay check advance products as consumer loans
Popular payday advance products would now be classified as consumer loans under a new regulation that the Consumer Financial Protection Bureau (CFPB) announced on Thursday. The CFPB claims this will guarantee lenders give customers important details regarding charges and fees.
According to the CFPB, around 75% of workers receive biweekly or monthly paychecks, and lenders have historically covered the gap between an expense’s due date and the worker’s payment. The market for payday advance products, employer-partnered or direct-to-consumer loans that enable workers to receive their wages days ahead of time, has grown quickly as inflation has eaten away at Americans’ savings and incomes. These businesses handled 90 percent more transactions in 2022 than they did in 2021.
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According to a CFPB analysis of data from eight employer-partnered companies, which it claims make up just under half of the employer-partnered market, the number of transactions processed by these businesses skyrocketed by 90% between 2021 and 2022, when over 7 million accessed about $22 million in loans.
Director of the CFPB Rohit Chopra stated, “Paycheck advance products are often marketed to and designed for employers, rather than employees.” “By taking action, the CFPB will stop race-to-the-bottom business practices and help workers understand what they are getting with these products.”
Many of these products would be subject to an existing federal regulation under the proposed rule, which requires lenders to provide borrowers with information about fees, interest rates, and the total cost of utilizing the product. In most cases, especially for expedited transfers, employees must pay a charge in order to obtain their paychecks early. According to CFPB data, the average expedited price is $3.18, but it usually varies between $1 and $5.99. Workers who use direct-to-consumer paycheck advance products may have to pay a monthly subscription fee of up to $14.99.
Acting Labor Secretary Julie Su stated, “Workers have seen significant wage increases in recent years, but junk fees and high rates on financial products not only chip away at these gains – they take advantage of workers.” Additionally, some lenders provide borrowers the option to “tip” them; the CFPB claims to have been closely monitoring this development. Chopra referred to the agency’s lawsuit against SoLo Funds, an online lending company, as “digital trickery to hide.” “digital trickery to hide interest and fees on its online loans” by giving options for a “tip” or “donation,” none of which were zero.
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