New Rule Ensures Transparency for Wage Advances

New rule offers protections for "earned wage" payday advances

An earned wage advance can allow a worker to access a portion of their paycheck before payday to cover unexpected expenses or better manage cash flow. These products are often cheaper than a payday loan, but do carry fees and risks for those taking the loans.

Now, these lending products will be governed by the same protections that apply to other forms of credit, including the Truth in Lending Act (TILA).

That's because of a new rule announced by the Consumer Financial Protection Bureau (CFPB).

A CFPB report found that workers using these employer-sponsored products take out an average of 27 such loans per year and that the typical employer-sponsored loan carries an annual percentage rate (APR) over 100%.

The new rule would ensure workers understood the total actual cost of the loan before using the product.

“Paycheck advance products are often marketed to and designed for employers, rather than employees,” said CFPB Director Rohit Chopra. “The CFPB's actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices.”

Consumer advocates applauded the move, saying it will offer workers a key credit protection.

In a statement released to the media, the Consumer Federation of America said:

“Workers have always relied on wages to repay advances from lenders. At the end of the day, an advance on wages is still a loan that has to be repaid, and no amount of hair-splitting can change it," said Adam Rust, Director of Financial Services for the Consumer Federation of America. “Policymakers should be skeptical whenever lenders insist on regulatory exemptions from rules that apply to their competitors. The CFPB’s interpretive rule will level the playing field and promote competition among short-term small-dollar lenders.”

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