Concerned that Californians were being victimized by novel types of lenders, state lawmakers gave regulators broad power in 2021 to guard against unfair, deceptive and abusive practices in the financial services industry.
On Tuesday, the California Department of Financial Protection and Innovation announced its first new regulatory targets: earned wage access, debt settlement and student loan relief services, as well as private loans with income-based repayment plans for college or trade school students. Starting in February, these services will have to register with and provide data to the department if they want to operate in California, making it easier for regulators to identify debt traps and other troublesome practices.
According to the DFPI, providers of earned wage access in California “have generally maintained that they are not subject to any existing consumer credit laws or regulations.” The rule announced Tuesday holds that these services can either be licensed and regulated as lenders subject to the California Financing Law, which limits interest rates and other terms, or register as credit providers under the 2021 law. If they choose the latter, they’ll have to submit data every month to the state about their fees, the percentage of advances repaid, the duration of the advances and the total number of advances made.
Tuesday’s rule doesn’t set any new limits on the fees charged, the amount of credit offered or other key features of the four types of services — the 2021 law doesn’t give the department that authority. What the rule will do is gather information about how these services operate and their effect on consumers, something that could lead legislators to impose new restrictions, said Suzanne Martindale, the DFPI’s senior deputy commissioner for consumer financial protection.
“The goal is to get the data,” Martindale said. “Let’s see the trends, let’s identify the risks for consumers, and then let’s have a conversation on where to go from here. … We are simply saying, come register and give us more information about your business.”
Some consumer advocates say more limits are needed on earned wage access services (also known as paycheck advances or income-based advances), which allow employees to borrow against their next paycheck based on the hours they’ve already worked. The state’s move is necessary, they say, but not sufficient.
“We really see it as the new frontier in payday lending,” Andrew Kushner, senior policy counsel for the Center for Responsible Lending, said of the services offered for a fee through employers or directly to consumers. “The problem is just like with a payday loan. It effectively creates its own ongoing demand. … It traps borrowers in a cycle of reborrowing.”
Earned wage access companies say their services give workers more control over the timing of their pay, while also helping employers reduce turnover. “Accessing accrued wages before the pay cycle ends becomes a financial lifeline, offering flexibility and confidence in financial wellness,” one provider, Rain Technologies, says on its website.
Typically, earned wage access services impose a per-use fee, a subscription charge or, in some cases, a voluntary “tip.” Two basic types of these services are covered by the rule: one that third parties offer through employers, which automatically withhold the repayment from the borrower’s next check, and one they offer directly to consumers, where the repayment is withdrawn from the borrower’s bank account.
The vast majority of those who take out advances repay them in full, according to the DFPI. But the cost can be high — according to the DFPI, the fees or tips collected by the services translated to an annual interest charge of more than 330% on average in 2021 — and the repayments may lead to more borrowing.
Kushner said the earned wage access industry depends on a relatively small number of users who take out advances repeatedly. The fees they pay for the advances eat into their paychecks, deepening their financial struggles.
Lucia Constantine, a senior researcher at the Center for Responsible Lending, said the center’s research found that one-third of the people who used wage advance apps reborrowed within two weeks at least 80% of the time they used the app. Almost 40% of the users had at least six advances in one or more months, she said, and in California, those users accounted for 85% of all advances.
The center also found that more than 30% of the Californians who use wage advance apps have taken out advances from three or more different apps in a month. State residents had significantly more overdrafts from their checking accounts in the three months after using these services than before using them, the center said.
The federal Consumer Financial Protection Bureau is stepping up oversight of earned wage access services too. In July, it proposed an interpretive rule that would require these services to disclose their costs and terms more clearly, as required by the federal Truth in Lending Act.
Disclosure is important, Kushner said, but the federal government leaves it to the states to regulate the terms and conditions that lenders offer. Advance wage access products “are loans under any definition,” he said, and states should regulate the providers the same way they regulate other lenders — with caps on the fees, interest charges and other costs imposed on borrowers.
Those providers, he conceded, “are really opposed to being treated as lenders.” A number of them pushed the DFPI to ease the registration and reporting requirements, arguing they weren’t necessary to protect California consumers.
Martindale said the state’s approach to earned wage access services is a lighter regulatory touch than treating them the same as lenders under the California Financing Law. “I think we landed in a place where no one, no stakeholder got everything they wanted,” she said.
Once the registration requirement goes into effect next year, it will offer one immediate benefit for consumers: Before signing up for one of these services, they will be able to check the DFPI website to see whether the company behind it is registered and can legally operate in California.
Regardless of whether companies are licensed or registered in the state, Martindale said, the 2021 law empowers the DFPI to bring enforcement actions against them if they offer credit in unfair, deceptive and abusive ways. So far, the agency has used that power to bring more than 300 enforcement actions against financial service companies and executives.