Disagreements are common, especially during an election season and especially during an era of intense polarization. Plenty has been written about that already. Less common is a disagreement among allies. A disagreement among allies, friends, partners is unpleasant, but at times inevitable.
The Consumer Financial Protection Bureau (CFPB), which the Woodstock Institute vigorously supports on essentially every other issue, recently proposed an “Interpretive Rule” that is a stinging rebuke of the relatively new earned-wage access industry, or EWA. Woodstock is one of a fairly small group of nonprofits advocating for national policies to protect consumers from predatory financial practices. Fighting predatory lending is the hallmark of groups such as ours. But regarding EWA products, it is an understatement to say that we hold the minority position among our peers. Our peers assert that EWA is no better than the bugaboo of financial services — the payday lenders.
The EWA industry aims to address a problem most workers experience from time to time: running out of money before payday. EWA companies exist as apps or are integrated into some companies’ payroll systems. They allow workers to access money they’ve already earned but not yet been paid without taking out a loan. The transaction amounts are small. The app I use allows me to access a maximum of $100 on any given day.
A typical EWA company makes money through voluntary payments by its customers. You read that correctly: The fees are voluntary. There are no interest charges, no late fees, no mandatory charges whatsoever. The only types of charges are a fee if you want the funds expedited and deposited into your account immediately, and some companies collect “tips” — not unlike a tip you might pay when you buy a cup of coffee.
At Woodstock, we recommend that consumers who are struggling to make ends meet tip nothing and choose not to have the funds expedited. That way, the advance is free. And, in my experience, the funds often arrive in your bank account by the end of the day even when you don’t select the expedited payment option. A November study by the Financial Health Network found that, on average, a consumer pays about $4 per transaction.
Unlike predatory loans with high interest rates that can lead consumers to accrue mounting debt indefinitely, a consumer doesn’t face this risk with EWA. Not only can the entire transaction be free, but there also are no referrals to debt collectors, no negative reports to credit bureaus, no debtors’ court. At worst, relying on EWA for one payday could mean you need to rely on EWA for the next payday and so on, and a failure to repay means the particular company you failed to pay probably won’t send you any more money.
I have used EWA a countless number of times. Like many consumers who are paid twice a month, rent makes me cash-poor in my first pay period. I am able to bridge the gap between pay periods using EWA. All other options to manage my cash flow are more expensive: revolving debt on a credit card, overdraft fees, etc.
The CFPB rule asserts that the voluntary tips and fees are “finance charges,” which puts them under the federal Truth in Lending Act (TILA). TILA is a decades-old law that requires lenders to disclose interest and fees to borrowers as an annual percentage rate (APR).
Translating voluntary payments on an EWA transaction into an APR would have illogical results. Because of how APR is calculated, a small tip on an EWA transaction would translate into an astronomically high APR. For example, a consumer who makes a $1 tip in connection with a $100 EWA transaction the day before their payday would be paying an APR of 365%! By comparison, if the same consumer went to a pawnshop in Illinois, they would likely pay $20 to borrow $100 repayable in 30 days. The pawn loan’s APR would be 240%, less than the EWA’s APR, even though the consumer is spending 20 times as much on the pawn loan.
Further, treating payments made by consumers in an EWA transaction as finance charges would almost always cause EWA products to run afoul of Illinois’ interest rate cap, which is a 36% APR. This means the CFPB rule could effectively outlaw the product and require consumers to turn to industries such as payday lenders and pawnbrokers, which cost significantly more per transaction.
If opponents succeed in their effort to eliminate this relatively new industry, consumers will be the ones who lose, and the old-fashioned predatory lenders will win. Avoiding this outcome is important enough to endure the unpleasantness of disagreeing with your closest friends.
Brent E. Adams is the senior vice president of policy and advocacy at the Woodstock Institute, a nonprofit focused on consumer financial protection. Adams is also a former secretary of financial and professional regulation for Illinois.
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