Companies seek endorsement of payday-like products even in states with reasonable usury caps

DURHAM, NC -State regulators should treat earned wage advance products like loans and hold lenders to usury and credit standards to prevent these products from putting borrowers into an unaffordable cycle of debt, the Center for Responsible Lending (CRL) and other advocates will tell lawmakers today at a Vermont committee hearing.  

An increasing number of lenders are marketing so-called Earned Wage Advance (EWA) loan products that are similar to payday loans, and are seeking endorsement in several state legislatures. The Center for Responsible Lending (CRL) today released a fact sheet and a short video explaining why these products demand scrutiny.

A CRL policy counsel today joins advocates at a committee hearing to recommend that Vermont lawmakers decline to codify an EWA business model that can carry an effective annual percentage rate (APR) that exceeds the state’s usury cap, and that could potentially trap Vermont consumers in unaffordable cycles of debt. 

There are two types of companies that call themselves EWA providers set up to get workers an advance on their pay. One model contracts with employers to enable them to offer their employees the cash advance as a benefit, which is paid back by payroll deduction. The other markets a payday advance directly to consumers and requires access to their bank account for repayment.

If the employer-based advance is free, it can potentially provide an affordable alternative to payday loans. But where the EWA provider advances the money to the consumer (the “direct-to-consumer model”), the payday advance risks trapping borrowers in unaffordable debt cycles. This model works like payday lending: the loans carry fees that can inflate the effective interest rates, and lenders automatically deduct payment from the borrower’s bank account.

“Companies that offer loans directly to consumers against their next paycheck are marketing a technology-based form of payday loan, a harmful product that Vermont and other states have appropriately prohibited, with rates capped at 18% annually for single payment loans in Vermont,” said CRL policy counsel Monica Burks in testimony submitted to the Vermont House Commerce committee. “CRL joins the [Vermont] Department of Financial Regulation and NCLC in recommending that any regulation of EWA products include provisions classifying these payday advances as credit, and the providers as lenders.”

Companies like Earnin, DailyPay and Payactiv are lobbying legislatures in Kansas, Missouri, New York and Georgia, in addition to Vermont, seeking to codify their business model in the state’s consumer lending code, even though some of these states have strong protections that limit the annual interest on consumer loans.

They sometimes obscure the true cost of the loans by marketing them as free but soliciting “tips,” which can be very high relative to the amount of the loan and the short time period before the loan must be repaid. A representative of Earnin testified to the Vermont committee that Earnin suggests a default tip of up to $11 on $100 advanced.

“[The Earnin representative] told Vermont lawmakers that tips make up some 40% of their revenue and that their business model would have to change significantly if the practice were regulated,” said CRL policy counsel Andrew Kushner, in CRL’s In Focus video on EWA. “This indicates that the business model of these companies depends on making loans with true costs that are well above what they disclose or advertise.”

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Press contact: Carol Parish Carol.Parish@responsiblelending.org