Opinion: To Be Credit, or Not To Be Credit

When is a loan not a loan?

This isn’t a trick question, or a Zen koan posed by Buddhist monks. It’s an ongoing debate in the credit world regarding “earned wage access” that has been triggered by new action from the Consumer Financial Protection Bureau.

The practice grants employees early access to their paychecks, typically in exchange for fees. Is that a loan? The CFPB — in its current incarnation, anyway — says no.

The new guidance is that these transactions are distinct from other products like traditional payday loans, renowned for sky-high interest rates. And indeed it does typically operate differently, via account deductions at the next payroll event.

Seemingly a minor point, but not when you consider that it allows such transactions to skirt the Truth In Lending Act. That means that earned wage access may not be governed by the same set of rules as other lending products, such as consumer protections, or disclosures regarding costs and terms.

That’s a gift-wrapped development for the industry, obviously. But it’s short-sighted, harms transparency, and targets a set of particularly vulnerable consumers who are already living paycheck to paycheck.

As for whether earned wage access constitutes credit, that’s as issue of semantics that enables companies to sidestep supervision. As the saying goes, if it looks like a duck and quacks like a duck … it’s most likely a duck.

Not to take away from the utility of the service: If someone can get access to money they’ve already earned, instead of waiting for their paycheck in a couple of weeks, that can help them avoid putting daily expenses on credit cards, or dealing with overdraft or late-payment charges, or having to borrow from friends or family.

Even if there are no interest rates being charged, the fees involved can be extremely high over time, rising to levels the National Consumer Law Center (NCLC) calls “predatory.” Such fees from payday loan apps can add up to $1,400 over two years, according to NCLC calculations.

The broader question is, if you don’t want consumers to be informed of the total potential costs involved — why is that? Presumably it’s because the fees are so forbidding that consumers might not choose to use these services.

What’s not helpful here for companies or consumers is the lack of clarity. First of all, there is a patchwork of state laws that have their own interpretations about whether these fees constitute finance charges or not.

When each state has its own opinion on the matter, it contributes to the general confusion and results in significant regulatory burdens for providers.

Second, federal guidelines on this issue have flip-flopped numerous times already, depending on whatever administration happens to be in power. The current refresh, for instance, is actually reinstating a position the CFPB held back in 2020.

It’s hard to design a game plan when the goalposts are constantly shifting, and even individual players are operating under a different set of rules.

It’s no secret that the CFPB has been pivoting away from its mandate — providing consumer financial protections — in favor of making life easier on businesses. But it’s cynical to maintain that this latest shift is protecting consumers in any way.

However you want to define the nature of a financial bill, it will come due. And those consumers deserve the same information, and protections, as any other borrower.

Something for lenders to keep in mind: The courts have a say in this matter, too, and a big one. Wrote the NCLC in a recent press release: “Every court that has ruled on these questions has rejected similar claims by earned wage payday lenders.”

Since the CFPB itself admits that the move “does not have the force or effect of law,” it might be wise for lenders not to push the limits of this new decree, lest they expose themselves to ongoing legal questions.

Lending to such a population already living on a knife’s edge without simple measures, like having to disclose total costs, feels unnecessarily grasping. If the industry is concerned at all about public image and trust — and it should be — then it should at least be transparent about what’s taking place.

It’s a practice that serves a legitimate space in the marketplace, in covering short-term liquidity needs. But to do so outside of the purview of the Truth In Lending Act comes across as deliberate obfuscation.

For something truly long term and sustainable, you don’t want to be operating a business model that feels like a careful laying of a trap.