OAKLAND, CA - The California Department of Financial Protection and Innovation (DFPI) proposed new regulations on Friday that would treat Earned Wage Advance (EWA) products as credit and require providers to disclose the true cost of the loan and abide by interest rate caps.
The Center for Responsible Lending (CRL) and other advocacy organizations have sounded the alarm as predatory fintech firms, like EWA providers, seek exemptions from consumer credit law in states around the nation. Providers claim the payday advances they market to consumers are not credit, and resist defining certain fees as finance charges.
“We applaud Commissioner Hewlett and the DFPI for telling it like it is, and showing that EWA products are essentially thinly-veiled payday loans in app form that are trying to get around state laws. The DFPI rules would put consumers first by treating EWA loans as credit products that are subject to certain protections that advocates have fought for to keep Californians safe,” said Vasudha Desikan, director of California policy at CRL. “EWA providers depend on problematic predatory practices for collecting much of their revenue, like pressuring consumers for ‘tips’ and calling them voluntary payments. The DFPI appears to have seen through this tactic, and will require so-called voluntary payments and other fees to be calculated in the true cost of the loan.”
The DFPI also released preliminary data from EWA providers that shows EWA loans carry annual interest rates over 300%, confirming that the advances are as costly as payday loans. Since they also have short terms and balloon payments like payday loans, they are likely causing a similar cycle of long-term damaging debt for borrowers.
The proposed rules define any advance of funds repaid in full or in part by a consumer’s compensation as a loan subject to the California Financing Law, with the exception of an advance of an employer’s own funds. Under the rules, EWA products marketed directly to consumers are considered loans regardless of how repayment is collected.
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