Proposed rule would require lenders to comply with California law, but triple-digit interest rates could remain
OAKLAND, CA – Consumer advocates praised the California Department of Financial Protection and Innovation (DFPI) for requiring fintech cash advances to comply with the laws that govern other forms of credit and for cracking down on “tips” used to disguise interest. The groups voiced appreciation for the solid start and urged the DFPI to go further to protect consumers from potential financial harm caused by earned wage advance (EWA) and other fintech payday loans that can extract wealth from low-wage workers.
In comments submitted today, the Center for Responsible Lending (CRL) and the National Consumer Law Center (NCLC) expressed support for the DFPI’s proposal to clarify that fintech cash advances are covered by the California Financing Law (CFL), including its fee and interest rate limits. The proposal requires that lenders be licensed under the CFL, with a temporary licensing exception for employer-based advances by firms that register under the California Consumer Financial Protection Law.
CRL and NCLC also praised the clarification that, despite industry claims, supposedly voluntary “tips” and “donations” are charges subject to fee and interest rate caps. But the groups urged further action, as the DFPI’s proposed rule stops short of full protection for consumers, allowing annual interest rates of up to 213% for a 10-day loan.
The proposed rule addresses the practices of three categories of fintech cash advances: earned wage advances made in partnership with employers; fake EWAs with no connection to employers, like EarnIn; and other direct-to-consumer fintech cash advances like Dave and Money Lion, which do not claim to be paying wages. All three types are balloon-payment loans repaid on the customer’s payday, either through payroll deduction, bank account debit, or another method. The direct-to-consumer advances generally disguise fees and interest by pushing consumers to pay “tips” and “donations.”
The DFPI’s proposed rule was announced in March after the regulator found average annual interest rates over 330% for both tip-based and non-tip advances, and high rates of repeat advances, with an average of 36 loans a year.
“The DFPI is doing the absolute right thing by capping interest rates on earned wage advances and other fintech cash advances, just as we do other forms of credit,” said Andrew Kushner, policy counsel for Center for Responsible Lending. “At the same time, the DFPI’s proposed regulation allows these fintech cash advances to have APRs of 213% or higher. The proposal is too loose to sufficiently rein in abusive fintech lending and permits very expensive loans that closely resemble traditional payday loans. We cannot stand by and allow fintech lenders to ‘innovate’ new ways to exploit low-wage workers.”
“Earned wage advances and other fintech cash advances are obviously loans, and tips are a disguised form of interest, as DFPI’s data shows. We commend the DFPI for calling out the Emperor’s New Clothes and requiring fintech cash advances to comply with lending laws and rate caps,” said Lauren Saunders, associate director of the National Consumer Law Center. “DFPI’s proposal is strong but needs to be strengthened. Far from killing the fintech cash advances, as some have claimed, DFPI has done too much to accommodate the industry by allowing high fees on extremely short-term loans with APRs of 213% or more.”
The comments submitted by CRL and NCLC defend the agency’s determination that these products are loans, while citing shortcomings with the proposed rule that should be addressed in future drafts, including:
- APR for a 10-day loan could come to 213%;
- APR for a seven-day loan could come to 290%;
- APR for a three-day loan could come to 600%;
- DFPI proposes to waive a statutory requirement that consumer loans have a minimum 15-day term. Very short-term balloon loans are an inherently harmful product, and the Department should not lightly disregard the legislature’s determination on this point;
- DFPI proposes to exempt from the rule advances funded directly by employers. While advances offered free by employers may be beneficial, the proposed exemption also would cover employer-funded advances from third parties that carry a cost, which opens the door to unfair practices.