California to Regulate Fintech Payday Loans

March 17, 2023 — Press Release

Junk fees, “tips” obscure APRs over 300% on earned wage advances, nonbank banking apps, and other fintech payday loans

WASHINGTON – The California Department of Financial Protection and Innovation (DFPI) has proposed new regulations governing disguised fintech credit and released new data showing high costs for consumers who use earned wage advances and other fintech payday loans. Advocates at the National Consumer Law Center applaud the proposal as a rejection of claims that fintech payday loans are not loans.

“California has called out the Emperor’s New Clothes by finding that earned wage advances and other fintech payday loans are loans, and that ‘tips,’ instant access fees, and other fees resulting in triple-digit interest rates must be subject to state rate limits,” said Lauren Saunders, associate director at the National Consumer Law Center. “The new California data shows these fintech payday loans, whether employer-based or direct to consumer, have the same triple-digit APRs and trap borrowers in the same debt trap cycle as traditional payday loans.”

“Data now shows that so-called ‘tips’ and other junk fees on fintech payday loans result in APRs from 328% to 348%, disguising high interest charges regardless of claims that these fees are purportedly ‘voluntary,’” Saunders added. “Junk fees add up to hundreds of dollars a year, draining wealth from communities of color and other vulnerable users of fintech payday loans, many of whom make less than $25,000 a year.”

DFPI, which has been collecting data from earned wage advance providers and other fintech payday lenders, found that:

• “[T]ips were included in 73% of the over 5.8 million advances made to California consumers, and the APRs for these advances ranged between 328% and 348%.”
• “The APRs for advances from companies that do not accept tips were similar, ranging from between 315% and 344%.”
• “The APRs for companies that accept tips and those that do not are generally similar to the average APRs for licensed payday lenders in California.”

DFPI proposed regulations that require providers of income-based advances, whether employer-integrated or not, to:

• Register with or obtain a license from DFPI;
• Comply with the fee and interest rate limits of the California Financing Law (CFL). The proposed regulation clarifies that those limits apply to tips or other voluntary payments. The CFL caps the interest rate on loans up to $2,500 at 30% or lower, depending on the size of the loan, plus lenders may charge an administrative fee that cannot exceed 5% of the advance. 

DFPI identified “multiple strategies that lenders use to make tips almost as certain as required fees and these charges can be quite costly.” DFPI explained that by treating tips as charges, it could assure that lenders who rely on tips and payday lenders and others who do not can “compete on a level playing field.” 

“Despite claims that ‘tips’ are voluntary, companies have ways of pushing people into paying, and California’s data shows that workers pay heavily, with costs virtually identical to those of traditional payday loans,” Saunders explained. 

The new regulations cover several types of fintech payday loans, including: 

• Earned wage advances that access employer time and attendance records (i.e., DailyPay, PayActiv, Even (now owned by Walmart)); 
• Cash advances that purport to be earned wages but that have no connection to an employer or its payroll system (Earnin); and
• Cash advances offered by nonbank banking apps (i.e., Money Lion, Dave, Brigit). 

Each of the lenders referenced submitted data to DFPI under several memoranda of understanding entered into in 2021. 

The clarification by the proposed regulations that “tips” are charges regulated by California law should also cover platform “peer-to-peer” payday lenders such as Solo Funds, which has been charged by the State of Connecticut with violating that state’s lending laws.

“Other states should follow California’s lead and reject efforts by fintech payday lenders to carve loopholes in lending laws that traditional payday lenders could drive a truck through,” Saunders said. “States should reject efforts by fintech payday lenders to disguise themselves as employers paying wages.”

Bills recently introduced in several states, including Georgia, Kansas, Mississippi, Nevada, and Vermont, would exempt fintech payday lenders from interest rate limits and other consumer protection laws. Many of the laws are based on a model law proposed by the conservative American Legislative Exchange Council (ALEC).

The proposed rule also adopts requirements for education financing (including income share agreements (ISAs)), debt settlement, and student debt relief providers. ISAs are most often used to finance higher education by requiring the borrower to pledge a share of their future income, but costs can be obscured and can add up to far more than traditional student loans.

Additional Resources:

• Earned Wage Advances and Other Fintech Payday Loans: Workers Shouldn’t Pay to be Paid, Mar. 3, 2023
• Comments of NCLC et al. to Consumer Financial Protection Bureau (CFPB) on Junk Fees, May 2, 2022
• Letter from 96 groups urging CFPB to rescind advisory opinion on earned wage advances, Oct. 12, 2021
• Comments to DFPI on income share agreements, Mar. 15, 2021