Predatory Payday Loans
California to Regulate Fintech Payday Loans After Study Finds Exorbitant Rates
Some states are fine-tuning their financial regulations to regulate so-called "junk fees" from payday predatory loans that add up to hundreds of dollars a year, draining wealth from communities of color and other vulnerable users of fintech payday loans, many with less than $25,000 income.
To this end, the California Department of Financial Protection and Innovation (DFPI) has proposed new state regulations governing disguised fintech credit. It basically has widened the definition of fintech loans subject to stringent regulation. DFPI also has released new data showing the high costs for consumers who use earned wage advances and other fintech payday loans. Advocates have praised the proposal as a rejection of claims that these payday loans are not loans.
The resulting "junk fees" add up to hundreds of dollars annually, significantly draining wealth from communities of color and other vulnerable users of these loans, many making less than $25,000.
With this proposed regulation, California has officially recognized 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 are subject to state rate limits. Its data found that fintech payday loans, whether employer-based or direct to consumer, have exorbitant triple-digit APRs and force borrowers into the a debt trap cycle like traditional payday loans.
The study utilized data that DFPI has been collecting from earned wage advance providers and other fintech payday lenders, and found that: (1) Tips were included in 73% of the more than 5.8 million advances made to California consumers, and the APRs varied between 328% and 348%; (2) The APRs for advances from companies not accepting tips were between 315% and 344%; and (3) The APRs for companies that accept tips and those that do not are 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; and comply with the fee and interest rate limits of the California Financing Law, which 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 stated that by treating tips as charges, 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. DFPI’s data evidences that workers pay heavily, with costs virtually identical to those of traditional payday loans.
The regulations cover several types of fintech payday loans, such as earned wage advances that access employer time and attendance records (i.e., DailyPay, PayActiv, Even) ; cash advances that purport to be earned wages but 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).
Legislation 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 are based on a model law proposed by the conservative American Legislative Exchange Council.
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.
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