Fueling the ongoing affordability crisis, new types of payday loans offered through cash advance apps – so-called “earned wage access products”– drain hundreds of dollars a year from thin wages. These loans are intentionally designed to evade legal definitions of “loans” and “interest” to avoid usury limits and other borrower protections.
Like traditional payday loans, earned wage payday loans extract disproportionately high fees and can trap people in an incessant cycle of borrowing.
Earned wage payday lenders engage in many practices that deceive borrowers, trick them into incurring excess fees, make free options illusory, and make it difficult to escape an escalating cycle of indebtedness. Whether or not these loans are “credit” as a legal matter, the products must comply with state and federal statutes prohibiting unfair, deceptive, or abusive practices (UDAP laws). Recent public enforcement actions contain useful illustrations of the unseemly practices of this industry. These practices are a stark warning against efforts to exempt earned wage payday loans from lending laws and may support claims under federal and state UDAP laws:
- Deceptive and manipulative practices regarding costs, including:
- Disclosing 0% APR, “no interest” or “interest free” even as up to 90% of users pay costly fees that can cost on average $300 a year and as high as $1400 over two years.
- Promoting “instant” or “fast loans,” while hiding high “expedite” fees that almost all borrowers pay.
- Delaying disbursement or exaggerating the amount of time needed for delivery if the borrower does not pay an “expedite” fee.
- Obscuring costs by hiding them on websites and apps or not fully disclosing them until the borrower is deep into the sign-up process for the loan.
- Dark patterns that are unfair or abusive tricks to make free options illusory and coerce purportedly voluntary “tips” and “donations,” including:
- Using default options that include costs automatically.
- Deceptive and manipulative user interfaces that steer users towards accepting advances with costs or make it difficult to avoid tips.
- Repeated requests for tips and interfaces that require multiple steps to avoid a tip.
- Deception around the purpose of a tip or amount of funds being donated.
- Psychological manipulations and guilt, including implied threats of consequences for borrowers who do not tip.
- Advertising large loans that few borrowers receive and limiting loan size or pushing smaller loans to multiply fees.
- Creating obstacles to prevent borrowers from canceling.
- Lending regardless of whether borrowers can afford to repay without further loans, leading to a cycle of dependence on new earned wage payday loans with additional fees.
Policymakers and regulators must address unfair, deceptive and abusive practices in this industry and resist calls to exempt these loans from laws that keep money in workers’ pockets.
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