New services offer twist on payday lending. Colorado Democrats are split.
A bipartisan effort to legalize and regulate so-called “earned wage access” services in Colorado has raised alarm from consumer protection advocates who say the products are a lot like payday loans under a new name.
Earned wage access services give workers an advance on their paycheck for a transaction fee — typically about $3, on cash advances that range from $35 to $200. The company providing the advance is then repaid directly out of the employee’s next pay check — either by their employer or out of the employee’s bank account through an automatic withdrawal.
House Bill 1020, sponsored by Rep. Sean Camacho, D-Denver, and Democratic Majority Leader Monica Duran of Wheat Ridge, would regulate EWA services for the first time in Colorado — something the bill’s supporters and detractors agree is needed.
Supporters say getting cash through an EWA isn’t quite the same as taking out a payday loan. EWA services don’t directly impact a consumer’s credit, and the money borrowed doesn’t accrue interest over time. The industry also argues it isn’t a loan because there’s no legal recourse — the debtor has no personal liability to repay the money owed if the withdrawal doesn’t go through. Firms offer a free option for those willing to wait; expedited charges only kick in if borrowers need money immediately. Some firms also sell monthly subscriptions.
But, consumer protection advocates say, they can still trap low-income borrowers in a cycle where they are seeking advances on their pay multiple times per month to pay the bills, only to have less left in their paychecks as cash advance fees accumulate.
“What we have seen is that it ends up being pretty costly for consumers,” Chris deGruy Kennedy, the president of the Bell Policy Center, a progressive think tank, told The Colorado Sun in an interview. “You do it once, and you paid $3.50, it’s hardly the end of the world. But you get into these cycles of paying to get paid.”
Moreover, because the companies are repaid so quickly, the Consumer Financial Protection Bureau found that the typical user is effectively paying over 100% annual percentage rate interest per transaction to borrow money for just a few days.
If they were considered loans under state law, that would violate Proposition 111, which limits payday loans to 36% APR. The ballot measure, backed by the Bell Policy Center, was approved by 77% of Colorado voters in 2018.
At a hearing Monday, Camacho said the bill would simply put “guardrails” around a business practice that’s already happening as more and more people sign up for services such as PayActiv and DailyPay.
As introduced, the measure would require providers to be licensed with the Colorado Attorney General’s Office and file annual reports on their operations. It would also limit fees to $7 per transaction — a cap that Camacho said would be reduced to $4 through a future amendment — and require providers to cover bank overdraft fees if they trigger one by withdrawing more money than a consumer has in their account when the company comes to collect.
“EWA is a financial services game changer for low-income workers” who live paycheck to paycheck, Camacho said. “EWA gives Coloradans the flexibility to manage their bills.”
The backlash to the measure has pitted Camacho and Duran — a top House Democrat — against progressive groups like the Bell Policy Center and labor unions, including the Colorado AFL-CIO, who are seeking stronger consumer protections, including a monthly cap on transactions and a provision that would regulate EWA companies under the same laws that payday lenders already are.
The House Finance Committee delayed a vote until Thursday. But even as Duran and Camacho said they were trying to work out a compromise, they pushed back forcefully during Monday’s hearing against comparisons to payday lending.
“This isn’t a loan — this is accessing your own money that you have earned through your employer if you need it,” Duran said.
Industry groups, too, chafe at the characterization. They say EWA products are a consumer-friendly way for people to get paid early in order to cover regular bills like child care and auto loans, which don’t always sync up with monthly or biweekly pay cycles — all for about the same price as an ATM fee.
“If we go away, there are only worse options,” said Ryan Naples, a senior public policy manager at EWA firm DailyPay. “If we go away, the need does not.”
Ed Van Wesep, a finance professor at the University of Colorado, agrees. He says his research has found that monthly pay cycles — the minimum frequency required by Colorado law — make it hard for low-income workers with little-to-no savings to access money when they need it. EWA services, he said, offer workers a better alternative than loans when they need money before payday.
To critics, the ATM analogy falls flat. Paying an ATM fee once doesn’t increase the likelihood that you’ll do so again, said Andrew Kushner, senior policy counsel with the Center for Responsible Lending. But much like payday loans, earned wage access products can lead to consumers becoming dependent on borrowing.
“If you take $100 out of your paycheck today, pay that $4 or $5 fee, that’s $105 less in your paycheck in 10 days,” Kushner said. “That’s going to make you return to use the service again.”
And while supporters say the industry can provide a financial lifeline for its users, some companies have been investigated for deceptive trade practices. Brigit, which has over 100,000 users in Colorado, last year settled a lawsuit with the Federal Trade Commission in which it agreed to pay $18 million, most of which is being refunded to its users.
The sponsors are attempting to thread a political needle to get the bill passed into law.
It has a Republican sponsor, Sen. Lisa Frizell of Castle Rock. But without stronger consumer protections, it’s not clear if enough Democrats will support it to pass it into law. On the flip side, stronger regulations could lose the support of Republicans. An industry trade association, the American Fintech Council, came out against the bill Monday, even as some companies, like PayActiv, are lobbying for it.
The bill would also require cuts to other areas of the budget in an already difficult year. The staff needed to regulate the services would be funded through $180,000 in annual licensing fees, according to nonpartisan legislative analysts. But because the state is over its constitutional revenue cap, any money collected would simply increase taxpayer refunds owed under the Taxpayer’s Bill of Rights. As a result, the Joint Budget Committee would have to cut $180,000 in other state services.
House Democrats on the Finance Committee appeared divided Monday — not just over the bill, but over the very nature of what they were being asked to regulate.
“At the root, is this not somebody getting access to money they’re not yet entitled to, and it is then paid back?” said Rep. Yara Zokaie, a Fort Collins Democrat. “How is that not a loan?”