State Legislature to Regulate California Payday Loan Alternative Apps

Inside Subprime: May 24, 2019

By Lindsay Frankel

California could become the first state to pass rules governing early access pay companies, a move intended to spur the growth of an industry that provides payday loan alternatives to workers.

The state Senate unanimously passed new legislation that would place restrictions on the fees and terms of advance pay services, which aren’t adequately covered by the current regulatory frameworks.

Pay advance companies provide workers with access to their wages before payday through partnerships with employers. They profit through monthly or per-use fees charged to the employee.

Advocates of the benefit say it helps workers cope with an emergency expense without needing to take out a costly payday loan. It also benefits workers living paycheck to paycheck who deal with the financial burden of unpredictable schedules and pay.

Last year, consumers used advance pay services to get money ahead of payday more than 18 million times and accessed a collective $3.15 billion in funds, according to research from Aite Group.

“We’re really at a tipping point where these products are going to become much more mainstream and adopted pretty quickly by employers of all sizes,” said senior analyst Leslie Parrish.

The new legislation would limit monthly fees to $14, prevent consumers from using the service more than three times during a given pay period, and cap advances at half the upcoming paycheck. The bill was sponsored by Democratic Sen. Anna Caballero, who noted that 4 in 10 U.S. households wouldn’t be able to cover an unexpected $400 expense, according to estimates from the Federal Reserve. The goal of the bill is for consumers to have safer options for credit than California payday loans, which have an average annual interest rate of 411 percent.

Consumer advocates have expressed concern that the advance pay industry isn’t governed by consumer lending laws. The Consumer Financial Protection Bureau made the decision to exempt advance pay companies from its 2017 payday loan rule, which has yet to go into effect.

Consumer advocates also worry that employees might end up trapped in an ongoing cycle of borrowing.

Still, many companies contend that relying on advance pay isn’t as financially damaging as the debt trap associated with high-interest payday loans.

Most advance pay companies support the legislation, though some say it may need modifying. Caballero said she hopes to collaborate with both industry representatives and consumer groups to “fine tune” the bill as it heads to the state Assembly.

Learn more about payday loans, scams, and cash advances by checking out our city and state financial guides, including AnaheimBakersfield, Chico, Fresno, Los Angeles, Modesto, Oakland, Redding, Riverside, Sacramento, San Diego, San Francisco, San Jose, Santa Barbara, Stockton and more.