State regulators scrutinize payroll advance firms

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A multistate investigation into the payroll advance industry will focus on the question of whether nearly a dozen companies in the fast-growing sector are violating payday lending laws.

The probe, which was announced Tuesday by the New York State Department of Financial Services, is expected to take a close look at business practices that vary significantly from company to company in an industry that does not fit neatly into existing regulations. Critics allege that in some cases, consumers are paying fees equivalent to loans with triple-digit annual percentage rates.

"High-cost payroll loans are scrutinized closely in New York, and this investigation will help determine whether these payroll advance practices are usurious and harming consumers,” New York Financial Services Superintendent Linda Lacewell said in a press release.

Regulators from Connecticut, Illinois, Maryland, New Jersey, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota, Texas and Puerto Rico are also participating.

Payroll advance companies typically charge fees for access to income that workers have already earned, but have not yet received due to time lags in the pay cycle. Often the prices are much lower than those charged by payday lenders, but fee structures vary substantially across the nascent industry.

Some of the companies partner with employers, which offer the products as an employee benefit. Other firms bypass employers and offer cash directly to consumers. Instead of being deducted from the employee’s next paycheck, the advances must be repaid by the customer. Consequently, the providers must get in line with other billers at the end of pay cycle.

Consumer advocates contend that if the customer has an obligation to repay the advance, the transaction should be treated as a loan. They have taken issue with legislation in California that would exempt the direct-to-consumer companies from the state’s lending laws.

Companies in both categories are receiving requests for information from New York regulators. In all, the letters are being sent to 11 companies, according to a source familiar the matter.

The probe appears to have grown out of an earlier New York Department of Financial Services investigation of Earnin, a direct-to-consumer firm, related to concerns that the Palo Alto, Calif., company was skirting lending laws in the Empire State. Under New York law, annual interest rates above 16% are civil usury.

Earnin is among the companies receiving document requests as part of the latest investigation, the New York Post reported.

In announcing the probe, New York regulators expressed concern about companies that collect unlawful interest rates under the guise of tips and fees. Under Earnin’s business model, users may choose to pay a tip. Critics have contended that customers are given incentives to do so, but the company maintains that the tip is optional.

“This is a brand new model,” Earnin said in an emailed statement, “so we expect and welcome questions from regulators like the New York Department of Financial Services.”

PayActiv, which is based in San Jose, Calif., and partners with employers, confirmed that it was also contacted to provide information.

“We welcome oversight of the emerging earned wage industry and we are supportive of efforts to protect consumers,” PayActiv Chief Operating Officer Ijaz Anwar said in an email.

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Payday lending Consumer banking Fintech State regulators NYDFS