We Can’t Create a Lending Loophole: Pay a Living Wage
Thursday, September 21st, 2023
A few days into the 2023 Virginia General Assembly session, VPLC learned that an “earned wage access” lender had talked two legislators into filing legislation to “regulate” the industry. The 2023 General Assembly rejected the legislation. However, it appears that there will be another effort to pass legislation in the 2024 General Assembly.
What is Earned Wage Access/Advance?
Earned wage access, or EWA, is a type of financial product that allows employees to receive part of their paycheck before payday. Although the lenders call it access it is really an advance on your salary. Companies like Walmart, Amazon and McDonald’s offer EWA as part of their benefits at no cost to their employees. However, often, employees must pay fees for the advance. The amount an employee is paid in advance, as well as any fees charged, are deducted from the employee’s next paycheck. If the advance is provided by a company other than an employer, it is a loan that the employee must repay by having it deducted from their next paycheck or bank account. EWAs that charge fees can become a problem for employees if overused.
Like traditional payday loans, EWAs are balloon-payment loans that lead to a cycle of reborrowing. A worker who cannot afford an expense from this week’s pay and borrows from next week’s paycheck will have a hole, triggering another loan. Most workers who use EWAs do so nearly every pay period – 12 to 120 times a year, with an average of 36 times.
So why did the EWA industry push legislation in Virginia claiming that these are not loans? This does not make any sense because if a company gives you their money in exchange for you repaying it with a fee, that is the very definition of a loan. What the industry lobbyists are looking for is an exemption from Virginia’s Fairness in Lending Act, passed in 2020.
In 2020, after years of legislative efforts to foster a safe and viable market for small loans, Virginia lawmakers passed bipartisan legislation—the Fairness in Lending Act. Now, Virginians have access to several lenders offering affordable loans including consumer finance loans and short term loans both online and in-person. In addition, six of the eight largest banks now offer affordable small loans and many credit union small dollar loans hit a new high in 2022.
Those lenders that refuse to offer affordable installment loans—the payday and car title lenders—have left the Commonwealth. Allowing an exemption from our lending laws would enable new forms of internet payday loans and allow traditional payday lenders to claim that their loans, too, are based on earned but unpaid wages. VPLC would support legislation to simply study the EWA industry. However, we will not support any legislation that will create a new loophole to the Fairness in Lending Act.
Legislators should concentrate on other methods to help workers instead of promoting a product that just leads to employees paying to get paid early and reducing their already inadequate wages. Employers should pay a living wage, offer regular work schedules, and offer early pay, if at all, for free.
By Jay Speer, Executive Director, Virginia Poverty Law Center