Vermont legislators are grappling with how to best regulate online paycheck advance services, a growing industry that has managed to operate in a legal gray area in the state for years.
Last week, members of the House Committee on Commerce and Economic Development took up H.99, a bill aimed at regulating so-called earned wage access services, which allow employees to access earnings prior to the end of a pay period. As originally written, the bill would have exempted companies that offer these digital pay-advance tools from the reporting requirements and rate caps that apply to loan providers in Vermont.
But on Thursday, after hearing testimony from advocates who argued in favor of regulating earned wage access services as loans, lawmakers signaled that they would revise the bill, potentially imposing steep regulations on such programs.
“With something like this, we need to be very careful on it and make sure we’re protecting people out there and at the same time possibly allowing the businesses to move forward in the state,” chair Rep. Michael Marcotte, R-Coventry, said in committee Thursday.
Although earned wage access services first emerged around a decade ago, the industry has ballooned in recent years. Approximately 5% of American workers used earned wage access services in 2022, according to data from the federal Consumer Financial Protection Bureau, which projects that that number has likely grown dramatically since.
It’s unclear how many Vermonters have used digital pay-advance apps, but testimony from three online pay-advance providers operating in the state — PayActiv, EarnIn and DailyPay — suggested that it could be in the tens of thousands.
Most employers pay workers on either a bi-weekly or monthly basis. Earned wage access services aim to bypass those traditional payment cycles, letting users access a portion of their wages in advance and then repay those funds when their actual paycheck arrives.
“Part of the issue that we are trying to solve for is that if you are living pay-check to pay-check you might only have $50 dollars in your bank account, but you have hundreds or even thousands of dollars that are legally yours but you don’t have access to it,” Ben LaRocco, an industry lobbyist, told committee members last week.
But consumer advocates have argued that, due to the fees associated with most digital pay-advance services, they function similarly to traditional payday loans that prey on low-income workers, trapping them in unhealthy borrowing cycles.
Many of these digital apps offer a version of their service for free, requiring users to wait for a few days to get their funds. For expedited transfers, however, workers have to pay fees, which typically range from $2 to $5 per transaction, according to data from the Consumer Financial Protection Bureau. Some apps also solicit gratuities, repeatedly encouraging users to provide ‘tips’ to express their support for the service.
“The people who develop these programs know that when there’s an option for a slow payment and a rapid payment, just about everybody is going to choose a rapid payment,” Geoff Walsh, staff attorney for the National Consumer Law Center, told lawmakers last week. “They know that this is a vulnerable group that needs the money right away, and they design their business model to basically prey on that group of individuals in financial distress.”
A study from the Consumer Financial Protection Bureau analyzing eight companies offering these apps found that about 90% of users in 2021 and 2022 paid at least one fee, with over 80% of total transactions in that time period involving fees. Users also made just over two wage advances per month on average, the study found, suggesting that most fell into cycles of repeated use.
Walsh said that by trapping users into these borrowing patterns, the services functionally end up charging workers borrowing rates to access their paychecks.
“(Workers) are in a sense paying to get their wages,” he said. “They are incurring more debt that leaves them less able to meet their important necessities because they are paying the fees that accrue on these earned wage access programs.”
After flying under the radar of regulators for years, earned wage access companies have faced growing scrutiny from federal regulators and state legislators across the country.
“The industry was evolving,” Aaron Ferenc, deputy commissioner of banking at the Vermont Department of Financial Regulation, said in an interview. “It was sort of a new area.”
In July, the federal Consumer Financial Protection Bureau proposed an “interpretive rule” that would define earned wage access services as loans, subjecting them to strict federal and state lender regulations. That rule has yet to be finalized, a process that could take months, according to Walsh, who suggested it’s unlikely the rule would go into effect with President Donald Trump in the White House.
In the absence of federal regulations, Vermont lawmakers are now trying to determine how best to regulate these services at the state level.
As introduced, H.99 would define earned wage access services as non-loans, exempting companies that provide the services from Vermont’s Licensed Lender Law, which sets an APR, or annual percentage rate limit, of 18% on loan products. The national consumer protection bureau has estimated that earned wage access services can have an average APR of up to 330%, suggesting that they would run afoul of Vermont lender laws if they were regulated as loans.
On Thursday, however, Marcotte said that members of the House Committee of Commerce and Economic Development would work with industry leaders and state regulators on “revising the draft that we have” to attempt to bolster consumer protections while leaving room for earned wage access companies to continue operating in the state.
“We’re probably in that space where we all agree it’s a loan,” Rep. Michael Marcotte said Thursday. “How do we deal with that now is the question?”
If legislators don’t answer that question, according to Ferenc, it’s likely that the Department of Financial Regulation would ultimately begin regulating digital pay-advance services as loans.
Pending legislative action, Ferenc said, the department would “likely work on and develop and issue guidance to industry that lays out why we think these are loans covered by our lender statute, and how we want you to engage with the public in those transactions.”
“We would be looking at compliance going forward, not really trying to look back to say we caught these companies operating illegally for a number of years,” he said.
