Bill would regulate firms that offer advances on workers’ pay

A Democratic proposal to regulate the pay advance industry has returned in the new legislative session, with progressive advocates still concerned the measure would enable predatory lending.

The bill would bring greater state oversight to some earned income access service providers — firms that provide cash advances for income earned but not yet paid — in a bid supporters say would help New Jerseyans living paycheck to paycheck make ends meet, especially in the wake of financial instability caused by the pandemic.

“People were scrambling to cover expenses, and the idea was to get folks the money they’ve earned for a small ATM-type fee rather than forcing them to take on debt or overdraft their account,” said Sen. Gordon Johnson (D-Bergen), the bill’s prime sponsor. “This is far from a payday loan office on a street corner preying on desperate individuals.”

Payroll advances firms allow workers to get paid early for hours or days they’ve worked but have not been paid for. Advances provided through an employer or third-party company contracted with an employer often come with a fee or a so-called “tip” that is voluntary but strongly encouraged. Critics say these amount to loans, but the industry disagrees.

Advance fees are usually lower than payday loan fees because providers can draw funds directly from a worker’s paycheck.

New Jersey and 11 other states launched an investigation into the payroll advance industry in August 2019, citing reports of exorbitant interest and fees, alongside other predatory practices. Payday loans with high-interest fees are prohibited in New Jersey.

Though they are similar in form and function, New Jersey does not yet consider pay advances loans so they are not subject to certain regulations, like interest limits set by New Jersey’s usury laws, which limit annual interest rates for non-corporate borrowers to 30%.

The bill would statutorily exempt payroll advances issued by firms contracted with an employer from our usury laws, while subjecting advance pay firms that work directly with consumers to them.

Firms that work with employers would be subject to a fee cap established by the state Department of Banking and Insurance. The bill provides few guidelines for the fee’s level, and it’s not clear how quickly the department must establish the cap.

The end result is a bill advocates say has too few guardrails and could push low-income New Jerseyans further down the socioeconomic ladder.

“Philosophically speaking, we think these products are problematic in that they create an environment where people are cumulatively diminishing their income over time,” said Beverly Brown Ruggia, financial justice director at progressive advocacy group New Jersey Citizen Action.

The bill covers only cash advance firms that integrate with an employer, though Brown Ruggia said the bill’s language is hazy and could open the door for direct-to-consumer advance services. Critics say such services could draw funds directly from a consumer’s bank accounts.

Fees charged by pay advance firms tend to be smaller than expenses associated with bank overdrafts or traditional payday loans, but some people may seek multiple advances in one pay period, compounding the costs.

Advances with fees that exceed the cap set by the state would be considered interest and fall under New Jersey’s usury laws. The state would become responsible for licensing cash advance providers — something that doesn’t happen under existing law.

Though payroll advance fees are usually small, because they are repaid quickly, any firm that skirts the cap is likely to violate the state’s usury laws. Taking a $100 advance five days before payday and paying a $5 fee is equivalent to a 365% annual rate.

“These earned pay companies already exist and are already doing business in New Jersey,” Johnson said. “This legislation is to fold the practice into our current regulatory system in order to protect consumers while making sure that hard-working families can access money they have already earned in case of an emergency.”

It does not appear as though the bill will move soon. The Legislature is expected to limit itself to budget hearings for all of April and Assemblyman John McKeon (D-Essex), the bill’s sponsor in the lower chamber and chair of the Assembly Financial Institutions and Insurance Committee, said discussions with the administration are ongoing. He is unsure when the bill will come before his committee.

“In concept, I really love the bill,” McKeon said. “I just want to make certain there’s no unintended consequence of it looking like something like predatory lending, even on a much smaller scale.”