Bill would regulate companies that offer worker wage advances
A Democratic proposal to regulate the payday advance industry has returned in the new legislative session, with progressive supporters still concerned the measure could allow predatory lending.
The bill would bring greater state oversight to certain earned income access service providers — companies that provide cash advances for earned but not yet paid income — under an offer, supporters say would help New Jerseyans live on paycheck to make ends meet, especially in the wake of the financial instability caused by the pandemic.
“People were scrambling to cover expenses, and the idea was to give people the money they earned for a small ATM-type fee rather than forcing them into debt or overdrafting their account” said Sen. Gordon Johnson (D-Bergen), the bill’s lead sponsor. “This is far from a street corner payday loan office preying on desperate individuals.”
Payday advance companies allow workers to be paid early for the hours or days they worked but did not get paid. Advances provided through an employer or a third-party company under contract with an employer often come with a fee or so-called “tip” that is voluntary but strongly encouraged. Critics say it amounts to loans, but the industry disagrees.
Advance fees are generally lower than payday loan fees because providers can take funds directly from a worker’s paycheck.
New Jersey and 11 other states launched an investigation in the payday advance industry in August 2019, citing reports of exorbitant interest and fees, as well as other predatory practices. Payday loans with high interest charges are prohibited in New Jersey.
Although they are similar in form and function, New Jersey is not yet considering payday advance loans, so they are not subject to certain regulations, such as interest limits set by New Jersey Usury, which limit annual interest rates for non-commercial borrowers to 30%. .
The bill would statutorily exempt payday advances issued by companies under contract with an employer from our usury laws, while subjecting prepayment companies that work directly with consumers to them.
Companies that work with employers would be subject to a fee cap set by the state Department of Banking and Insurance. The bill provides few guidelines on the level of fees, and it is unclear how quickly the department should set the cap.
The end result is a bill that supporters say has too few safeguards and could push low-income New Jerseyans further down the socioeconomic ladder.
“Philosophically speaking, we believe these products are problematic in that they create an environment in which people cumulatively decrease their income over time,” said Beverly Brown Ruggia, director of financial justice at the advocacy group. progressive New Jersey Citizen Action.
The bill only covers cash advance companies that integrate with an employer, though Brown Ruggia said the bill’s wording is unclear and could open the door to direct cash advance services to consumers. Critics say such services could draw funds directly from a consumer’s bank accounts.
The fees charged by payday advance companies tend to be lower than the expenses associated with bank overdrafts or traditional payday loans, but some people may request multiple advances in a single pay period, compounding the costs.
Advances in excess of the state cap would be considered interest and subject to New Jersey usury laws. The state would become responsible for licensing cash advance providers, which does not happen under current legislation.
Although salary advance fees are generally low because they are reimbursed quickly, any company that circumvents the cap is likely to violate state usury laws. Taking a $100 advance five days before payday and paying a $5 fee equals an annual rate of 365%.
“These wage-earning companies already exist and do business in New Jersey,” Johnson said. “This legislation aims to bring the practice into our current regulatory system to protect consumers while ensuring that hard-working families can access the money they have already earned in an emergency.”
It doesn’t look like the bill will move forward any time soon. The Legislative Assembly is expected to limit itself to budget hearings for the entire month of April and MP John McKeon (D-Essex), sponsor of the bill in the lower house and chairman of the Financial Institutions and Insurance Committee of the Assembly, said discussions with the administration were ongoing. He does not know when the bill will be presented to his committee.
“In concept, I really like the bill,” McKeon said. “I just want to make sure there’s no unintended consequence if it looks anything like predatory lending, even on a much smaller scale.”
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