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Apps Will Get You Paid Early, for a Price

Americans have become accustomed to summoning just about anything on demand, from groceries to car rides. Now it’s just as easy to get paid when you want.

As the coronavirus pandemic squeezes household budgets, workers and employers alike are increasingly turning to pay-advance apps with friendly-sounding names like Earnin, Dave, Brigit and Rain. They allow users, for a sometimes-optional fee, to request money ahead of payday. One even briefly offered a program for those waiting for slow-to-arrive jobless benefits.

And many customers see them as lifelines.

“I turned to those pay-advance apps to compensate where I couldn’t,” said Tasha Ayala-Spain, an American Airlines employee from Upper Darby, Pa., whose hours were slashed this year. She has used Dave and Earnin to get advances of up to $200 per pay period.

“It wasn’t like a loan to a bank,” said Ms. Ayala-Spain, who sometimes worked 50-hour weeks before the pandemic, loading and unloading baggage, mail and medical equipment from airplanes. “You don’t have to pay interest.”

The appeal is obvious: For a few dollars or less, users can cover a bill that comes due in the middle of a pay cycle or get cash for an unexpected expense, like a wildfire or hurricane evacuation. By tapping their earned but unpaid income early, they can avoid overdraft fees, late charges or worse — more predatory lenders. And come payday, the advance is repaid from their bank account or directly from their paycheck.

But these services, which millions have downloaded, come with question marks. Some customers have sued, regulators across the country are looking into their practices, and consumer advocates fear that the apps are glossy packaging for the kind of lending that can leave users stuck in an expensive cycle of debt.

“It’s possible it’s helping them cover their bills and avoid overdraft and higher cost loans,” said Alex Horowitz, a senior officer for the Pew Charitable Trusts’ consumer finance project. “It’s also possible it’s leaving them without enough money on payday so they turn to them again.”

The apps generally come in two flavors. Some, like Earnin and Dave, are open to the public and can require access to your transaction history or work time sheets. Earnin may even use your phone’s GPS to check work attendance. Others, like PayActiv, DailyPay and Rain, are offered through employers as a workplace benefit.

Their popularity has grown rapidly. Last year, workers tapped their paychecks through workplace providers an estimated 37 million times, gaining access to more than $6 billion, or nearly double the amount in 2018, according to Aite Group, a research company. And DailyPay said the number of users who tapped money for coronavirus-related reasons had increased 400 percent during the early months of the pandemic.

“Maybe the user’s income hasn’t been affected by Covid but someone else in their household has had their hours reduced or has been laid off, resulting in less overall income,” said Leslie Parrish, a senior analyst with Aite.

In recent months, hundreds of companies — including Kroger, Wayfair, Dollar Tree, Staffmark, HCA Healthcare and Mercy Hospitals — have begun offering the apps to employees.

“I cannot change the level of salary, but what I can change is the timing,” said Safwan Shah, founder and chief executive of PayActiv, which added 410 employers as clients from March to August — more than double the additions a year earlier.

Big-money investors have been eager to cash in on the growth of an industry that caters largely to the financially vulnerable. Alternative lenders — a class of businesses that also include point-of-sale and small-business lenders — drew $2.5 billion in equity funding during the first half of 2020, according to CB Insights.

“This is venture capital money that is expected to be paid back royally,” said Lauren Saunders, associate director of the National Consumer Law Center. Although cheaper than payday lenders, cash-advance apps can be costly if used frequently, she said: A $100 advance taken out five days before payday with a $5 fee is equivalent to an annual percentage rate of 365 percent.

Some services have installed safeguards, including limits on the amount that can be advanced and ceilings on fees. Others let employers set the rules for their workers.

DailyPay will immediately transfer up to 100 percent of earned but unpaid income for a $2.99 fee, or $1.99 for next-day delivery. Its founder and chief executive, Jason Lee, said most users wanted to cover a specific need.

“Something like 87 percent of people who use it type in a precise number, like $85.91,” Mr. Lee said.

The similarity to traditional payday lending has prompted regulatory scrutiny. The New York Department of Financial Services and officials in 10 other states, along with Puerto Rico, are investigating the fledgling industry, focusing on whether the apps violate consumer-protection and payday-lending laws. The results could be significant: Payday lenders are barred in 15 states, including New York, New Jersey and Connecticut.

Wage-advance apps occupy a regulatory gray area. Unlike traditional and payday lenders, they don’t have any recourse against users — they don’t try to collect on unpaid debts or report them to credit bureaus.

And payday-lending laws typically apply to services that charge customers a fee to be eligible for a loan. Workplace-affiliated services do often charge fees, and say that’s permitted because they aren’t offering credit but instead access to an early payment directly from your employer. Public apps often take a different approach: optional “tips,” which are among the practices that state regulators are examining.

Credit…Kriston Jae Bethel for The New York Times

Both services used by Ms. Ayala-Spain, the American Airlines employee, accept tips. Dave, an online bank with automated budgeting tools, offers advances of up to $75, or $100 for its banking customers, with tips optional. Earnin also accepts tips — what its chief executive, Ram Palaniappan, called a “trust-based pricing model.”

“It’s a new product, and regulators want to understand it,” said Mr. Palaniappan, whose app is estimated to have been downloaded more than 10 million times and offers advances up to $500, depending on the user’s wages. “And I think they should as more and more consumers are using it.”

Ms. Ayala-Spain said that she tipped Earnin anywhere from nothing to $15 — and that when she skipped a tip, she noticed a difference in how she was treated. “It would decrease the amount I was able to take out,” she said.

Earnin said that it was “always evolving our practices to better service our customers” but that tipping behavior was not a factor in the amount users could cash out. The company also said it had reassessed its risk modeling because of the pandemic, leaving some customers with lower maximum advances.

Earnin’s business practices have prompted lawsuits from customers. One was resolved privately, and Earnin agreed to settle the class action in July by paying up to $12.5 million. That settlement awaits the approval of a judge.

According to settlement documents, Earnin caused more than a quarter of a million workers to incur the overdraft and other fees that it promised it would protect them from. One of the lead plaintiffs, Mary Perks, said that she had requested $100 and $50 from Earnin, and that when the company tried to collect what it was owed, her low bank balance triggered $70 in overdraft charges, according to the suit. With $14 in tips included, Ms. Perks ultimately spent $84 on a $150 advance, according to the complaint. Earnin declined to comment on the settlement.

But there are also plenty of satisfied customers. Wesley Clute, a musician and producer, had been working up to 40 hours a week as a manager at a Taco Bell near his home in Gulfport, Miss., until his hours were cut because of the coronavirus lockdowns. His finances were further pinched when he contracted the coronavirus during a weeklong vacation to visit his sister.

When he got back to work after three weeks away, he used Rain for an advance to buy diapers for his son, groceries and other essentials, though Mr. Clute said he was careful not to overuse the app.

“Three dollars is not bad compared to an A.T.M. fee, and it goes directly into your bank account,” Mr. Clute said. “I haven’t had to wait longer than 15 minutes after hitting the button.”

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Trump Appointees Manipulated Agency’s Payday Lending Research, Ex-Staffer Claims

Last summer, on his final day of work at the nation’s consumer finance watchdog agency, a career economist sent colleagues a blunt memo.

He claimed that President Trump’s appointees at the Consumer Financial Protection Bureau had manipulated the agency’s research process to justify altering a 2017 rule that would have sharply curtailed high-interest payday loans.

The departing staff member, Jonathan Lanning, detailed several maneuvers by his agency’s political overseers that he considered legally risky and scientifically indefensible, including pressuring staff economists to water down their findings on payday loans and use statistical gimmicks to downplay the harm consumers would suffer if the payday restrictions were repealed. A copy of the memo was obtained by The New York Times from a current bureau employee.

Political appointees at the bureau, led by its director, Kathleen Kraninger, have pressed forward with the Trump administration’s deregulatory drive despite the logistical hurdles posed by the coronavirus pandemic. This week, the agency is expected to release the revised payday rule, which will no longer require lenders to assess whether customers can afford their fees before offering a loan.

Payday lending has been a signal battle of the Trump administration’s efforts to dismantle regulations. The consumer bureau’s original rule, an Obama-era initiative finalized in late 2017, was poised to be the first national regulation of payday loans. Democrats in Congress have pressed Ms. Kraninger for details about its proposed revision, with mixed success.

“They’re moving quickly to establish this rule because they think they can take advantage of the time we don’t have to focus on them right now,” said Representative Maxine Waters, a California Democrat who heads the House Financial Services Committee.

The Trump administration “has demonstrated that they are not committed to the mission of the C.F.P.B.,” said Ms. Waters, who urged the bureau to delay issuing the new rule until the pandemic abated. The agency has been working on the revision for more than a year.

Mr. Lanning’s 14-page memo provides an unusually detailed glimpse into the Trump administration’s campaign against the so-called administrative state, where obscure officials labor over small tweaks to fine print that can reshape industries.

Mr. Lanning, who worked at the consumer bureau for seven years, left in August for a position at the Federal Reserve Bank of Chicago.

He said in an email that the memo’s intent was to inform new members of the payday research team about the “history and process” behind the rule revision. He declined to discuss its contents.

Jonathan Lanning’s C.F.P.B. Memo About ‘Process Concerns’

A career economist in the Consumer Financial Protection Bureau’s research office sent his bosses and colleagues a memo about what he saw as political inference in the agency’s research work. (PDF, 17 pages, 1.68 MB)

Matt Leas, a spokesman for the C.F.P.B., said the agency has “a fair, transparent and thorough” process for making rules. “The comments received and evidence obtained are all taken into consideration before issuing a final rule,” he said. “The director is the ultimate decision maker and ensures that the decisions taken are justified publicly, as is required by law.”

Efforts to dismantle the payday regulation began with the arrival of Mick Mulvaney, the Trump administration budget chief, who was appointed the C.F.P.B.’s acting director in late 2017. Among his priorities was to delay, and eventually undo, the Obama-era payday lending restrictions, which were scheduled to take effect in summer 2019, according to two former senior bureau officials who discussed the issue with him.

But unwinding a federal rule is a long and complicated process. The bureau’s research team had already spent nearly five years gathering and analyzing data on payday lending for the original rule. To avoid having its reversal struck down in court — as dozens of Trump administration regulations have been — the bureau would need to demonstrate that new research or other data had called into question the original rule. That task fell to the agency’s office of research — a group of economists and other social scientists that included Mr. Lanning.

In 20 states, payday lending is effectively banned, but in the places where it remains legal, it has thrived: There are more payday loan storefronts in America than McDonald’s restaurants. Their customers — often working poor people who cannot always secure traditional credit — collectively borrow nearly $29 billion a year and pay nearly $5 billion in fees, according to research by Jefferies, an investment bank.

While short-term loans are intended as an emergency stopgap, many borrowers find themselves unable to repay their debts quickly, and borrow again. Half of all payday loans are part of a sequence that is extended at least nine times, piling up fees that can exceed the value of the original loan, according to research the consumer bureau published to support its original restrictions.

In 2018, as the agency began re-researching the question under Mr. Mulvaney’s directive, it became clear that the Trump administration wanted to scrap the 2017 rule, according to five people familiar with the office’s work.

In his memo, Mr. Lanning indicated that the bureau’s leadership, bolstered by a new layer of political appointees installed by Mr. Mulvaney, had manipulated the reconsideration process to steer it toward that goal. As early as May 2018, while Mr. Mulvaney publicly claimed to be keeping an open mind about the reconsideration, bureau economists were told that Mr. Mulvaney had decided to abolish core provisions of the payday rule. They were directed to research only his preferred changes, without analyzing whether alternative approaches would yield a better outcome for consumers or industry.

Mr. Mulvaney did not respond to a request for comment.

Political officials with “fundamental misunderstandings” about the agency’s research pressured the bureau’s economists to use “inaccurate and inappropriate” data, Mr. Lanning wrote. In the end, most of the changes that Mr. Mulvaney’s team wanted to incorporate didn’t make it into the final draft, according to three people involved in the bureau’s internal discussions.

But some survived. In the proposal for the rule revision, Mr. Mulvaney’s deputy at the time, Brian Johnson, inserted language that was intended to show that the changes would cause consumers less harm than the bureau’s economists estimated.

The bureau had projected that its original rule would cut payday loan volume by at least 62 percent. That would save consumers some $4 billion a year in fees, according to calculations by The Times.

For any revision, the economists were required, under the Dodd-Frank law, to analyze how the proposed changes would affect consumers. But Mr. Johnson argued that since the original rule’s “ability to pay” underwriting requirements — which asked lenders to assess whether a loan seeker could pay the fees — had not yet taken effect, abolishing them would have no practical effect on consumers.

When career staff members warned that Mr. Johnson’s method was frowned on by federal rule-making bodies and had hampered other Trump deregulatory efforts in federal court, they were overruled by Tom Pahl, another agency official installed by Mr. Mulvaney. The final draft rule contained both Mr. Johnson’s method — stating that consumers would feel “little effect” from the Trump administration’s proposed changes — along with a more traditional economic analysis from the bureau’s research staff, which concluded that the changes would have a negative impact on borrowers.

Mr. Johnson, previously a Republican staff member for the House Committee on Financial Services, left the consumer bureau in February to join Alston & Bird, a Washington lobbying and law firm. He did not respond to an email seeking comment on his work at the bureau.

Mr. Lanning was especially scathing about one new agency employee who became heavily involved in the research group’s work: Christopher Mufarrige, a young lawyer with a master’s degree in economics, who joined the bureau in fall 2018 on a temporary assignment and reported to Mr. Johnson.

Three former bureau employees who worked with Mr. Mufarrige said he had often criticized the 2017 rule as flawed and unnecessary. Mr. Lanning’s memo complained about Mr. Mufarrige’s “attempts to selectively cite evidence” and his pattern of making “critical errors on basic economics.”

Mr. Mufarrige declined to comment on Mr. Lanning’s allegations. He left the bureau in December and now works at a Washington law firm.

Ms. Kraninger, who took over the consumer bureau in late 2018, signed off quickly on a draft of the revised rule. According to Mr. Lanning’s memo, she conducted a single staff-level review of the proposal: a 45-minute meeting in January 2019 that began late and focused on the legal reasoning behind the revised rule. There was little discussion of the evidence or research behind it.

The next month, the bureau proposed gutting its prior rule, which, the agency said, had drawn on data that was “not sufficiently robust and reliable.”

Payday lenders praised the turnaround. The original rule was “motivated by a deeply paternalistic view that small-dollar loan customers cannot be trusted with the freedom to make their own financial decisions,” said Dennis Shaul, the chief executive of the Community Financial Services Association of America, a trade group.

But consumer advocates said the about-face wasn’t supported by any new evidence or industry changes. A 220-page comment letter, signed by 12 groups, criticized the revision as an “exercise in grasping for straws” and suggested that they would challenge it in court.

“The bureau didn’t come up with the rule on a whim,” said Linda Jun, a senior policy counsel for Americans for Financial Reform, a consumer advocacy group. “To this day, despite many people asking, they haven’t provided anything about the basis for changing this rule beyond some vague references to new research. It’s hard to see the reversal as anything other than political.”

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