Colorado Lawmakers Revisit Whether Paycheck Advances Count as Loans

Colorado legislators are once again wrestling with a basic question about the growing earned-wage access industry: when a company hands a worker an advance on their paycheck in return for repayment and a flat fee, is that a loan? The answer could determine whether the companies have been operating in conflict with a law Colorado voters approved to rein in payday lenders.

The apps provide workers with money before payday. A typical fee of $3.50 on a $50 advance works out to an annual interest rate of 365%, roughly ten times the cap voters set in 2018. Consumer advocates say that makes the products look a lot like payday loans. Andrea Kuwik, policy and research director at the progressive Bell Policy Center, called earned-wage access a credit product in which people borrow against future earnings and repay a company, and said she sees "remarkable similarities to payday loans."

The companies reject that label. They point out that they charge flat fees, do not sue customers or send them to debt collectors, and do not put credit scores at risk. As a result, the services operate in a largely unregulated gray area in Colorado. Ben LaRocco, government affairs director for provider EarnIn, told lawmakers in February that the business does not fit neatly into one category, combining elements of money transmission and lending.

House Bill 1046, supported by the industry and two Democratic lawmakers, would formally define the advances as not being loans. Providers would need a state license, and fees would be capped at $5 for advances under $75 and $7 for larger ones. Companies would have to prominently offer a free option that delivers funds a few days later, and apps would be barred from soliciting tips, a common industry practice. The bill narrowly cleared a committee vote in February over objections from progressive lawmakers and consumer groups, and a second hearing is expected in April.

Majority Leader Monica Duran, a Wheat Ridge Democrat, and Rep. Sean Camacho are sponsoring the bill. They say the small advances and even smaller fees offer a vital service to cash-strapped workers and beat the alternatives of credit card debt or late bills. Duran noted that the services have existed in Colorado for years without guardrails, and said people should be able to reach their money for groceries, copays, diapers or formula without taking out a loan.

Opponents counter that the products are a modern version of payday lending. The New York attorney general found that the most common transaction from one provider, DailyPay, was a $20 advance with a $2.99 fee, equal to annual interest above 750%. Although the companies say customers need not repay if they stop using the service, lawsuits and federal judges have noted that the firms are often linked to bank accounts and can withdraw what they are owed. Federal regulators, consumers and two attorneys general have sued companies elsewhere, and federal judges in California and Illinois have repeatedly rejected arguments that the products are not loans. Regulators in Connecticut and California have classified them as loans, according to American Banker.

Rep. Yara Zokaie, a Fort Collins Democrat who has led opposition over two sessions, said the products are "the definition of loans" and accused the industry of seeking to keep predatory practices and fees. A similar Colorado bill died last year amid comparable resistance, part of a national industry push for friendlier state rules.

Attorney General Phil Weiser's office has offered little clarity. A spokesman could not say whether the voter-approved payday rules could be used against these companies, and two officials who testified in February would not say whether the office had investigated any of them. Assistant Deputy Attorney General Martha Fulford did say Weiser wants companies that market directly to consumers regulated under current rules, and that the employer-partnered model could be regulated "with protections."

The bill has also been complicated by the legislature's $1.5 billion budget shortfall. Because implementing the rules would cost money, the sponsors proposed paying for oversight with donations to the state, potentially including money from the companies that would be regulated. The attorney general's lobbyist, Jefferey Riester, questioned whether that is an appropriate way to fund regulation. Duran acknowledged the concerns and said she is looking for a version that costs nothing and does not rely on donations. The bill next goes to the House Appropriations Committee, likely in mid-April at the earliest.