Fintechs’ Cash Advances for Workers Draw Suits as States Diverge

Fintechs offering workers early access to their pay are getting taken to court over hidden fees and lax disclosures, even as the industry has won concessions in state legislatures around the country.

Biden-era enforcers and local Democratic officials have targeted earned-wage access providers such as Dave Inc. and EarnIn, including a complaint this month from the city of Baltimore.

Private class actions are also advancing in federal and state courts, with some early rulings going against the cash-advance companies.

The cases are poised to reshape the legal landscape for earned-wage access products, which exploded in popularity during the Covid-19 pandemic and are offered by top employers including Amazon.com Inc. and Walmart Inc.

“This is the path of the new product,” said Cathy Brennan, a Hudson Cook LLP partner who advises financial technology companies.

Starting Gun

Litigation against earned-wage access companies began last November when the Federal Trade Commission sued Dave Inc.—and referred the case to the Justice Department—alleging the fintech hid fees and didn’t provide sufficient disclosures to customers.

Days later, Washington, DC, Attorney General Brian Schwalb sued ActiveHours Inc., which operates as EarnIn, with similar allegations.

Dave and EarnIn, which provide direct-to-consumer products, didn’t respond to requests for comment.

In April, New York Attorney General Letitia James sued DailyPay Inc., an earned-wage access provider that partners with employers, and MoneyLion Inc., which operates on the direct-to-consumer model, alleging they often charged fees with annual rates up to 750%.

MoneyLion was also hit with Baltimore’s suit this month alleging deceptive practices and other violations of state and local consumer laws.

DailyPay declined to comment. Gen Digital Inc., MoneyLion’s parent company, didn’t respond to a request for comment.

Private class actions followed those government cases.

Earned-wage access companies are confronting suits in federal courts in Maryland, California, and Georgia, and state court in Illinois, according to a Bloomberg Law review.

The litigation is a natural byproduct of the products’ growth, said Monica Burks, policy counsel at the Center for Responsible Lending.

“The aggregate effects of this predatory product are starting to show themselves,” she said.

Arbitration Clauses

Private litigants face a hurdle that state attorneys general and municipalities don’t: mandatory arbitration clauses buried in product disclosures.

Companies try to cut off private cases by invoking the clauses in most instances, as happened in a North Carolina case on Oct. 23.

But there’s an exception for suits by military personnel.

The Military Lending Act bars mandatory arbitration for covered personnel and their families. It also caps interest rates on loans offered to service members at 36%.

A federal judge in California on Oct. 7 rejected a bid from Empower Finance Inc., now known as Tilt Finance Inc., to have a proposed class action over its earned-wage access product sent to arbitration because the claims included alleged MLA violations.

Tilt didn’t respond to a request for comment.

High Fees

Earned-wage access products can be offered through employers or in a direct-to-consumer model based on cash flow into a customer’s bank account.

The paycheck advances don’t carry interest, but fintechs typically charge expediting fees if customers want their money right away. Several companies require subscriptions and ask customers to pay tips, sometimes making it difficult to opt out of such payments.

To consumer advocates, earned-wage access advances are dressed-up payday loans. Because of the fees, the advances can carry APRs averaging nearly 400%—matching some payday loan offerings, according to a September report from the Center for Responsible Lending.

EWA users are also prone to taking out more advances to cover shortfalls in future paychecks, the group found. Many users said they take advances from multiple companies at once, leading to debt stacking, according to the report.

In an Oct. 22 response, the American Fintech Council said the CRL report used flawed data with a small sampling of “chronically vulnerable” users, among other shortcomings.

Several earned-wage access providers defending lawsuits—including DailyPay, EarnIn, and MoneyLion—are AFC members.

State Differences

A dozen states so far have moved to regulate the earned-wage access market, with as many as 28 others set to consider legislation next year, according to Phil Goldfeder, the AFC’s CEO.

The federal Consumer Financial Protection Bureau failed to finalize an earned-wage access rule in the waning days of the Biden administration and has been effectively sidelined under President Donald Trump, leaving states to chart their own course.

Some states, such as Nevada and Wisconsin, have determined the advances aren’t loans because they don’t carry interest rates and are nonrecourse, meaning the companies won’t send debt collectors after customers who don’t pay up. Instead, companies are required to get licensed by state regulators.

Maryland took a different path, determining that earned-wage access advances are loans. But the state also allowed companies to get around Maryland’s 33% interest rate cap—applicable to loans of $1,000 or less—in part by excluding tips from finance charges.

The law took effect Oct. 1, the same day Baltimore sued MoneyLion in state court. Some of the city’s claims only cover the period before the effective date.

A federal judge in Maryland said in August that EarnIn’s advances were loans and that the expediting fees and tips the company collected from customers counted as a finance charge despite the state law, which sets a per-transaction fee limit but doesn’t include tips in the calculation.

With litigation pending, and decisions going against earned-wage access companies at least in the preliminary stages, the industry will have to consider ways to adapt to the legal landscape, said Jonathan Joshua, a financial regulations specialist at Joshua Law Firm LLC.

Companies should consider sanding off “the rough edges of the product, the ones that make people look at this and say, ‘it’s a loan,’” he said.