On October 7, the U.S. District Court for the Northern District of California denied a fintech company's motion to compel arbitration in a putative class action. The plaintiffs, both servicemembers, allege that the company's earned wage access (EWA) product violates the Military Lending Act (MLA), the Truth in Lending Act (TILA), and the Georgia Payday Lending Act (GPLA).
The court determined that the MLA's arbitration ban applied because the EWA product functioned as consumer credit subject to a finance charge. The optional instant delivery fee, highlighted as a core feature in the company's app and marketing, was treated as a cost of credit. By classifying the product as covered credit, the court held that the arbitration clause in the company's terms of service could not be enforced against the servicemember plaintiffs since the MLA prohibits arbitration agreements.
The company also argued that the EWA product was not an extension of credit because the parties' agreement expressly identified those advances as "non-recourse" and borrowers could avoid repayment by simply de-linking their bank accounts from the company. The court rejected this argument because (i) the borrowers' future conduct to avoid repayment did not negate the fact that a specific sum of money was due at the time of the advance and (ii) the company could still collect after a borrower de-linked his or her bank account because the company could incentivize payment of the balance by withholding future advances.
Because plaintiffs' TILA and GPLA claims were tied to the same agreement and involved the extension of consumer credit, the court held that the MLA mandated the denial of the company's effort to compel these claims to arbitration. Nevertheless, the court recognized that plaintiffs would likely be unable to certify a proposed class including non-service members, most of whom would not be covered by the MLA.
Putting It Into Practice: Courts are increasingly treating earned wage access products as extensions of consumer credit under federal lending laws (previously discussed here). EWA providers and their bank partners should review their product terms and agreements to ensure compliance with the MLA, TILA, and other federal lending laws as regulators and courts continue to narrow the distinction between earned wage access and credit products.
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