NY Federal Court Rules That Earned Wage Advances Constitute Consumer Credit Under TILA and Military Lending Act

The U.S. District Court for the Southern District of New York concluded that a financial technology company’s short-term cash advances constituted consumer credit subject to TILA and the Military Lending Act (MLA).

The company offers short-term cash advances, known as “Instant Cash,” through its mobile telephone application.  This so-called “earned wage advance” product provides cash to workers who are paid bi-weekly, but who must be able to cover expenses in the interim.  When the user seeks an advance, the application automatically requests the user’s authorization to debit a linked bank account for repayment on a date usually around the next expected payday.

The plaintiffs — military members who used the product — sued the company, alleging that it extended to military members consumer credit with a rate of interest greater than the MLA’s 36% maximum and that it violated TILA by omitting certain financing disclosures.  The company moved to dismiss, arguing that TILA and the MLA did not apply because its product does not involve an extension of credit or a finance charge.

The court disagreed and denied the company’s motion to dismiss.  Relying on the ordinary meaning of the term, the court determined that the plaintiffs had plausibly alleged that the product created a debt.  Because users expressly authorize the company to later debit their bank accounts for repayment, the court reasoned, the arrangement involves an “obligation to pay or repay someone or something in return for something received” (i.e., a debt).

Next, the court determined that the plaintiffs had plausibly alleged that the company’s product involved a finance charge.  Because the company focused its marketing on the immediate accessibility of funds, the court reasoned, the timing of the advance is an integral part of the product.  It follows that the “Express Fee” that the user must pay to receive such prompt access is also integral.  Thus, the court concluded that the fee is necessarily connected to the extension of credit such that it qualifies as a finance charge.

Finally, the court denied the company’s alternative request to compel arbitration, because the MLA prohibits arbitration of a dispute involving the extension of consumer credit.  But because the Federal Arbitration Act permits a party to appeal an order denying a motion to compel arbitration, the company has already filed a notice of appeal.