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The attorney general for the District of Columbia is suing instant payday loan fintech Earnin for “deceptively marketing and providing illegal high-interest loans,” the AG alleges.
Earnin allows its users to get loans against paychecks. It advertises that users can get $150 a day, up to $750 per pay period, with “no interest, credit check or ‘mandatory’ fees,” according to its website. But, in order to get the money immediately, users are charged what it calls a “Lightning Speed” fee. Earnin then pays itself back by withdrawing the loan amount, plus any fees, from the customer’s bank account or debit card on the next payday, the lawsuit describes.
Like most of the other fintechs in this category, Earnin says that the service is free if users don’t want their pre-payday loans immediately, but are willing to wait up to a couple of business days for funds to transfer. The AG alleges that the fees Earnin collects are equivalent to an interest rate of 300% on average, which is “more than 12 times the District’s 24% interest rate cap,” it says. On top of that, the AG says that Earnin is operating in the District without proper licensing.
Earnin’s lawyer, Karl Racine, says that the AG’s “lawsuit demonstrates a fundamental misunderstanding of how our product works and why so many DC residents benefit from it.” Racine argues that “DC workers who use our EWA product have the choice to access their earned money at no cost, in which case money is received within 1-2 business days.”
Earnin was a fintech darling back in 2018, when it raised $125 million from a host of big-name VCs including DST Global, Andreessen Horowitz, Spark Capital, Coatue, and Ribbit.
Founder Ram Palaniappan has consistently positioned the service at those who were at least financially sufficient to wait for paydays — that is, people who lived “paycheck to paycheck” — and said that granting these folks early access to wages was “an issue of fairness,” he told TechCrunch in 2018.
But these types of instant payday loans that advertise themselves as free are facing increasing regulatory scrutiny and legal action. Earlier this month, the The Federal Trade Commission (FTC) took action against the online cash app and neobank Dave, making similar allegations regarding how it advertises, versus how it charges fees. Dave told TechCrunch it plans to defend itself saying that the FTC “asserts many incorrect claims regarding Dave’s disclosures.”
The Consumer Financial Protection Bureau (CFPB) sued SoLo Funds, which operated a similar consumer loans fintech, in May. SoLo was backed by Serena Williams, Alumni Ventures, and Techstars. SoLo was also sued by, and settled with, DC’s AG. Its CEO told TechCrunch in May that “regulators seem driven by press releases when they should be motivated by true consumer protection and empowering equitable solutions.”
The payday loan industry has, and will likely continue to be, under scrutiny. New protections against lender auto withdrawals as part of CFPB regulations are scheduled to take effect in March, 2025.
Meanwhile, Chime introduced its payday loan feature earlier this year. It too advertises the feature as “no interest, no credit check, and no mandatory fees.” But, like the others that use this phrasing, it does charge fees for immediate cash transfers.
