District of Columbia Attorney General Brian L. Schwalb has filed a lawsuit against EarnIn for "deceptively marketing and providing illegal high-interest loans" to more than 20,000 D.C. residents.
Schwalb's office said EarnIn—whose legal name is ActiveHours—violated District law by falsely claiming that its Cash Out earned wage advance product is not a loan and can be accessed instantly with no mandatory fees and no interest.
According to the Attorney General, Cash Out is a loan. EarnIn advances the funds and then secures repayment on the borrower's next payday by withdrawing the amount from the borrower's bank account or debit card. Consumers must pay a fee if they want to obtain the funds immediately, through a service EarnIn calls" Lightning Speed. "The Attorney General says this fee equates to an average interest rate of 300%, which is more than 12 times the District's 24% interest rate cap. The Attorney General also said that although it acts as a lender, EarnIn has been operating in the District without the required lending license.
"EarnIn lures in hard-working, cash-strapped workers with the false promise of free instant cash advances, and then charges them unlawfully high interest," Schwalb said. "This predatory business model is illegal. Especially at a time when the cost of living is already too high."
EarnIn said the allegations are false.
"The Attorney General's lawsuit demonstrates a fundamental misunderstanding of how our product works and why so many D.C. residents benefit from it," said Karl Racine, former Attorney General of the District of Columbia (he left the job in January 2023), who is a partner at Hogan Lovells and of counsel to EarnIn.
EarnIn's earned wage access product "is about providing workers access to the money they've already earned, but have yet to receive from their employer – no interest, no recourse, and no hidden fees," Racine said. People can use the product at no cost and receive their money via ACH transfer within two business days, or they can opt to pay a small fee to access their money within minutes, he said.
"EWA empowers individuals to make financial decisions that work for their unique situations," Racine said. "Elected officials should empower workers to make choices that best meet the needs of their families."
An EarnIn spokeswoman said that regulators including the Federal Reserve and some courts have determined that optional fees for services like Lightning Speed are not finance charges and thus should not be calculated as interest. She also said that Cash Outs are not loans, because a loan requires a legal obligation to repay and consumers have no obligation to repay a Cash Out.
She also said EarnIn is not licensed as a lender in D.C. or any other jurisdiction because it does not offer loans.
This debate around whether earned wage access is a
National Consumer Law Center's Lauren Saunders strongly supported the lawsuit.
"The D.C. AG has called out the emperor's new clothes," said Saunders, who is associate director of the nonprofit in an interview. "EarnIn's cash advance app is a payday loan. It's an advance of your pay ahead of when it's due that is repaid out of your bank account on payday. That's exactly what a payday loan is and their gobbledygook arguments are not grounded in the law."
The NCLC is against payday advances that violate state lending laws, she said.
"These are triple-digit annual percentage rate loans," Saunders said. "APR matters because the research shows that people [who use earned wage access] enter into an even worse cycle of debt than traditional payday loans. The California Department of Financial Protection and Innovation found an average of nine loans a quarter. That's 36 a year, so all these fees add up."
If someone can't afford an expense out of this week's paycheck and they take it out of next week's paycheck, then they're short the next week and they end up borrowing again, she said.
"You're just paying fee after fee after fee, and ending up with less money at the end of the day," Saunders said.
Phil Goldfeder, CEO of the American Fintech Council, defended the concept of earned wage access.
"Simply put, EWA is not a loan, and should not be regulated as such," he said in a statement. "It bears no hallmarks of a traditional lending product – it is a no-cost, non-recourse tool providing millions of Americans with safe, convenient access to wages they have already earned."
The Consumer Financial Protection Bureau came to this conclusion nearly four years ago, he said, which "allowed a host of responsible innovators to offer additional financial flexibility to consumers who may otherwise be pushed to predatory financial products like payday loans."
These customers, who tend to be underbanked or have little to no credit history. will be most harmed by efforts to reclassify EWA.
"AFC strongly objects to any legal, legislative, or regulatory action that seeks to erroneously classify EWA as a loan product and limit access to this safe, innovative financial product for the consumers who need it the most," Goldfeder said.
