Court Rejects Arbitration for Service Members’ Credit Claims

The U.S. District Court for the Northern District of California has denied a motion from a fintech company to compel arbitration in a class action lawsuit brought by servicemembers. On October 7, 2023, the court ruled that the company’s earned wage access (EWA) product constitutes an extension of consumer credit, which is subject to the protections of the Military Lending Act (MLA).

The plaintiffs allege that the EWA product violates not only the MLA but also the Truth in Lending Act (TILA) and the Georgia Payday Lending Act (GPLA). In its decision, the court noted that the MLA’s prohibition on arbitration agreements applies because the EWA product involves a finance charge, specifically through an optional instant delivery fee prominently featured in the company’s marketing materials.

By determining that the EWA product operates as a form of credit, the court concluded that the arbitration clause in the company’s terms of service could not be enforced against the servicemember plaintiffs. This ruling underscores the importance of the MLA’s protections for military personnel against predatory lending practices.

The fintech company contended that the EWA product should not qualify as an extension of credit. It argued that the agreement characterized these advances as “non-recourse,” meaning that borrowers could avoid repayment by unlinking their bank accounts from the service. The court dismissed this argument, stating that the requirement for repayment of a specific sum at the time of the advance remains, regardless of the borrower’s future actions.

Additionally, the court indicated that the company could still pursue repayment after a borrower de-links their account by withholding future advances. Given that the claims under TILA and GPLA were interconnected with the same agreement and involved the extension of consumer credit, the MLA mandated that the company’s request to compel arbitration for these claims be denied.

As the legal landscape evolves, the court acknowledged that the plaintiffs might struggle to certify a class that includes non-service members, many of whom would not benefit from the MLA’s protections.

Implications for Earned Wage Access Providers

This ruling reflects a growing trend among courts to classify earned wage access products as extensions of consumer credit under federal lending laws. Providers of EWA services, along with their banking partners, are advised to thoroughly review their product terms and agreements to ensure compliance with the MLA, TILA, and other federal lending regulations.

As regulators continue to scrutinize the distinctions between earned wage access and traditional credit products, companies in this sector must adapt to the changing legal environment. This case serves as a significant reminder of the potential risks involved in offering financial products to military personnel and the critical importance of adhering to consumer protection laws.