A District Court judge in California has denied a defendant’s motion to compel arbitration in a class-action lawsuit, ruling the defendant meets the definition of creditor under the Military Lending Act, which prohibits arbitration claims for covered members of the armed forces.
The background: Two active-duty service members claimed that the defendant’s short-term “Cash Advance” product violated the Military Lending Act, the Truth in Lending Act, and Georgia’s Payday Lending Act. The plaintiffs alleged the defendant’s “instant” cash advance program functioned as a loan and not an earned wage access product as advertised, and charged impermissible fees under federal and state law.
- To access a cash advance, users connected their bank accounts and authorized automatic withdrawals on payday to repay the advance plus any “tip” or instant delivery fee.
- Although the company described its advances as “non-recourse” and said users had no legal obligation to repay, repayment rates were reportedly in the “high 90% range.”
- The plaintiffs, both service members, argued this structure amounted to consumer credit subject to MLA protections, which prohibit arbitration agreements for covered borrowers.
The ruling: Judge Jacqueline Scott Corley of the District Court for the Northern District of California rejected the defendant’s argument that its cash advances did not constitute “credit” under the MLA. The court found that by providing funds upfront and scheduling repayment from users’ paychecks, the company effectively allowed consumers to “incur debt and defer its payment,” satisfying the statutory definition of credit. The court also ruled that the “instant transfer fee” qualified as a finance charge, thus making the product consumer credit subject to MLA restrictions.
- “By providing users funds and imposing a procedure to collect those funds at a later date, Empower’s Cash Advances provide consumers the right to ‘incur debt and defer its payment’… and therefore extend ‘credit,” Judge Corley wrote in her ruling.
- Because the MLA prohibits creditors from requiring arbitration in disputes with covered service members, the court held that the arbitration clause was unenforceable, not only for the MLA claims but also for the related TILA and state law claims. Judge Corley emphasized that the MLA’s prohibition applies to “any dispute” involving an extension of consumer credit, making the arbitration agreement void.
- The decision aligns with a growing number of rulings classifying fintech “earned wage access” and “cash advance” products as extensions of consumer credit when fees or repayment mechanisms tie repayment to future earnings. The case will now proceed in open court unless the defendant appeals.
The defendant has appealed the ruling to the Court of Appeals for the Ninth Circuit.
