On April 13, a financial technology company filed a notice of appeal to the U.S. Court of Appeals for the 2nd Circuit, challenging a March 31 SDNY ruling denying its motion to dismiss a proposed class action. The suit, brought by active duty servicemembers, alleges that: (i) the company’s earned wage advance product constituted consumer credit subject to TILA and the Military Lending Act (MLA); (ii) the company exceeded the MLA’s 36 percent military annual percentage rate cap; and (iii) the company failed to provide required financing disclosures under TILA.

According to the opinion, the product provides short-term cash advances of $25 to $250 through a mobile application; consumers link their bank accounts, and the company uses proprietary underwriting criteria to determine eligibility and advance amounts. Advances are repaid through preauthorized ACH debits from consumers’ bank accounts, typically on their next payday. The company’s terms of service include a “no recourse” clause disclaiming legal claims against borrowers who fail to repay, but the court held that plaintiffs plausibly alleged that the product nonetheless creates a “debt” under TILA and the MLA. The court reasoned that the company retains the right to debit consumers’ bank accounts, including when it detects a positive cash inflow, and that consumers’ qualified right to revoke ACH authorization does not negate the obligation created at the time of the advance. The court analogized the product to deferred presentment (payday loan) transactions, in which a consumer receives cash in exchange for granting a creditor the right to draw from the consumer’s bank account on a future date.

The court also held that plaintiffs plausibly alleged that the company’s “Express Fee,” which enables consumers to receive funds within 20 minutes rather than the standard three-day ACH transfer, constitutes a “finance charge” under TILA and the MLA. The court rejected the company’s argument that the fee is voluntary and therefore not “imposed” as an incident to credit, reasoning that the timing of fund delivery is a material term of the credit product — particularly for a product marketed as providing cash “instantly” and “within seconds.” According to the opinion, courts addressing similar arguments regarding earned wage advance products have reached the same conclusion. The court further denied the company’s motion to compel arbitration, holding that because the plaintiffs are active duty servicemembers who plausibly alleged that the product extends consumer credit, the MLA renders the arbitration clause unenforceable.