Last week, the U.S. District Court for the Northern District of California denied Empower Finance’s motion to compel arbitration in a class action lawsuit concerning its earned wage access (EWA) product, Cash Advance. In Vickery v. Empower Finance, Inc., the court found that Empower’s Cash Advance product was “credit” under the Military Lending Act (MLA) making Empower’s arbitration agreement unenforceable under the MLA, which prohibits arbitration agreements for consumer credit extended to active-duty service members and their dependents.
Background
Empower Finance offers an EWA product branded as “Cash Advance,” which allows users to access funds approximating their earned but unpaid wages before payday. Empower’s contracts provided for non-recourse advances, however, did not affirmatively disclaim that consumers had no obligation to repay such advances. Although users authorized Empower to withdraw repayment plus any fees from their accounts on their next payday, users were also contractually permitted to cancel those withdrawals without defaulting on the agreement. Despite Empower’s assertion that its users had no unconditional obligation to repay, the court found Empower’s practices to be “credit” under both the MLA and the Truth in Lending Act (TILA).
Procedural History
The case was initiated by U.S. Navy Petty Officer Samuel Vickery and U.S. Army Sergeant Rae Fuller, who filed a putative class action alleging violations of the MLA, TILA, and the Georgia Payday Lending Act (GPLA). Empower sought to compel arbitration based on its Terms of Service, which included an arbitration agreement. However, the court denied Empower’s motion, citing the MLA’s prohibition against arbitration agreements with covered members of the armed forces.
Key Legal Issues
The MLA explicitly prohibits creditors from requiring covered members to submit to arbitration for disputes involving consumer credit. The court determined that Empower, by offering its Cash Advance product, qualifies as a “creditor” extending “consumer credit” under the MLA’s definitions, thereby subjecting it to these prohibitions. Empower’s argument that its advances do not constitute “credit” due to their non-recourse nature was rejected. The court focused its analysis on the time of origination noting that at origination Empower advanced funds and that consumers authorized Empower to debit the full amount of such advance plus other charges, which constituted the right to “incur debt and defer its payment” (i.e., was “credit” under the MLA and TILA). The court also relied on the high repayment rates (90+%) and the fact that consumers who withdrew their payment authorization could be denied future advances.
Additionally, the court examined the nature of Empower’s Instant Transfer Fee, deeming it a finance charge because it is incident to the extension of credit. In reaching this conclusion the court rejected arguments that a finance charge must be both incident to and a necessary condition of credit and distinguished the Instant Transfer Fee from the Eleventh Circuit’s Veale holding by concluding that a fee to obtain credit faster is distinguishable from an expedited credit card delivery fee because the Instant Transfer Fee is directly related to the extension of credit itself. This classification of the Instant Transfer Fee as a finance charge is significant because it subjects Empower’s advances to the MLA and TILA.
Furthermore, the court found that the MLA’s prohibition on arbitration extends to claims under the TILA and the GPLA, given their intertwined factual bases with the MLA claims. This decision underscores the broad application of the MLA’s arbitration prohibition, affecting Empower’s ability to compel arbitration across these claims.
