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Millions use Earnin to get cash before payday. Critics say the app is taking advantage of them

Millions use Earnin to get cash before payday. Critics say the app is taking advantage of them

PALO ALTO, Calif. – In ads on Snapchat and Hulu, Earnin makes a pitch to people who need cash right away: The smartphone app allows people to access money they’ve already earned before payday. In exchange, Earnin encourages users within the app to “tip” about 10 percent of the cash they receive.

“What we’re telling people is that you should have access to your pay,” CEO Ram Palaniappan said in a recent interview with NBC News at the company’s Palo Alto headquarters. “Your pay should not be held back from you, and we’re trying to give access to your pay.”

Earnin, which was recently endorsed by the celebrity pastor T.D. Jakes and invested in by the rapper Nas, has taken great pains to avoid being seen as a traditional lender. The startup internally calls money transfers “activations” instead of “loans” and frames its business as a way of leveling the financial playing field for those without easy access to credit.

But critics say that the company is effectively acting as a payday lender – providing small short-term loans at the equivalent of a high interest rate – while avoiding conventional lending regulations designed to protect consumers from getting in over their heads.

Earnin argues that it isn’t a lender at all because the company relies on tips rather than required fees and does not send debt collectors after customers who fail to repay the money.

Earnin says it is exempt from a 2017 federal rule on payday lending that requires lenders to ensure that customers have the ability to repay the money they borrow, and from the Truth in Lending Act of 1968, which requires lenders to disclose their annual interest rate.

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“This is absolutely a new and different way to skirt the laws around payday lending,” said Jill Schupp, a Democratic state senator from Missouri who represents the St. Louis suburbs and plans to revise her pending payday-lending regulation bill to encompass Earnin.

“To use the word ‘tip’ instead of a usury charge, an interest rate or a fee, it’s just semantics,” Schupp said. “It’s the same thing at the end of the day.”

Payday lenders flourished in the 1990s and 2000s but have declined in recent years due to pressure from consumer advocates and regulation. And while the U.S. economy has improved, worker wages have shown little growth, leaving open a continued demand for short-term loans.

Earnin’s rapid growth – it is the largest of a handful of companies that provide this type of service and raised $125 million in investment last December – has recently drawn scrutiny from state regulators and lawmakers, including Schupp. Payday lending is illegal in 15 states and Washington, D.C., but Earnin operates nationwide.

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In New York, the Department of Financial Services is investigating whether the company has run afoul of a law banning payday lending, Earnin confirmed. In Alaska, the Banking Division at the Department of Commerce recently reopened a similar inquiry, the chief of enforcement told NBC News. New Mexico’s Financial Institutions Division plans to send a letter to Earnin to ensure the company is complying with the state’s new ban on payday lending, the office’s director said. And in California, which allows payday lending, a bill that passed the state Senate seeks to impose fee and tip caps on companies that operate like Earnin and its competitors.

One former Earnin user, Nisha Breale, 21, who lives in Statesboro, Georgia – another state where payday lending is illegal – said she hadn’t fully realized that, when converted to an annual percentage interest rate, what seemed like a small $5 tip on a $100 advance payment (repayable 14 days later) was actually equivalent to a 130 percent APR.

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