By CultureBanx Team
- Nas’ Queensbridge Ventures portfolio company Earnin is operating in the gray area of payday lending regulations
- African Americans are 2x as likely to take out a payday loan than other ethnicities
Earnin, a cash advance app backed by rap icon Nas is in hot water for its predatory-like practices. Valued by investors at $800 million, the company is under investigation by at least 11 states and Puerto Rico for evading state usury laws. Since all of the investigations commenced, Earnin recently got rid of its feature that links the size of a loan to voluntary “tips” in New York. The question still remains as to whether the tips suggested by Earnin count as loan fees, with an effective annual percentage rate?
Why This Matters: The cash advance app allows users to take out money in increments as high as $100 and they can tip any amount up to $14. Earnin uses the tips to pay for the service. If the app’s platform was deemed to be a loan, the $9 tip suggested by Earnin for a $100, one-week loan would amount to a 469% APR, according to the New York Post. In addition to the rapper’s Queensbridge Ventures investment, they are also backed by Silicon Valley heavyweight venture capital firms like Andreessen Horowitz, DST Global and Spark Capital.
Earnin’s marketing and business models resemble those of payday lenders and that they operate in the gray area of regulations on payday lending
Critics say Earnin’s marketing and business models resemble those of payday lenders and that they operate in the gray area of regulations on payday lending. So far 16 states have already banned payday loans including New York because of ridiculously high interest rates.
It seems like Earnin is trying to avoid complying with the 1968 Truth in Lending Act, which requires lenders to disclose APRs and the total fees a borrower will pay. Earnin claims it cash advances aren’t loans, but “non-recourse transactions”, meaning they don’t charge interest or give the company the right to collect. However, the IRS can consider non-recourse debt as a loan, even if the lender is unable to personally pursue a borrower in case of default. In the company’s terms of service they clearly state that they reserve the right to sue users for violating Earnin’s terms of service, which definitely seem a lot like a form of recourse.
U.S. Consumers borrow $90 billion every year in short-term small dollar loans. It’s easy to see how this type of installment lending has evolved into a profitable juggernaut, with revenue jumping from $4.3 million to $6.5 million over a four-year period. Traditional payday lenders, which Earnin doesn’t fall into this category yet, can command interest rates north of 900%.
Situational Awareness: Interestingly enough Earnin has previous ties to the hip hop community, as its current CEO Ram Palaniappan used to be the president of RushCard. Let me jog your memory, it’s a prepaid debit card company that’s been riddled with issues and co-founded by hip-hop mogul Russell Simmons.
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