Earnin cash advance app changes tone amid New York investigation
A cash advance app backed by rapper Nas has scrambled to escape the regulatory heat due to concerns it made illegal payday loans in the Big Apple, The Post has learned.
Earnin, a Silicon Valley startup whose investors also include venture capital firm Andreessen Horowitz, has quietly disabled a controversial feature for New York users that ties its loan amount to voluntary ‘tips’, according to reports. sources close to the situation.
The tips — which can be as high as $14 on a $100 weekly loan — are comparable to the crippling annualized percentage rates that have had payday loans banned in 15 states, including New York, critics say.
Earnin removed the pay-to-play feature – which granted up to 10 times more loans to users who voluntarily tipped, according to internal documents and a source close to the company – at the time of a subpoena to to appear March 28 from the New York Department of Financial Services, sources said. Although the review was not illegal, experts say, it raised eyebrows among staff, a former employee said.
The agency launched its investigation following an exclusive March 21 report from The Post that raised questions about Earnin’s business model. Valued by investors at $800 million in December, Earnin is currently under investigation by at least 11 states and Puerto Rico for circumventing state usury laws.
In an April 10 Slack message, Melissa Hudson, a high-ranking Earnin executive in charge of development teams, said she was working on a document explaining to regulators that New York user maximum payouts — which could reach $1,000 per payment cycle — were unrelated to how much they “tipped”, according to a copy obtained by The Post.
The previous formula, Hudson wrote, “had quite a few tip-related factors,” adding that she wanted to make sure those weren’t in the document sent to the DFS.
At the time, Earnin was preparing to submit thousands of pages of documents about his business to state regulators, including those that showed the mathematical formula that determined how much New York users could borrow.
“Can you confirm that there are no other tip-related factors that fall into this tip-independent pattern that NY users fall into?” Hudson asked, referring to the documents to be submitted to the DFS, according to messages from Earnin Slack.
The change came so Earnin executives could say ‘in the present tense’ that New York users’ maximum payouts weren’t affected by how much they paid in fees, according to a former employee who helped collect information for New York regulators. The change, which has only happened in New York so far, was not representative of the company’s broader business model, the ex-employee told the Post.
Still, the decision to abruptly change the model isn’t illegal – and may end up saving the company money, legal experts say.
“It seems like a smart thing to do,” Sam P. Israel, a securities lawyer who has advised companies on regulatory issues, told The Post. “If there’s a problem there, they cut their losses.”
Eric Kuo, a spokesperson for Earnin, told the Post, “There have been no changes to Earnin’s max model for New York customers since the company received a subpoena from NYDFS. .” He declined to comment further.
Regardless of the timing, the change appears to have caught some Earnin staff off guard.
“We’ve moved all New York users to a tip-independent experience?” a product manager asked a risk manager Earnin in a Slack message in early April.
“Yes,” replied the risk manager.
Earnin tells users that their money management practices and the number of co-workers they sign up can influence their max, but it doesn’t clarify that higher tips mean they can earn more money.
But inside the company, the connection was well known, according to former employees.
“Low-tip users may not understand that their tip rate may be preventing them from getting a raise,” according to a draft of a September 2018 memo titled “Maximum Adjustment Peak Messaging Experiences.”
As a business, Earnin has been sensitive to the appearance of regulatory compliance, hiring former DFS Superintendent Ben Lawsky and consulting with former Uber executive Emil Michael, The Post reported.
Earnin also considered going after perceived enemies.
Shortly after The Post’s first report on Earnin, the company’s chief executive, Ram Palaniappan, held a town hall meeting to discuss the fallout from the story.
An employee suggested the company hire a private investigator to investigate the Post reporter who wrote the story — a suggestion Palaniappan did not shut down, according to a former employee who attended the meeting.
Subsequently, Ihsan Kabir, now the group’s product manager, approached Palaniappan with a similar suggestion, the source said.
“He turns to Ram after all, on the way back to their offices, and says they should hire a PI on you,” the source told the Post. “Ram doesn’t dispute it – he doubles down. He says it’s unfair.
Asked about the situation, Earnin’s spokeswoman Katy Feinberg said Palaniappan and the company “did not hire a private investigator.”