A cash-advance app backed by rapper Nas has been scrambling to escape regulatory heat over concerns that it has been doing illegal payday lending in the Big Apple, The Post has learned.
Earnin, a Silicon Valley startup whose investors also include venture capital firm Andreessen Horowitz, quietly disabled a controversial feature for New York users that links the size of its loans to voluntary “tips,” according to sources close to the situation.
The tips — which can stretch as high as $14 on a $100 weekly loan — are comparable to the crippling annualized percentage rates that have gotten payday loans banned in 15 states including New York, critics say.
Earnin did away with the pay-to-play feature — which handed out as much as 10 times more in loans to users who voluntarily tipped, according to internal documents and a source close to the company — around the time of a March 28 subpoena from the New York Department of Financial Services, according to sources. While the revision was not illegal, according to experts, it raised eyebrows among staffers, a former employee said.
The agency launched its probe following an exclusive, March 21 report by The Post that raised questions about Earnin’s business model. Valued by investors at $800 million in December, Earnin is now under investigation by at least 11 states and Puerto Rico for evading 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 users’ maximum payouts — which could be as high as $1,000 per pay cycle — weren’t tied 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 wouldn’t be in the document sent to the DFS.
At the time, Earnin was preparing to submit thousands of pages of documents about its business to the 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 going into this tip-independent model that NY users fall into?” Hudson asked, referring to documents to be submitted to DFS, according to Earnin Slack messages.
The switch 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 gather information for New York regulators. The switch, which has only occurred in NY at this time, was not representative of the company’s larger business model, the ex-employee told The Post.
Nevertheless, the decision to abruptly change the model isn’t illegal — and may end up saving the company money down the line, according to legal experts.
“It sounds like a smart thing to do,” Sam P. Israel, a securities lawyer who has advised companies on regulatory matters, told The Post. “If there is a problem there, they’re cutting their losses short.”
Eric Kuo, a spokesman 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 switch appeared to have caught some Earnin staffers off guard.
“We moved all NY users into tip independent experiment?” a product manager asked an Earnin risk manager in an early-April Slack message.
“Yes,” the risk manager replied.
Earnin tells users that their money management practices and the number of coworkers they sign up can influence their max, but it doesn’t make it clear that higher tips mean they can take out more money.
But inside the company, the connection was well-known, according to former employees.
“Low tipping users may not understand that their tip rate can prevent them from getting an increase,” according to a draft of a September 2018 memo titled “Max Adjustment Tip Messaging Experiments.”
As a company, Earnin has been sensitive about appearing to comply with regulations, hiring former DFS Superintendent Ben Lawsky and consulting with former Uber executive Emil Michael, The Post has reported.
Earnin also considered going after perceived enemies.
Not long after The Post first reported on Earnin, the company’s chief executive, Ram Palaniappan, held an all-hands meeting to discuss the fallout from the article.
One employee suggested the company hire a private investigator to look into The Post reporter who had written the story — a suggestion that Palaniappan didn’t shut down, according to a former employee who attended the meeting.
Afterward, Ihsan Kabir, now the group product manager, approached Palaniappan to make a similar suggestion, the source said.
“He turns to Ram after the all-hands, on their way back to their desks, and says they should hire a PI on you,” the source told The Post. “Ram doesn’t dispute it — he doubles down. Says it’s unfair.”
Asked about the situation, Earnin spokeswoman Katy Feinberg said that Palaniappan and the company “did not hire a private investigator.”