On September 27, 2016, the Consumer Financial Protection Bureau (CFPB) entered into a Consent Order (the “Order”) with Flurish, Inc d/b/a LendUp (LendUp), a startup online lending company based in San Francisco that offers single-payment loans and installment loans in 24 states. The Order sends a powerful message to online lenders to make sure their legal houses are in order before opening their doors to customers.
CFPB Findings. The Order is based on the following findings, among others:
- LendUp advertised that its loan program would build consumers’ credit and credit scores, regularly furnish information to consumer reporting agencies and offer consumers access to “more money at better rates for longer periods of time” than other options available to them.
- LendUp advertised that consumers could obtain financial stability by moving up the “LendUp Ladder,” i.e., taking out its payday loans, repaying them on time, and completing financial education courses, thereby qualifying them to take out additional payday loans or installment loans on more favorable terms – “As you earn more points [by paying off your loans on time], you ascend in status from Silver, to Gold, to Platinum, to Prime,” with each rung up this ladder enabling the consumer to potentially borrow larger amounts of money at a lower interest rate or for a longer period of time.
- The program provided that Platinum and Prime loan borrowers would be eligible to have their payment history information furnished to national consumer reporting agencies (NCRAs).
- Many of the advertised benefits of the program were in fact not made available to consumers who moved up the LendUp Ladder. Although it advertised its loans nationwide, LendUp did not offer any Platinum or Prime loans to consumers outside of California. Moreover, from its commencement of operations in 2012 to at least February, 2014, it did not furnish any information about its loans to NCRAs.
- LendUp failed to disclose, to Silver-status payday loan borrowers who received discounts for selecting an earlier repayment date than the latest date allowed under state law, that the discount would be reversed if they subsequently extended their repayment date or defaulted.
- LendUp had no written policies or procedures relating to credit reporting from 2012 until 2015.
- LendUp retained a portion of a fee that it charged to consumers who requested expedited delivery of their loan proceeds, but failed to count that portion as a finance charge or to factor it into the loan APR disclosed on the Truth-in-Lending disclosure statement.
- LendUp’s banner advertisements failed to include information required by Regulation Z (APR and whether rate may increase after consummation) in advertisements in which “trigger terms” appeared.
CFPB Conclusions. Based on these findings, the CFPB concluded that LendUp violated provisions of the Consumer Financial Protection Act (by having engaged in unfair and deceptive practices), the Fair Credit Reporting Act and Regulation V (by failing to have written policies and procedures in place for furnishing information to NCRAs), and TILA and Regulation Z (by disclosing inaccurate APRs and not disclosing information required to be disclosed in advertisements containing “trigger terms”).
The Order essentially obligates LendUp, under the direct supervision of its Board of Directors, to take all necessary measures to put a stop to the offending practices. It also requires that LendUp: (1) within 10 days of the effective date, deposit $1.83 million into a segregated deposit account to be used to provide redress to affected consumers; (2) within 30 days of the effective date, submit a comprehensive written redress plan to the CFPB for review and non-objection; and (3) within 10 days of the effective date, pay to the CFPB a civil monetary penalty of $1.8 million. In addition, the Order subjects LendUp to certain continuing reporting requirements.
Lessons Learned. At minimum, online lenders should take away from this Order the following lessons:
- The CFPB will hold internet lenders to the same standards as non-internet lenders.
- The CFPB’s approach to the FinTech industry may be less amicable than that of the prudential regulators, whose focus has been on encouraging and facilitating responsible innovation. (See Reed Smith Client Alert (April 1, 2016) “OCC Issues FinTech White Paper Indicating Openness to ‘Responsible Innovation’,” available at https://www.reedsmith.com/OCC-Issues-FinTech-White-Paper-Indicating-Openness-to-Responsible-Innovation-04-01-2016/.)
- Before launching a new subprime product or marketing a product to subprime borrowers, online lenders, similar to other consumer lenders, need to closely review, and ensure that they are in compliance with, all applicable rules governing those products and that they will not engage in unfair, deceptive or abusive practices when marketing, providing and/or servicing those products.
With regard to the last of these lessons, the assistance of experienced compliance counsel can be of great value. Counsel can review the applicable federal and state laws and regulations (including potentially applicable state licensing laws); advise as to any obligations, limitations and/or prohibitions contained in, and assist in the development of effective policies and procedures to comply with, those laws; go over marketing (including telemarketing) plans, inspect draft advertisements, banner ads and websites; ensure that all required disclosures are given to consumers in a timely manner and, if given electronically, only after obtaining effective consumer consent; provide information concerning lender responsibilities when selecting and monitoring third party vendors; and perform a host of other valuable services aimed not only at keeping the company in the good graces of its various regulators but also reducing the chances of being subjected to costly and time-consuming individual and class action litigation based on alleged compliance deficiencies. Counsel can also help companies prepare for state regulator and CFPB examinations and provide valuable assistance in dealing with those agencies should they commence an investigation and/or decide to pursue an enforcement action.
Robert M. Jaworski is a member of Reed Smith’s Financial Services Regulatory Group, resident in the Princeton, NJ office. He is a Fellow of the American College of Consumer Financial Services Lawyers, and a former Deputy Attorney General and Deputy Commissioner of Banking for the State of New Jersey. He frequently writes and speaks on regulatory issues of interest to financial institutions.
The Order can be accessed at http://files.consumerfinance.gov/f/documents/092016_cfpb_LendUpConsentOrder.pdf. The CFPB investigation was conducted in coordination with the California Department of Business Oversight, which announced a separate settlement with LendUp. That settlement can be found at http://www.dbo.ca.gov/Press/press_releases/2016/LendUp Settlement Release 09-26-16.pdf.