Relevant to NYC’s lending startups, on December 21, the Consumer Financial Protection Bureau (CFPB) announced an agreement with LendUp Loans, LLC (LendUp) under which the company would cease making any new loans and collecting on certain outstanding loans among other restrictions and penalties involved.
LendUp had provided loans online to consumers primarily for personal, family, or household purposes, with a unique “LendUp Ladder,” that sought to allow borrowers to ‘climb’ up to loans of higher amounts at lower interest rates through behaviors such as the repayment of loans on time and the taking of free courses. According to the company, this set them apart from traditional payday lenders who “treat all their customers the same,” and it had received funding from Google Ventures, Andreessen Horwitz and Kleiner Perkins among others.
CFPB Found Fault with the Failure to Live up to Claimed Benefits of the Ladder and not the Ladder Approach Itself
Significantly, the CFPB’s Complaint, brought in Federal Court in the Northern District of California, did not take issue with the Ladder approach itself, but rather the company’s failure to deliver on claims related to it, alleging that, “LendUp claimed to offer larger loans at lower rates to repeat borrowers who ascend its “LendUp Ladder,” but that, “many borrowers who reached higher LendUp Ladder levels did not, in fact, receive these promised benefits.”
Specifically, the allegations include the following:
- LendUp extended over 340,000 single-payment loans to over 80,000 borrowers where it charged the same interest rate it had charged the borrower for an identical loan at a lower Ladder level
- It extended over 30,000 single-payment loans to over 15,000 borrowers where the company charged the same interest rate on a larger loan compared to a loan of the same duration that it had extended to the borrower at a lower Ladder level
- It extended about 150,000 single-payment loans to over 30,000 borrowers where LendUp charged a higher interest rate than it had charged the borrower for an otherwise identical loan at a lower Ladder level
- It extended over 30,000 single-payment loans to over 15,000 borrowers where the company charged a higher interest rate on a larger loan compared to a loan of the same duration that it had extended to the borrower at a lower Ladder level
- Many borrowers did not gain access at all to loans of larger amounts as they moved up the Ladder
- In some instances, the company unilaterally reduced the maximum loan amount available to borrowers who had maintained their Ladder level.
Deceptive Acts or Practices Under the Consumer Financial Protection Act
The Complaint argued that the above instances constituted deceptive acts and/or practices, falling under the Consumer Financial Protection Act of 2010.
Under that statute, a deceptive act or practice exists where a material misrepresentation or omission is involved that is likely to mislead consumers acting reasonably under the circumstances, with information being material to consumers it if is likely to affect conduct regarding the product or service.
In the instance of LendUp, alleged wrongdoing in this area also involved violating a Consent Order from 2016, prohibited it from misrepresenting the benefits of borrowing from the company, including access to and availability of loan products.
However, the wording of the statute and the CFPB’s use of it would warrant that similarly situated lending startups ensure that promotion material remain consistent with actual products and services offered.
The Equal Credit Opportunity Act
The Complaint also alleges that LendUp failed to provide timely and accurate notices to borrowers, called ‘adverse-action notifications,’ and thus was in violation of the Equal Credit Opportunity Act, which seeks to provide transparency as to the underwriting process and prevent credit discrimination.
Specifically, over 7,400 instances were cited where LendUp failed to provide adverse-action notices within 30 days after receiving completed applications and in over 71,800 instances, it issued the required notices, but misstated the principle reasons why the credit applications were denied.
Under a Proposed Stipulated Order, LendUp would not be required to admit wrongdoing, but would be prohibited from making new loans; collecting on outstanding loans to harmed consumers; selling consumer information; and making misrepresentations when providing loans or collecting debt or helping others that are doing so.
The Proposed Order also seeks $40,500,00.00 for the purpose of providing redress to Affected Consumers in the amount of the finance charges paid in connection with the loans alleged to be involved, but also provides for suspension of this payment should LendUp adhere to the other provisions of the Order in light of the company’s inability to pay. It would, however, still be required to pay a civil monetary penalty of $100,000.00.