On September 27, 2016, the Consumer Financial Protection Bureau (CFPB)
ordered an online lender, Flurish, Inc., to pay a civil penalty of $1.8
million, on top of providing $1.83 million in consumer refunds. Flurish
was doing business as LendUp, an online lender that touted itself as a
“consumer-friendly, tech-savvy alternative to traditional payday
loans.” The CFPB found that the company misled borrowers and failed
to deliver on promised benefits to approximately 50,000 consumers.
According to the CFPB, LendUp offered customers the ability to build credit
and have access to cheaper loans, but then failed to provide those loans
and ignored consumer protection laws in the process. In a statement, Director
Richard Corday said: “The CFPB supports innovation in the fintech
space, but start-ups are just like established companies in that they
must treat consumers fairly and comply with the law.”
Flurish is an online startup operating out of San Francisco, California,
offering installment and short-term loan products in 24 states. Marketing
as LendUp starting in 2012, Flurish advertised its business as a way for
participating consumers to build credit, while progressing to loans with
more favorable rates and terms. Its marketing slogan became known as the
“LendUp Ladder.” However, the CFPB contends that this was
a marketing ruse to garner greater participation in LendUp’s loan
programs, while never producing the promised benefits.
Based on information from the enforcement action, the CFPB claims that
LendUp made loan product offerings that were not available in some of
the areas advertised, and did not live up to many of its promises. One
of LendUp’s promises was the claim that consumers would improve
their credit scores by taking out loans with the company. However, the
CFPB showed that LendUp didn’t even accurately report loans to consumer
reporting agencies for a period of time, thereby failing to deliver on
its promise of improving a borrower’s credit scores.
The CFPB confirmed that LendUp violated consumer financial protection laws by:
Misleading Consumers About Access to Favorable Loan Programs
LendUp advertised that consumers would have an opportunity to move “up
the ladder” and progress to loans with better terms. The CFPB found
that many of the loan programs detailed in the LendUp Ladder program did
not exist or were unavailable to borrowers in that state. LendUp offered
a variety of loan products as being available nationwide, yet many of
the loan programs were not available outside of California.
Failed To Disclose True Cost of Credit
The Truth in Lending Act (TILA) requires that lenders disclose the annual
percentage rate for a particular loan product, providing potential borrowers
with accurate information about loan fees and terms. LendUp’s internet
marketing campaign included ads that allowed the consumers to view loan
amounts and repayment terms, yet never disclosed the APR to the consumer
as is required by TILA.
Altered Loan Pricing Without Consumer Disclosure
One of the loan products offered by LendUp presented borrowers with the
option to select an early repayment date. Consumers who chose this earlier
date would purportedly receive a discount on their loan origination fee.
The CFPB found that if a borrower later extended the repayment date, the
company reversed the discount and added the amount to the loan balance
without notifying the borrower. Besides not disclosing the policy, the
company’s loan agreement that it used for three states indicated
that the borrower would not be charged any fees to extend their repayment period.
Misled Consumers on APR
LendUp inaccurately disclosed finance charges by offering consumers faster
loan funding for a specific fee, yet failed to disclose that fee in the
annual percentage rate calculation. Although the company passed along
some of the fees to a third-party vendor, they also retained a portion
of the amount collected.
Failed to Provide Consumer Credit Reporting
When the company began operations in 2012, they based their loan advertising
as a way for the consumer to improve their creditworthiness. However,
the Bureau found that the business did not provide any consumer credit
information to reporting agencies until two years later in February 2014.
The company also failed to put in place appropriate internal written procedures
and policies for the proper management and reporting of consumer credit habits.
CFPB Enforcement Action
The CFPB has authority under the Dodd-Frank Act to take action against
companies for deceptive or abusive consumer finance practices, including
imposing fines, restrictions, or both. In this case, the CFPB required
that LendUp to take the following actions:
- Must stop misleading borrowers by misrepresenting products to consumers
that are not available in their state. They must use correct calculations
in determining fees involved, provide accurate disclosures, and stop misrepresenting
what fees are being charged.
- Must stop all unlawful advertisements. The company must regularly review
all marketing material to ensure compliance with current consumer finance
protection law and that they are not misleading consumers.
- Must confirm the accuracy of all pricing. The company must regularly monitor
and test APR calculations and disclosure policies to ensure that it is
in compliance with the Truth in Lending Act.
- Must pay restitution and refunds to consumers. The company must pay approximately
$1.83 million to over 50,000 consumers without the consumers requesting
payment. The company must alert consumers to the ability to receive a
refund and the amounts that they are entitled.
- Must pay a civil penalty of $1.8 million into the CFPB’s Civil Penalty Fund.
The CFPB is stepping up efforts with regards to enforcement actions, primarily
focusing on debt collection, mortgage servicing, and short-term or payday
loans. In 2015, the CFPB doubled its enforcement actions over the previous
year, and it appears that 2016 will be a sizeable increase over last year.
In 2015, the Bureau settled 59 cases and went to litigation with 11 other
firms. So far this year, the CFPB has brought actions against several
large institutions, including a $28.5 million penalty to Navy Federal
Credit Union for improper debt collection, and a $9 million fine to Titlemax
for luring consumers towards more costly title loans. It will be interesting
to see if any of these recent fines will be challenged now that the CFBP
was found to be unconstitutional in the recent PHH Corp. v. CFPB case.
Contact Geraci Law Firm at (949) 298-8050 today, or contact
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