Fintech
CFPB Files Lawsuit Against Fintech for Deceptive Practices
On May 17, the CFPB filed a cause against a California-based fintech that operates a national website and mobile application-based peer-to-peer lending platform through which consumers can obtain small-dollar, short-term loans. The Bureau claims that while the company aims to offer 0% APR loans, its use of dark templates ensures that nearly every borrower pays a fee, in the form of a “tip” or “donation.”
The Bureau alleges that the company violated the Consumer Financial Protection Act’s prohibition against unfair, deceptive, and abusive conduct, as well as the Fair Credit Reporting Act. Specifically, the CFPB alleges:
- Misleading statements about the cost of borrowing: While its advertisements and loan information market interest-free loans, virtually all borrowers pay “tips” to the lending investors, “donations” to the company, or both. According to the Bureau, these fees result in a high total cost of credit, sometimes exceeding 300%.
- Dark patterns used to deceive consumers. The company presents three default options to consumers for “donation” or “tip” and requires consumers to select one before proceeding with the lending process. But it does not inform consumers that a “donation” is voluntary and hides the “No Donation” option from the consumer.
- Making false threats and collecting money consumers don’t owe: According to the Bureau, because these loans were made without a required state license or in excess of state usury limits in the state where the borrower resides, they are void and uncollectible. Additionally, the company has threatened consumers that it will provide negative information to credit reporting companies when it never has.
- Using a “social credit” score created without collateral: The company has developed its own credit scoring method for potential borrowers and accordingly acts as a credit reporting company. But it has not taken adequate steps to ensure that the data the company collects on consumers is accurate.
Putting it into practice: Although there are a number of interesting issues here (e.g. dark models, social credit score), the Bureau’s action against a fintech requesting “tips” should be of some concern to fintechs. Like we discussed previously, the CFPB has been slow to offer guidance to earned-wage access providers. Many of these providers have a business model in which consumers provide voluntary “tips” out of appreciation for the provider’s service. The Bureau appears to have come out strongly against a rollover model. While it can be argued that the distinction here is that the tips were allegedly not voluntary and consumers were deceived by deceptive dark schemes, the Bureau went to great lengths to demonstrate that tips increased the total cost of credit for consumers . To the extent it begins to characterize tips as “financial charges,” could we see the Bureau apply TILA to earned wage access products? We will continue to monitor this space for further developments.