On May 17, the CFPB filed a lawsuit against a California-based fintech that operates a nationwide website and mobile-application based peer-to-peer lending platform through which consumers can obtain small-dollar, short-term loans. The Bureau alleges that while the company markets itself as offering 0% APR loans, its use of dark patterns ensures that almost 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:
- Misrepresentations About the Cost of the Loan: While its ads and loan disclosures market no-interest loans, virtually all borrowers pay "tips" to the investor lenders, "donations" to the company or both. According to the Bureau, these fees result in a high total cost of credit, sometimes in excess of 300%.
- Dark Patterns Used to Trick Consumers. The company presents three default options to consumers for the "donation" or "tip" and requires consumers to select one before moving forward with the loan process. But it does not inform consumers that a "donation" is voluntary and it obscures a "No Donation" option from the consumer.
- Making False Threats and Collecting Money Consumers Do Not Owe: According to the Bureau, because these loans were either made without a required state license or in excess of state usury caps in the state where the borrower resides, they are void uncollectable. In addition, the company has threatened consumers that it will furnish negative information to credit reporting companies when it has never done so.
- Using a Created "Social Credit" Score without Safeguards: The company 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 make sure the data the company gathers on consumers is accurate.
Putting It Into Practice: While there are a host of interesting issues here (e.g., dark patterns, social credit scoring), the Bureau's action against a fintech that requests "tips" should cause some concern for fintechs. As we have discussed previously, the CFPB has been slow to offer any guidance to earned-wage access providers. Many of these providers have a business model where consumers provide voluntary "tips" in appreciation for the provider's service. The Bureau seems to have come out forcefully against a tipping model. While it can be argued that the distinction here is that the tips were allegedly not voluntary and consumers were tricked by deceptive dark patterns, the Bureau went to great lengths to show that the tips increased the total cost of credit for consumers. To the extent it starts to characterize tips as "finance charges," could we see the Bureau apply TILA to earned-wage access products? We will continue the monitor this space for further developments.
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