Non-bank financial services are being scrutinized similar to banks. This highlights the fact that the Consumer Financial Protection Bureau (CFPB) plans to hold online lenders to the same legal standards as other financial institutions involved in lending. The bureau gets a lot of information from lending companies themselves. It has executed “Project Catalyst,” which aims to help innovative consumer financial products meet regulatory requirements. The bureau also started the “no-action letter” initiative, which allows companies to seek pre-approval for product testing.
The CFPB recently fined LendUp a record $1.8 million for violating multiple provisions of the Consumer Financial Protection Act. Having the right law firm from the beginning is not only essential, but it’s a survival tool for lending startups struggling with complex legal issues with multi-state permissions, aggressive advertising, data security, and other issues that could get a lender caught in the crosshairs of regulation.
Venable LLP is a leader in compliance and regulatory litigation and does a lot of work in areas dealing with CFPB, enforcement, and investigations. A well-respected law firm ranked 66 on AmLaw’s top 100, the firm has close to 600 attorneys in multiple countries. Alexandra Megaris, an attorney at the firm, explained to Lending-Times the complicated scenario facing young startups. She advises companies on regulatory investigations and government enforcement matters with a focus on consumer protection, consumer finance, and advertising issues. She works with banks and non-banks to prepare for and navigate supervision examinations by the CFPB and other regulators, including advising companies on building and enhancing compliance management systems.
A Look at CFPB Case Studies
Megaris said the CFPB’s focus is on enforcement. Legal actions lead to big headlines, so attention is skewed towards enforcement. She believes that, though examination and supervision get less attention, they have the biggest impact on the FinTech ecosystem.
Though the CFPB has initiated many feel-good proposals, it has not been extremely amicable to the sector like other regulators. Many enforcement matters start out as examinations. Unlike investigations, examinations expect an “open kimono” policy. That is, they can access everything (even privileged documents). She also believes the CFPB has taken a lead over the FTC in becoming the most active regulatory agency in the FinTech lending segment.
LendUp was required to pay a restitution of $1.8 million to borrowers and another $1.8 million as a penalty. The CFPB found that LendUp misled consumers through false advertisements and other means with regard to the true cost of lending, shifting performers to lower APR loans and failing to report credit information to the bureaus. She also said this ruling puts the onus of responsibility on advertisers and marketers. Usually, the courts have held that affiliate messaging is the responsibility of the company. Now, the lead generator might also be obligated to make sure that information is being utilized by the end lender.
T3Leads and Lead Publisher is a case where the CFPB sought monetary relief, including disgorging the founder of Lead Publisher of his profits and banning him from the financial products and consumer leads industries. CFPB Director Richard Cordray issued a statement that said, “This is a reminder to the middlemen who traffic in personal information: If you ignore warning signs that those buying this data are violating the law, you risk the consequences for the harm you are doing to people.”
These cases show that CFPB is not going soft on Silicon Valley for any abuse of consumer rights. The entire FinTech industry will need to ensure it is compliant with the relevant laws, and that every vendor is responsible for how the information is utilized by the down chain.
Online Lenders Can No Longer Operate Without Sound Legal Advice
The True Lender Doctrine is another potential minefield for lenders. In the case of Cashcall, CFPB argued the company was the actual “true lender” and implied that its operations were unauthorized. Furthermore, the CFPB said, any legal structuring was deceptive and improper. The case hinged on the fact that, though payday loans were originated by tribal entity Western Sky Financial, the de-facto lender was Cashcall because the tribal entity had no monetary interest in the loans. Cashcall wanted to shield itself from state usury laws by processing transactions through an exempt tribal entity. Megaris has seen multiple litigations on the True Lender Doctrine and is not surprised to see that courts have ruled differently on similar sets of facts. This creates huge uncertainty for companies on whether their day-to-day operations are legal or not.
All this indicates that FinTechs are currently operating in a legal gray zone. It is essential to have compliance experts on board from the beginning. This will ensure that all products created are vetted by a professional well versed in what is allowed under the relevant laws. Advertising, affiliate network and purchase, and sale of users’ personal data are other corporate actions which need to go through an attorney to make sure the company is not participating in anything prohibited. Startups won’t be able to defend themselves by saying they could not afford such services or that the infractions took place when they were only a five-person team. LendUp got to know that the hard way. Other lenders are advised to learn from LendUp and firm up the legal side of the lending business.
Written with Heena Dhir.