CFPB Enforcement Measures Focus on Revenue Sharing Agreements and ‘Alternative Payday’ Loans | Eversheds Sutherland (United States) LLP

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In September 2021, the CFPB took action against Better Future Forward, Inc. (BFF), a provider of student income sharing agreements, and LendUp, a risky online consumer lender. In both cases, the CFPB alleged that the target company violated the Dodd-Frank Act by misleading clients about the nature or consequences of their dealings with these companies. The BFF and LendUp actions reflect the CFPB’s renewed focus on education lending and subprime consumer lending, a trend that is expected to intensify under new CFPB director Rohit Chopra.

  1. Revenue sharing agreements

On September 7, the CFPB issued a consent order against Better Future Forward, Inc. (BFF), a provider of revenue sharing agreements (ISA). ISAs are an alternative to traditional student loans in which a provider advances funds for post-secondary education in exchange for future payments based on a percentage of the student’s post-graduation income. Unlike a loan, the ISA does not contain an unconditional obligation to repay a fixed amount. Instead, the student’s obligation is satisfied when they pay the maximum reimbursement amount (the “payment cap”) or when a certain period of time elapses. If the student’s income falls below a specified threshold for a given month, no payment is required.

Many AIS providers rely on this absolute lack of repayment obligation to distinguish their transactions from loans, which are subject to the Federal Truth in Lending Act and other financial protection laws. consumers. However, the CFPB did not directly address the conditionality of the repayment obligation in the order of September 7. Instead, the abridged analysis focused on the definition of “credit” in the Dodd-Frank Act, which is the right to “incur debt and defer payment”.1 The CFPB noted that the ISAs in question met the definition of “credit” despite the absence of an absolute obligation to repay and the provider’s acceptance of the risk of non-payment.2

The CFPB’s characterization of BFF’s ISA transactions as loans formed the basis for the following violations of truth in loans law identified in the consent order:

  • Failure to provide the required information on the cost of borrowing;
  • Failure to disclose that a bankruptcy filing cannot release the borrower from his obligation to repay the loan; and
  • Illegally impose a prepayment penalty on a private education loan (adding a non-refundable 10% to the original payment limit).

The CFPB also noted that the BFF “growth component” added to the amount of the advance was indistinguishable from the financial burden of a traditional loan. However, the consent order does not rely on this point to qualify ISAs as loans.

The CFPB did not inflict civil sanctions on BFF, citing its cooperation. However, the ISA industry is now informed that the CFPB considers these transactions to be loans for the purpose of complying with the consumer financial protection laws that the CFPB enforces.

  1. Online consumer loans

On September 8, 2021, the CFPB filed an action against Flurish, Inc. (d / b / a LendUp) in the United States District Court for the Northern District of California. The complaint alleges the company was engaged in continued deceptive practices that violated the Dodd-Frank Act and a 2016 consent order based in part on the same behavior. The 2016 order required LendUp to pay around $ 1.83 million in reparations and to pay a fine of $ 1.8 million for falsely telling borrowers that by repaying on time and taking education classes free financial aid, they could climb the LendUp Ladder and access lower interest rates and larger principal amounts on future loans.

In the September complaint, the CFPB alleged that, while the 2016 ordinance was in effect, higher tier borrowers often paid the same or higher interest rates than lower tier borrowers for identical loans. In addition, senior borrowers often could not access the larger loan amounts promised, and some saw their loan limits unilaterally reduced. In short, LendUp misled borrowers about the effects of repeat borrowing. The CFPB also alleged in the September order that LendUp violated the Equal Credit Opportunity Act (ECOA) by failing to provide timely and accurate notices of adverse action.

Repeated borrowing and the perceived lack of awareness among borrowers of its consequences was a central concern of the CFPB during the Obama administration. At the end of Obama-appointed director Richard Cordray, the CFPB issued a controversial rule requiring short-term, low-cost lenders to guarantee the applicant’s ability to repay the loan without borrowing again. The underwriting provisions of the so-called payday loan rule were repealed in a 2020 regulation under the nomination of Trump, Kathy Kraninger.

The CFPB’s lawsuit against LendUp, although based in part on the company’s breach of a 2016 consent order, shows the agency’s continued sensitivity to issues associated with repeated use of low-value loans. Given its significant investment in addressing “debt cycle” issues, the CFPB can renew these efforts either through new regulation or through targeted enforcement of the Dodd-Frank prohibitions on unfair, deceptive and deceptive acts or practices. abusive.

In addition, given the recent focus by the CFPB on small business loans and related data collection, small business loan providers (especially sole proprietors) should remain attentive to CFPB enforcement activities. in the consumer space. Although the Truth-in-Lending Act only applies to transactions with consumers, the ECOA imposes notice and non-discrimination requirements on small business loans in addition to consumer loans.

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1 12 USC § 5481 (7).
2 Similar factors have been cited by courts and regulators in determining that two other loan alternatives, Earned Wage Access and Merchant Cash Advance, are not loans in certain circumstances. However, the action of the BFF is in line with the CFPB position that third party litigation financing agreements are loans. See 201702_cfpb_RD-Legal-complaint.pdf (consumerfinance.gov).

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