On April 25, the FTC filed a complaint against Lending Club in the district court for the Northern District of California. The complaint alleges that Lending Club’s online advertising “lures prospective borrowers by promising ‘no hidden fees,’ but when the loan funds arrive in consumers’ bank accounts, they are hundreds or even thousands of dollars short of expectations due to a hidden up-front fee that [Lending Club] deducts from consumers’ loan proceeds.” Related advertising highlighted in the complaint includes paid blog posts, such as one stating “once you’re approved, your money goes straight into your account, with no hidden fees,” along with online, mail and television advertising that directed consumers to Lending Club’s website. In addition to targeting hidden fees, the complaint asserts that Lending Club: (i) misled consumers into believing they were approved for a loan, which discouraged them from seeking credit elsewhere; (ii) withdrew double payments from consumers’ accounts; and (iii) continued to collect electronic payments from consumers after they had canceled their automatic payments or completely paid off their loans.

The FTC’s 30-page complaint includes numerous step-by-step analyses of online advertising screen shots. For example, the complaint discusses in detail the various online pop-up bubbles that Lending Club used to disclose fees in its application process, noting the low likelihood that a consumer would click on particular icons triggering the appearance of a disclosure bubble and the small font size used in bubbles or other disclosures. The complaint similarly reviews Lending Club’s mobile advertising by beginning with a screen shot, and then conducting a detailed analysis of each alleged deficiency, augmented by specific examples.

Throughout the complaint, the FTC contends that Lending Club had actual knowledge that many consumers were unaware of the upfront fee. In this regard, the complaint notes that Lending Club’s training materials for its customer service representatives included “‘I didn’t receive the full loan amount’ as one of the two main post-disbursement complaints that representatives should be prepared to address.” Other factors supporting Lending Club’s alleged actual knowledge include internal reports summarizing the results of consumer complaints, a compliance review noting that the upfront fee was not readily apparent, and a warning received from one of Lending Club’s largest investors that the upfront fee “is not clear and conspicuous and could be subject to a UDAAP claim,” along with a warning from the same investor’s legal counsel that the “relative obscurity” of Lending Club’s disclosure of the upfront fee could make it a target of law enforcement action.

Pepper Points

• In its public statements, Lending Club has strongly denied the FTC’s complaint allegations. Whether those highly detailed accusations are ultimately established or successfully defended, they offer other online lenders an opportunity to acquire valuable insights into how the FTC views online and mobile advertising.

• The complaint highlights the importance of taking well-documented action in response to consumer complaints, audits and compliance reviews, and any other information that reasonably signals a possible issue with a financial product or service. To this end, documenting the reasons why no changes were made in response to such signals can prove just as important as documenting any changes that were made.

• Although Lending Club loans are made by Web Bank, the FTC’s complaint makes no mention of that fact. Thus, for purposes of this non-usury lawsuit, it is clear that the FTC views Lending Club as the lender.

• This lawsuit by the FTC may be a bellwether of similar actions to come. In response to the reduced appetite of the CFPB’s new leadership for pursuing lawsuits and enforcement actions, the lending industry could see an uptick in actions brought by the FTC.

• While the FTC does not have jurisdiction over depository institutions, banks that present false and misleading advertising may have similar suits brought against them by their primary regulators.