CFPB Enforcement Actions Zero in on Income Share Agreements and “Payday Alternative” Loans

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Eversheds Sutherland (US) LLPIn September 2021, the CFPB took action against Better Future Forward, Inc. (BFF), a provider of student income share arrangements, and LendUp, an online, subprime consumer lender. In both cases, the CFPB alleged that the target company violated the Dodd-Frank Act by deceiving customers as to the nature or consequences of their transactions with those companies. The BFF and LendUp actions reflect the CFPB’s renewed focus on educational loans and subprime consumer loans, a trend expected to intensify under newly confirmed CFPB Director Rohit Chopra.

  1. Income Share Agreements
On September 7, the CFPB issued a consent order against Better Future Forward, Inc. (BFF), a provider of income-share agreements (ISAs). ISAs are an alternative to traditional student loans in which a provider advances funds for postsecondary education in exchange for future payments based on a percentage of the student’s post-graduation income. Unlike a loan, the ISA agreement does not contain an unconditional obligation to repay a fixed amount. Instead, the student’s obligation is satisfied when she either pays the maximum repayment amount (the "payment cap") or a certain period of time passes. If the student’s income falls below a specified threshold for a given month, no payment is required.
 
Many ISA providers rely on this lack of an absolute repayment obligation to distinguish their transactions from loans, which are subject to the federal Truth-in-Lending Act and other consumer financial protection statutes. However, the CFPB did not directly address the conditional nature of the repayment obligation in the September 7 order. Instead, the abbreviated analysis focused on the definition of “credit” in the Dodd-Frank Act, which is the right to “incur a debt and defer its payment.”1 The CFPB found that the ISAs in question met the definition of “credit” despite the lack 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 the Truth-in-Lending Act identified in the consent order:
  • Failing to make required cost-of-borrowing disclosures;
  • Failing to disclose that a bankruptcy filing may not relieve the borrower of her obligation to repay the loan; and
  • Illegally imposing a prepayment penalty on a private education loan (by adding a non-refundable 10% to the payment cap at origination).
The CFPB also noted that the “growth component” BFF added to the advance amount was indistinguishable from the finance charge on a traditional loan. However, the consent order does not rely on this point in classifying the ISAs as loans. 
 
The CFPB did not impose civil penalties on BFF, citing its cooperation. However, the ISA industry is now on notice that the CFPB considers these transactions to be loans for purposes of compliance with consumer financial protection statutes that the CFPB enforces. 
  1. Online Consumer Loans
On September 8, 2021, the CFPB filed suit against Flurish, Inc. (d/b/a LendUp) in the United States District Court for the Northern District of California. The complaint alleges that the company was engaged in continuing deceptive practices that violated the Dodd-Frank Act and a 2016 consent order based in part on the same conduct. The 2016 order required LendUp to pay approximately $1.83 million in redress and pay a $1.8 million penalty for falsely representing to borrowers that, by repaying on time and taking free financial education courses, they could ascend 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 order was in effect, higher-level borrowers often paid the same or higher interest rates relative to lower-level borrowers for identical loans. Additionally, higher-level borrowers often could not access the promised higher loan amounts, and some had their loan caps 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 adverse action notices.
 
Repeat borrowing, and a perceived lack of borrower awareness around its consequences, was a major focus of the CFPB during the Obama Administration. In the waning days of Obama-appointed director Richard Cordray, the CFPB issued a controversial rule requiring short-term, small-dollar lenders to underwrite to the applicant’s ability to repay the loan without re-borrowing. The underwriting provisions of the so-called payday lending rule were rescinded in a 2020 rulemaking under Trump appointee Kathy Kraninger.
 
The CFPB’s suit against LendUp, though based in part on the company’s violation of a 2016 consent order, shows the agency’s continuing sensitivity to issues associated with repeated use of small-dollar loans. Given its considerable investment in addressing “cycle of debt” issues, the CFPB may renew these efforts either through a new rulemaking or targeted enforcement of the Dodd-Frank prohibitions on unfair, deceptive and abusive acts or practices.
 
Additionally, given the CFPB’s recent focus on small business lending and related data collection, providers of loans to small businesses (particularly sole proprietors) should stay alert to CFPB enforcement activity in the consumer space. Although the Truth-in-Lending Act applies solely to consumer transactions, the ECOA imposes notice and non-discrimination requirements on small business loans in addition to consumer loans.

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1 12 U.S.C. § 5481(7).
2 Similar factors have been cited by courts and regulators in determining that two other loan-alternative products, earned wage access and merchant cash advance, are not loans under some circumstances. However, the BFF action is consistent with the CFPB’s position that third-party litigation funding arrangements are loans. See 201702_cfpb_RD-Legal-complaint.pdf (consumerfinance.gov).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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