Despite the winds of deregulation blowing in Washington, DC, on April 25th the Federal Trade Commission  (FTC) filed suit against the nation’s largest online lender (Lending Club) for allegedly engaging in deceptive practices.

Specifically the FTC cited four areas of concern:  First, the FTC claimed that the online lender prominently stated that it charged “No Hidden Fees” but the origination fee was not disclosed unless the prospective borrower clicked on a small question mark that further explained the annual percentage rate applicable to the loan.  Second, the FTC alleges that borrowers who were told that they were approved for a loan, were subsequently denied the loan which was misleading and unfair.  Third, the FTC claims that unauthorized amounts were withdrawn from deposit accounts such as when loans had been already paid off.  Fourth, the FTC states that the required privacy policy was not delivered in the required manner, it being only a hyperlink on the website terms of use.  The suit, filed in federal court in California seeks customer redress and injunctive relief.  The online lender has denied the allegations and has indicated that some operational issues were corrected upon detection and that in other instances processes have changed.

The online lender issued a press release contesting the allegations made by the FTC as “legally and factually unwarranted.”  See here.  It further explains in a detailed blog post its side of the story and its approach to consumer disclosure at issue in the FTC’s complaint.

This action is a significant development for online lenders at a time when the other federal agency with primary responsibility for consumer financial protection, the CFPB, has seen a change in leadership and significantly curtailed its enforcement activities pending reviews of its policies and procedures.  It is notable that the FTC took action with only two commissioners available to vote on moving forward and it will be interesting to see whether this an isolated case involving a legacy investigation or whether it portends a more activist enforcement mode for the FTC under Trump administration-appointed leadership.  In the meantime, all online lenders would be wise to  evaluate the statements and disclosures made in their advertisements and on their websites to ensure that they are in compliance with applicable laws, especially laws prohibiting unfair and deceptive acts and practices such as the Federal Trade Commission Act and similar state laws.

News Flash: Colorado versus Fintech Update — Magistrate remands Avant

The Grinch came a few days early in Colorado.  A U.S. magistrate judge made a recommendation to the District Court to remand back to state court the pending action filed by the state of Colorado against a marketplace lender based on true lender issues.  The crux of the decision is that, since no bank was a party to the action, there is no basis to exercise federal subject matter jurisdiction.  Objections may be filed with respect to the recommendation and the U.S. District Court is not bound to follow the recommendation or could choose to modify it.  Banks making marketplace loans have filed actions in federal court in Colorado that remain pending.

OLPI believes how the judge framed this issue may be misguided and will fuel inflated concerns about marketplace lending business models.  While the crux of the decision is that an FDIC insured bank was not named in the action, the magistrate judge makes broad factual and legal observations related to a true lender analysis that does not have any real legal precedential value but will no-doubt precipitate a flood of articles from law firms and otherwise rile investor sentiment.  OLPI has already observed that investors in marketplace loans have already grown wary of Colorado loans –as such, the “broad observations” and other actions in the state of Colorado appear to be limiting credit to Colorado citizens from marketplace lenders.  This fact may play into and strengthen the WebBank and Cross River Bank actions that are currently pending in federal courts and discussed here.

The Federal Reserve Bank of Cleveland’s recent study on P2P lending raises several serious issues concerning the use of proceeds for online loans and the result of marketplace lending. Specifically, the study highlights concerns related to use of proceeds for online loans, results of lending in terms of credit scores, and overall financial impact on borrowers.

The Online Lending Policy Institute (OLPI) looks forward to discussing this study with its authors, as well as reviewing the P2P lending study with the authors of a separate study by the Federal Reserve Bank of Philadelphia, which reached markedly different conclusions.

OLPI notes, however, that the Cleveland Fed’s study makes an unfortunate comparison between online lending and the subprime loans leading up to the Financial Crisis. There is no apt comparison between online lending and subprime lending preceding global financial crisis, and rhetorical flourishes such as this undermine serious research related to online lending that is both merited and necessary.

Similarly, the study’s concluding observation that “… there are no regulators that oversee the online lending marketplace and its players” is false and misleading. Online lending is subject to a wide array of federal and state consumer protection laws and regulations as detailed here.

Data Breach. Yesterday, Equifax revealed that it incurred a massive data breach – impacting at least 143 million consumers. Equifax is reaching out to all of its clients – including many online lenders – to let them know what it is doing to mitigate the effects of this massive breach. Equifax’s official statement is that they are ensuring a breach like this never happens again, none of their core credit databases were penetrated, and they plan to offer every U.S. consumer free credit monitoring for a specified period of time.

What’s Next? There are already news reports that Equifax may not be handling the influx of concerned consumers well – requiring consumers to enter their last name and last six digits of their Social Security number (which has irked more than a few consumers). Interestingly, this request for “last six digits” seems to indicate that the typical requirement for last four is not enough to verify consumers’ identities after this breach.

Equifax, however, is doing the right thing by actively reaching out to their clients and consumers.  They have assured their clients that the breach related only to their consumer facing site and not to their core credit database, so consumers’ credit reports (detailing tradelines, etc.) were not exposed.

Lender Implications. Today, online lenders will review their third-party risk management protocols to better understand the nature of the breach and to develop a response to their impacted clients. Tomorrow, online lenders will have to get some comfort that Equifax has sufficiently handled this problem and, as they are handling this problem, online lenders need to ensure that Equifax is still able to handle other aspects of its relationship with these clients. Namely, Equifax has a large suite of fraud prevention products that the online lending industry relies on, among other related services.

Also of note, the long term effects of this breach may impact the integrity of the data that online lenders use for a variety of reasons (target marketing and prescreened offers, underwriting and pricing for instance).  If that impact is negative, it could hurt the operations of the online lenders and could also result in more fraud due to the speed of the process – online lenders will need to show how their security accounts for these highlighted risks.

OLPI will continue to monitor this story as it develops.  OLPI will also ensure that this issue – cyber security risks—is fully briefed at its 2nd Annual OLPI Policy Summit this month on September 25 in Washington, DC. For more information, please visit

The 2015 decision by the Second Circuit Court of Appeals in Madden v. Midland Funding, LLC precipitated uncertainty among financial services providers and the secondary market.  Many legal experts believed the decision cast doubt on and generally ignored the longstanding legal principle of “valid-when-made.”  That is, a loan or contract that was non-usurious when it was made remain non-usurious when it is subsequently transferred to another person.  In Madden, however, the decision found that the sale and assignment of a loan to a non-bank by a national bank did not necessarily transfer to the loan purchaser the right to charge interest at the rate allowed by the national bank and specified in the loan contract.  Critics of the decision (including President Obama’s US Solicitor General) claim the court’s conclusion is wrong and violates contractual principles of assignment as well as the long standing legal precedent that loans are “valid-when-made.” Read More

After a grueling three-day markup of the bill, the House Financial Service Committee favorably reported the Financial CHOICE Act to the House Floor by a strict party line vote of 34-26. Democrats pulled out all of their dilatory practices including offering 19 amendments to this bill (all failed to be adopted) and having the committee read approximately 350 of 600 pages of this bill aloud. Click here to see the 593-page text of the Financial CHOICE Act 2.0.

Read More

Comptroller Curry will leave his post as Comptroller of the Currency on May 5.  President Trump appointed Keith Noreika to serve as acting comptroller.  Mr. Noreika is a banking law expert and a partner at the law firm of Simpson Thacher & Bartlett LLP.  He will keep the OCC running until President Trump names a permanent replacement (and that proposed permanent replacement is confirmed by the Senate). Read More

The State of Colorado is challenging the marketplace lending model.  On February 15, 2017,  the Administrator of the Uniform Consumer Credit Code for the State of Colorado (“Colorado”) sued Avant and Best Egg (in separate actions), claiming in both actions that they violated Colorado’s usury rate and entered into loan agreements containing a governing law provision other than Colorado.  Click here to see the Complaint against Avant and hereto the see the Complaint against Best Egg.  Colorado sued Avant and Best Egg, but did not sue their partner banks, WebBank and Cross River, respectively.  The Complaints allege that Avant and Best Egg are the true lenders. Read More

States have taken their dislike over the OCC’s planned fintech charter a step further and sued the OCC in the US District Court for the District of Columbia.  The Conference of State Bank Supervisors sued the OCC and Comptroller Curry arguing, among other things, that the “business of banking” requires an institution to take deposits.  Strangely, this ignores existing national bank models: credit card banks, trust banks, and cash management banks.  All of this being said, CSBS also argues that the OCC violated the Administrative Procedure Act by publishing only a high-level white paper and supplement to the Comptroller’s Licensing Manual (which they did seek feedback on) — thereby avoiding publishing new rules that welcome the public vetting process.  This argument will likely have more teeth.

Read the Complaint here: 2017-04-26 – Complaint – CSBS v. OCC