Fintech Legal Report – October 2022 | Perkins Coie

by James · October 12, 2022

Weekly Fintech focus

The FTC explains that merchants using BNPL services are also subject to consumer protection obligations.
The CFPB is ending its no-action letter and compliance sandbox guidelines.
The CFPB is suing an online lender for violations of the Military Lending Act related to the lender’s membership fees.

FTC explains risks for both merchants and BNPL suppliers in new guidance

The Federal Trade Commission (FTC) published a blog post on the establishment and marketing of Buy Now, Pay Later (BNPL) payment plans. The post serves as a reminder to companies rolling out BNPL payment plans that those plans are subject to the consumer protection rules of the FTC Act. The FTC’s post follows close on the heels of the CFPB’s BNPL report.

The post recommends that companies carry out a BNPL compliance check which includes a review to ensure compliance with the following three principles:

Claims about the BNPL service must be true to the typical consumer, which means that the representations about costs and charges should not apply only to a subset of the company’s consumers.
Consumers should understand the processes for onboarding and using the BNPL service. The FTC has recently focused on dark patterns and companies’ use of data to increase conversion. Regarding BNPL services, the FTC cautions companies to view the transaction through consumers’ eyes and avoid dark patterns that reduce consumers’ understanding of the material terms of their transactions.
The retailer and BNPL supplier cannot disclaim responsibility for a transaction by assuming that the other party is responsible. Both the retailer and the BNPL supplier have a relationship with the customer and each must comply with applicable law regarding their role in the transaction. Further, if the consumer is cheated or treated unfairly, both the retailer and the BNPL company may be liable for this conduct.

CFPB ends no-action letter and compliance sandbox guidelines

On September 26, 2022, the Consumer Financial Protection Bureau (CFPB) announced that it is ending the agency’s three-year-old “Policy on No-action Letters (No-action Policy)” and “Policy on the Compliance Assistance Sandbox (Compliance) Sandbox)” (collectively, guidelines) effective September 30, 2022. The no-action guidelines gave covered institutions an opportunity to obtain relief from supervisory findings or enforcement action against certain conditions. Similarly, the Compliance Sandbox offered covered institutions (1) immunity from liability under the safe harbor provisions and (2) an acknowledgment that certain aspects of the products or services in question complied with the relevant federal consumer law. With the guidelines ending at the end of the month, the CFPB will no longer accept new applications, but will continue to review existing applications and notify applicants if it intends to take further action.

In announcing this decision, the CFPB noted that these guidelines did not advance the goal of facilitating consumer-friendly innovation and that the guidelines failed to meet appropriate levels of transparency and stakeholder participation. The CFPB also noted that it will develop new approaches to facilitate innovation while continuing to take applications under the agency’s more narrowly focused innovation policy designed to review new disclosures. Notably, this newer policy hasn’t seen any approvals yet; The no-action policy had six approvals and the Compliance Sandbox had three approvals since 2019. The CFPB stated that the termination of the policies does not remove previously approved and currently active no-action letters and approvals.

The CFPB is suing an online lender for violating the MLA

On Thursday, September 29, 2022, the CFPB sued New York-based online lender MoneyLion Technologies (MoneyLion) and 38 of its subsidiaries. The complaint alleges that MoneyLion violated various protections set forth in the Military Lending Act (MLA) and also violated the CFPB’s Consumer Financial Protection Act.

The MLA limits the interest that a lender can charge on consumer loans to no more than 36%. See 10 USC 987(b). Under the MLA, the following costs and fees are included in the calculation of the 36% interest rate cap: (1) financing costs; (2) credit insurance premiums; (3) additional credit-related products sold in connection with the credit; (4) additional fees such as application fees, participation fees or debt cancellation fees. See 10 USC 987(i)(3), (4).

MoneyLion and its subsidiaries required consumers to pay a monthly membership fee of $19.99 to access their “Credit Builder Loan” product, a 12-month installment loan of $500 to $1,000 with annual percentage rates (APRs) between 5.99% and 29 .99%. MoneyLion automatically renewed these consumer memberships over the life of the loan. MoneyLion continued to charge these membership fees even after a consumer had paid off the obligation, and instructed consumers that they could not cancel their membership until previous membership fees were paid. For other loan products, MoneyLion restricted access to loan program rewards and benefits such as monthly credit reporting and access to investment accounts, while membership fees remained due. The CFPB found that all loan products that included a membership fee were lent out above 36%.

In addition, MoneyLion required consumers to submit to an arbitration clause in the event of a dispute, a direct violation of the MLA. See 10 USC 987(e)(3). Furthermore, MoneyLion did not provide covered borrowers with loan disclosures required by the MLA, which include a statement containing the annual interest rate applicable to the consumer loan product offered to the service member.

For the foregoing violations discussed in the context of the MLA, the CFPB also finds that MoneyLion violated the Consumer Financial Protection Act. Specifically, MoneyLion represented to consumers who signed up for membership loan products that they could cancel their memberships for any reason without restriction. However, MoneyLion prohibited consumers from canceling their membership even after a loan was paid off if the consumer had unpaid membership dues. The CFPB finds that these representations and omissions likely misled consumers about their ability to cancel their memberships in the loan program. The CFPB is ordering MoneyLion and its subsidiaries to pay damages, restitution and other financial relief to consumers harmed by their deceptive and abusive acts or practices. The CFPB is also seeking civil monetary penalties.

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