Fintech Legal Report – October 2022 | Perkins Coie


Weekly Fintech Focus

  • FTC explains that merchants using BNPL services are also subject to consumer protection obligations.
  • CFPB ends its no-action letter and compliance sandbox policies.
  • CFPB sues an online lender for Military Lending Act violations related to the lender’s membership fees.

FTC Explains Risks to Both Merchants and BNPL Providers in New Guidance

The Federal Trade Commission (FTC) published a blog post about 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 closely on the heels of the CFPB’s BNPL report.

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

  • Claims about the BNPL service must be true for the typical consumer, meaning that the representations about cost and fees should not be applicable 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. As it pertains to BNPL services, the FTC warns companies to view the transaction through the consumers’ eyes and avoid dark patterns that reduce the consumers’ understanding of the material terms of their transactions.
  • The retailer and the BNPL provider cannot disclaim liability for a transaction by assuming that the other party is liable. Both the retailer and BNPL provider have a relationship with the customer, and each must comply with applicable law as it pertains to their role in the transaction. Further, if the consumer is deceived or treated unfairly, both the retailer and BNPL company could be liable for that behavior.

CFPB Ends No-Action Letter and Compliance Sandbox Policies

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, Policies) as of September 30, 2022. The No-Action Policy provided covered institutions an opportunity to obtain no-action relief from supervisory findings or enforcement actions against certain matters. Similarly, the Compliance Sandbox offered covered institutions (1) immunity from liability under the safe harbor provisions and (2) an approval that certain aspects of products or services at issue complied with the relevant federal consumer financial law. With the Policies terminating at the end of the month, the CFPB will no longer accept new applications but will continue to consider existing applications and notify applicants if it intends to take additional steps.

In announcing this decision, the CFPB noted that these Policies did not advance the objective of facilitating consumer-beneficial innovation and that the Policies failed to meet appropriate levels of transparency and stakeholder participation. The CFPB also noted that it will be developing 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 has not 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 ending of the Policies does not extinguish previously approved and currently active no-action letters and approvals.

CFPB Sues an Online Lender for MLA Violations

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 enshrined in the Military Lending Act (MLA) and also violated the CFPB’s Consumer Financial Protection Act.

The MLA limits the interest rate that a lender may 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% rate cap: (1) finance charges; (2) credit insurance premiums; (3) add-on credit-related products sold in connection with the credit; (4) additional fees such as application fees, participation fees, or debt-cancellation fees. See 10 U.S.C. 987(i)(3), (4).     

MoneyLion and its subsidiaries required consumers to pay a monthly membership fee of $19.99 for access to its “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 renewed these consumer memberships automatically during the lifetime of the loan. MoneyLion continued to charge these membership fees even after a consumer had paid off the obligation, instructing consumers that they could not cancel the membership until past membership fees had been 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 delinquent. The CFPB found that all loan products that included a membership fee were lent in excess of 36%.

Additionally, MoneyLion required consumers to submit to an arbitration clause in the case of a dispute, a direct violation of the MLA. See 10 USC 987(e)(3). Further, MoneyLion did not provide covered borrowers with loan disclosures required by the MLA, which includes a statement containing the APR 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 has violated the Consumer Financial Protection Act. Specifically, MoneyLion represented to consumers enrolling in membership loan products that they could cancel their memberships for any reason without limitation. However, MoneyLion prohibited consumers from cancelling their memberships even after a loan was paid off if the consumer had unpaid membership fees. The CFPB finds that these representations and omissions likely misled consumers about their ability to cancel their loan program memberships. The CFPB is ordering MoneyLion and its subsidiaries to pay damages, restitution, and other monetary relief to consumers injured by their deceptive and abusive acts or practices. The CFPB is also seeking civil money penalties.

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