Weekly Fintech focus
- The FTC explains that merchants using BNPL services are also subject to consumer protection obligations.
- CFPB is ending its no-action letter and compliance sandbox policies.
- The CFPB is suing an online lender for violations of the Military Loans Act related to the lender’s membership fees.
FTC Explains Risks to BNPL Merchants and Providers in New Guidelines
The Federal Trade Commission (FTC) has published a blog post on setting up and marketing the Buy Now, Pay Later (BNPL) payment plans. The message reminds companies that deploy BNPL payment plans that these plans are subject to the consumer protection rules of the FTC Act. The FTC post closely follows the CFPB’s BNPL report.
The post recommends companies conduct a BNPL compliance check that includes a review to ensure compliance with the following three principles:
- Claims about the BNPL service must be true for the typical consumer, which means representations about costs and charges must 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. With respect to BNPL services, the FTC warns companies to see the transaction through the eyes of consumers and to avoid shady patterns that reduce consumers’ understanding of the material terms of their transactions.
- The Merchant and the BNPL Provider cannot disclaim responsibility for a transaction on the assumption that the other party is responsible. Both the retailer and the BNPL provider have a relationship with the customer, and each must comply with applicable law regarding their role in the transaction. In addition, if the consumer is deceived or treated unfairly, the retailer and the BNPL company could be held responsible for this behavior.
CFPB Ends No Action Letter and Compliance Sandbox Policies
On September 26, 2022, the Consumer Financial Protection Bureau (CFPB) announced that it was ending the “No Action Letter Policy (No Action Policy)” and the “Sandbox Policy Compliance Assistance (Compliance Sandbox)” (collectively, the Policies) as of September 30, 2022. Similarly, the Compliance Sandbox offered covered institutions (1) immunity from liability under safe harbor provisions and (2) approval that certain aspects of the products or services at issue were compliant with relevant federal consumer finance law.As the policies expire at the end of the month, the CFPB will no longer be accepting new applications but will continue to review existing applications s and inform applicants if it intends to take further action.
In announcing this decision, the CFPB noted that these policies did not advance the goal of facilitating consumer-beneficial innovation and that the policies did not achieve appropriate levels of transparency and stakeholder participation. The CFPB also noted that it will develop new approaches to facilitate innovation while continuing to accept applications under the agency’s more focused innovation policy, designed to review new disclosures. Notably, this new policy has not yet received approval; the no-action policy has received six approvals and the compliance sandbox three approvals since 2019. The CFPB said the end of the policies does not extinguish previously approved and currently active no-action letters and approvals.
CFPB sues online lender for MLA violation
On Thursday, September 29, 2022, the CFPB sued New York-based online lender MoneyLion Technologies (MoneyLion) and 38 of its affiliates. The complaint alleges that MoneyLion violated various protections enshrined in the Military Loans Act (MLA) and also violated the CFPB Consumer Financial Protection Act.
The MLA limits the interest rate a lender can charge on consumer loans to a maximum of 36%. See 10 USC 987(b). Under the MLA, the following costs and charges are included in the calculation of the 36% cap rate: (1) finance charges; (2) credit insurance premiums; (3) complementary credit-related products sold under the credit; (4) additional costs such as application fees, participation fees or debt cancellation fees. See 10 USC 987(i)(3), (4).
MoneyLion and its affiliates required consumers to pay a monthly fee of $19.99 to access its “Credit Builder Loan” product, a 12-month installment loan of $500 to $1,000 with annual rates in percentage (APR) between 5.99% and 29.99%. MoneyLion renewed these consumer memberships automatically for the term of the loan. MoneyLion continued to charge these membership fees even after a consumer had paid the bond, telling consumers that they could not cancel the membership until the previous membership fees had been paid. For other loan products, MoneyLion restricted access to loan program rewards and benefits, such as monthly credit reports and access to investment accounts, while membership fees remained outstanding. The CFPB found that all loan products that included a fee were over 36% lent.
In addition, MoneyLion required consumers to submit to an arbitration clause in the event of a dispute, a direct violation of the AMLA. See 10 USC 987(e)(3). In addition, MoneyLion has failed to provide Covered Borrowers with the loan information required by the MLA, which includes a statement containing the APR applicable to the consumer loan product offered to the Service Member.
For the aforementioned violations discussed in the context of the MLA, the CFPB also finds that MoneyLion violated the Consumer Financial Protection Act. Specifically, MoneyLion advised consumers who sign up for membership loan products that they can cancel their membership for any reason without limitation. However, MoneyLion prohibited consumers from canceling their membership even after repayment of a loan if the consumer had an unpaid membership fee. The CFPB believes that these representations and omissions likely misled consumers about their ability to cancel their loan program membership. The CFPB orders MoneyLion and its affiliates to pay damages, restitution and other monetary relief to consumers harmed by their deceptive and abusive acts or practices. The CFPB is also asking for pecuniary civil penalties.