On May 17, 2024, the Consumer Financial Protection Bureau (“CFPB”) filed suit against an online lending platform, alleging, among other things, the use of dark patterns to induce consumers to pay tips and donations, disclosure violations, and usury violations on loans offered through its lending platform. The complaint, filed in the U.S. District Court for the Central District of California, accuses the company of misrepresenting the cost of loans, tricking consumers into believing that a donation is required to obtain a loan, making false threats, collecting money that consumers do not actually owe, and failing to ensure that data the company uses for credit decisions is accurate. The CFPB seeks injunctive relief, consumer redress, disgorgement, and a civil money penalty.

According to the complaint, the company targeted by the action markets its online lending platform to borrowers as a consumer-friendly alternative to high-cost, short-term loans. Advertisements and disclosures state that the loans are “no interest,” “0% APR,” or “0% interest.” Consumers may serve as individual peer lenders and profit from tips received on loans that they fund. In addition to tipping the peer-lender, borrowers have the option of paying a donation to the company for facilitating the loan. The company’s website states that all tips and donations are optional and voluntary, but the CFPB alleges that such fees are not optional because virtually all consumers who receive loans pay a tip, a donation, or both. The tip-based model has become increasingly popular in small dollar lending, earned wage access, and other fintech lending as an alternative to more traditional interest and fee-based models.

More specifically, the CFPB alleges:

  • Deceptive Practices and Dark Patterns Related to Tips and Donations: According to the complaint, borrowers are prompted during the application process to select a tip amount and encouraged to pay the “maximum possible tip” to increase the likelihood that the loan is funded. Additionally, the CFPB asserts that borrowers are prompted to select one of three default donation amounts based on a percentage of the loan principal, and that it does not provide a “No Donation” or “0%” option or a way to click through to the next page without selecting a donation amount. While there is a way to receive a loan without a tip or donation, the CFPB maintains that the option is obscured — it is not disclosed and involves toggling off the “Donation” setting at the end of a list of other options on a separate “Settings” screen outside of the application flow.
  • Misleading Advertisements and Disclosures: The CFPB alleges that marketing “no interest” loans fails to account for the tip and donation and is deceptive. While the complaint does not include a cause of action for a violation of the Truth in Lending Act, the CFPB alleges the failure to include the tip and donation amounts in the finance charge, APR, and total of payments is a deceptive practice under the Consumer Financial Protection Act.
  • Violations of Licensing and Usury Laws: The CFPB contends that the company serviced and collected (or attempted to collect) loans that were void and uncollectible under the laws of a number of states, because either the company was not licensed to make such loans or the loans exceeded the state usury cap. According to the Bureau, the company did not have–a license to lend, broker, arrange, or provide credit services in sixteen states. It further alleges that almost all of the company’s loans – which range in size between $20 and $575 – carry an annual percentage rate of over 36% (the interest rate cap for certain consumer loans in several states as well as under the Military Lending Act), with many in excess of 300%, above many state usury limits.
  • Failure to Maintain Reasonable Procedures to Ensure the Accuracy of Credit Information: The CFPB alleges that the company is a credit reporting agency under the Fair Credit Reporting Act. The complaint states that the company gathered credit information about applicants – including information about their cell phones, deposit accounts, debit cards, and prior loans made by the company – to create a proprietary score that was provided to third-party prospective lenders reviewing a loan request. The Bureau alleges that the company failed to maintain reasonable procedures, as required under Section 607(b) of FCRA, 15 U.S.C. § 1681e(b), to ensure the accuracy of the information it shared with lenders. This included a failure to verify whether the score reflected all loans that had been repaid on the company’s platform, whether fraud or lender account problems resulted in a borrower appearing to be overdue on a loan they had actually repaid, and whether the number of repaid loans included in the score was accurate.
  • Misrepresentations Regarding Collections: The CFPB alleges that the company attempted to coerce payment on loans obtained through the platform by misrepresenting that if a consumer failed to repay the loan it would be reported to credit reporting agencies (“CRAs”) and impact the consumer’s credit score, when in fact the company did not report any of its loans to the CRAs.

The CFPB notes in its press release that the company has entered into settlements related to these practices in California, Washington, D.C. and Connecticut. We previously discussed those three settlements, in which the fintech did not admit to any violations of law or wrongdoing, here.