Weekly Fintech Focus
- The CFPB shuts down an online lender for repeated failures related to deceptive marketing claims.
- Some major credit bureaus announce plans to incorporate BNPL installment plans in credit reports.
- FTC Chair Lina Khan provides comments on the CFPB’s inquiry into big tech platforms’ engagement in payments and financial services.
CFPB Shutters LendUp
On December 21, 2021, the Consumer Financial Protection Bureau (CFPB) issued a press release stating that the online lender, LendUp Loans (LendUp), headquartered in Oakland, California, has agreed to stop making new loans and collecting on certain outstanding loans. This resolves the lawsuit that the CFPB brought against the company in September 2021 alleging that LendUp was in violation of a 2016 CFPB consent order, which prohibited LendUp from making deceptive marketing claims.
Specifically, LendUp marketed that borrowers who repaid loans on time and took free courses offered through LendUp’s website would earn “points” that would allow them to climb to higher “LendUp Ladder” levels, where they could access lower interest rates and larger loan amounts. However, tens of thousands of LendUp borrowers who ascended to higher LendUp Ladder levels received the same or even higher rates compared to their previous loans.
In the CFPB’s proposed stipulated final judgment and order, the agency requested that the U.S. District Court for the Northern District of California enter a judgment prohibiting LendUp from (1) making new loans, (2) collecting on outstanding loans to harmed consumers, (3) selling consumer information, and (4) making misrepresentations when providing loans or collecting debt. LendUp would also be required to pay a $100,000 civil money penalty. The CFPB is also working to provide redress to eligible consumers harmed by LendUp.
Credit Bureaus Announce Plans to Include BNPL Loans on Credit Reports
Equifax, one of the three main U.S. credit bureaus, announced in mid-December it will begin recording buy now, pay later (BNPL) payment installment plans on credit reports in early 2022. In early January, reports indicated that two other main U.S. credit bureaus, Experian and TransUnion, will bring BNPL loans into their credit reports in 2022 as well.
BNPL products, also known as point-of-sale financing, have exploded in popularity in the past two years. An estimated 45 million people in the United States used BNPL services in 2021, an increase of over 80% from 2020.
BNPL products can be attractive to consumers because they allow flexibility to pay over time without accruing interest. Consumers usually pay no interest on purchases and are charged only late payment fees. As long as payments are made on time, this makes the BNPL credit “free” to consumers, with BNPL providers paid directly by merchants. BNPL products also appeal to consumers looking for alternatives to traditional forms of credit, such as credit cards.
Although BNPL products have proven appealing to consumers, they are also attracting increased scrutiny over the potential to cause consumer harm. In December 2021, members of Congress wrote a letter to CFPB Director Rohit Chopra calling for more oversight of BNPL providers.
The letter highlighted that unlike other credit products (and with limited exceptions), on-time payments for BNPL are not usually reported to the credit bureaus but delinquencies or defaults may be, which could make it difficult for consumers to use BNPL to build positive credit history.
Currently, some BNPL companies do report some loan information to certain credit bureaus. Affirm, for example, reports some loans to Experian. Equifax’s changes are expected to make it the first credit reporting agency to formalize a standard process for reporting BNPL tradelines for inclusion on traditional consumer credit reports, with the other bureaus expected to follow.
As the letter to the CFPB recognized, the reporting of BNPL loans to credit bureaus presents certain challenges. Although standardized reporting of on-time payments for BNPL loans can help consumers build a credit history, standardized reporting of late or missed payments could have the opposite effect. Further, because BNPL loans are typically short-term and repaid within a few weeks, the reporting of positive payments might actually reduce a consumer’s credit score by lowering the average age of the consumer’s credit accounts.
FTC Khan Weighs in on CFPB Big Tech Payments Probe
Recently, we discussed the CFPB’s probe into big tech companies’ payment services in which the CFPB sent information requests to six large U.S.-based technology companies and indicated that it would also study the practices of some large Chinese technology companies. Now, the chair of the Federal Trade Commission (FTC), Lina Khan, has weighed in on the probe with a comment letter as part of the CFPB’s inquiry. She encourages the CFPB’s inquiry into big tech companies’ moves into payments and financial services markets and says that these activities “demand close scrutiny.” In particular, she identifies three areas of concern for the CFPB’s inquiry: (1) big tech’s participation in payments and financial services could enable entrenchment and extension of their market positions and privileged access to data and AI techniques that could result in anticompetitive behavior and exploitation; (2) algorithmic decision-making in financial services could increase the risk of discrimination, bias, and opacity in decision-making; and (3) big tech’s commingling of payment and authentication services could create concentration risk by creating single points of failure. The FTC will be looking to the CFPB’s inquiry to inform its own work.
- Data Market Position—Khan states that big tech companies can utilize payments data and combine it with their already large data troves to develop “hyper-granular data across markets.” This data could give them a competitive advantage over companies that rely on big tech platforms to host their services as well as position these big tech companies over traditional credit bureaus. Big tech companies may also use such data to target advertising to consumers and small businesses that rely on big tech platforms for other services; the FTC refers to these activities as “consumer capture.” The FTC also sees big tech payment processing offerings as an on-ramp for these companies to enter other financial services areas such as lending and alternative scoring for creditworthiness, which the FTC believes could increase concerns about bias, fairness, and opacity. Finally, the FTC is concerned about big tech companies functioning as both lender and employer, which could lead to big tech companies using their asymmetric data knowledge in ways that could disadvantage borrowers, particularly those who are also employees.
- Algorithmic Decision-Making—The FTC is concerned that big tech reliance on AI and algorithmic decision-making could produce and replicate inequality and discrimination in new contexts when coupled with payment services. Moreover, the FTC is concerned that these algorithmic tools will live in “black boxes” that obscure issues within the algorithms, resulting in unlawful bias.
- Concentration Risk—The FTC sees big tech’s commingled roles in payment and authentication as a potential concentration risk. In particular, the FTC is concerned that failures of big tech single sign-on services (SSO) could lock small businesses out of their accounts for payment processing and other financial services. This could occur if a social networking platform disables a business’s account for nonfinancial reasons, resulting in the business losing access to core financial services on another platform that uses the SSO.