Did a marketplace lender assess its customers “hidden fees”? A Federal Trade Commission suit in federal court accuses Lending Club of making false promises to consumers, then charging hundreds or even thousands of dollars in fees.

LendingClub allegedly recognized that its hidden fee was a “significant problem,” according to the agency’s complaint, with an internal review concluding that its claim could be deceptive and result in an enforcement action.

What happened

California-based LendingClub offers unsecured consumer loans through its website, handling a loan from application processing to assessment of creditworthiness to loan servicing. But according to the FTC, the company violated Section 5 of the Federal Trade Commission Act as well as the Privacy of Consumer Financial Information Rule, issued pursuant to the Gramm-Leach-Bliley (GLB) Act.

With regard to deception in violation of Section 5, the FTC accused LendingClub of luring prospective borrowers with the promise of “no hidden fees,” but “when the loan funds arrive in consumers’ bank accounts, they are hundreds or even thousands of dollars short of expectations due to a hidden upfront fee that Defendant deducts from consumers’ loan proceeds,” according to the FTC’s complaint.

Many of LendingClub’s mailers state, “FEES: There are no hidden fees or prepayment penalties,” while online ads tout “no hidden fees.” When consumers visit LendingClub’s website, they begin the loan process by answering the question, “How much do you need?” For consumers who meet the first round of credit checks, the website reiterates “No hidden fees” under an icon of a smiling masked bandit, the FTC stated.

The FTC noted that the site did feature a small green dot (known as a tooltip) with a white question mark inside, which appeared next to the term “APR.” If a consumer clicked on the tooltip, a pop-up bubble appeared with a disclosure that read: “APR stands for Annual Percentage Rate and is a measure of the total cost of credit as an annual rate. The APR is comprised of the annual interest you pay at a rate of 6.99%—which is ultimately paid each month to the investors who enable your loan—and a one-time origination fee of 3.5% ($350.00) that is collected out of your loan proceeds.”

If a consumer did not click on the tooltip, however, no other disclosure appeared from which a consumer could learn of the existence of the upfront fee, the FTC said, and consumers are not required to click on the tooltip to move forward with their application.

“Although Defendant tells consumers that its loans contain ‘No hidden fees,’ Defendant nevertheless charges consumers an upfront fee that is not clearly and conspicuously disclosed,” the FTC alleged. Calculated as a percentage (on average, 5 percent of the requested loan amount, the agency said), the fee is deducted before a borrower receives the loan funds.

Consumers “frequently” complained to LendingClub that they were not aware of the upfront fee, the agency asserted, with one consumer reporting that he applied for $15,000 to cover relocation expenses and then received only $14,000—“an amount insufficient to cover his relocation.”

LendingClub was aware that many consumers didn’t know about the upfront fee, the FTC added, as training materials for customer service representatives list “I didn’t receive the full loan amount” as one of the two main post-disbursement complaints that reps should be prepared to address. Further, internal compliance reviews “repeatedly” cited the fees as “a significant problem” for consumers, and one of the defendant’s largest investors warned the company that the upfront fee “is not clear and conspicuous and could be subject to a UDAAP claim” (unfair, deceptive, or abusive acts or practices claim), the FTC said.

“Defendant has ignored these warnings,” the FTC alleged. “Rather than improving over time, Defendant’s violations have become more egregious over the years: when redesigning the application flow in the winter of 2014, Defendant increased the prominence of the ‘No hidden fees’ representation and decreased the prominence of the tooltip.”

On a mobile device, the fee disclosure was sandwiched between lines of “below the fold” text, the agency said, embedded in the middle of a text-heavy page.

The FTC claimed LendingClub made additional misleading statements, informing those who completed an application that their “loan is on the way” despite the fact that two additional processes were necessary before final approval, and stating “Your Loan is 100% Backed” even though approval was not final.

On top of the deception allegations, the complaint added counts under the unfairness prong of Section 5, alleging the defendant made unauthorized bank account withdrawals by charging consumers double payments without authorization or making withdrawals even after a consumer paid off her loan.

As for the alleged Privacy Rule violation, the agency said LendingClub failed to deliver the required initial privacy notice to consumers.

The complaint seeks injunctive relief as well as monetary damages in the form of restitution, the refund of monies paid and disgorgement.

To read the complaint in FTC v. LendingClub Corp., click here.

Why it matters

The complaint reminds lenders of the continued importance of accuracy and completeness in advertising and other marketing in order to avoid UDAAP claims, including under Section 5 of the FTC Act.

In addition, with the Consumer Financial Protection Bureau backing off its aggressive enforcement activity, the FTC’s California federal court complaint demonstrates that other regulators may be willing to step up to the plate and take action against allegedly deceptive conduct in the financial services industry, particularly with regard to fintech companies. However, the FTC has undergone a recent seismic change, with an almost completely new set of commissioners tapped by President Donald Trump. With a Republican majority and a new perspective at the FTC, it remains to be seen whether the commission will be more active in the financial services industry or the case reflects a legacy action.