California's Department of Business Oversight (DBO) reached a $2.68 million settlement with LendUp recently, a deal based on the regulator's allegations that the firm charged illegal fees and committed other "widespread" violations of state law.

What happened

California's financial regulator conducted an exam of San Francisco-based Flurish (doing business as LendUp) pursuant to the California Deferred Deposit Transaction Law (CDDTL) from July 2013 to May 2014 and under the California Finance Lenders Law (CFLL) from November 2013 to August 2014.

What did the Department of Business Oversight (DBO) find? A total of 385,050 individual violations and "a persistent failure" by LendUp to comply with California state laws.

Specifically, the company charged borrowers what it characterized as "expedited fees" to receive loan proceeds the same day they were approved and did not disclose these fees—which are illegal under both the CDDTL and CFLL—as finance charges to borrowers. As a result, LendUp understated annual percentage rates in violation of the CFLL as well as the federal Truth in Lending Act (TILA).

When borrowers sought to extend their payment period from 15 days to 30 days, LendUp tacked on a fee, the DBO said, in violation of the CDDTL. Further running afoul of both state statutes, the company required borrowers to take out both a payday loan and an installment loan, despite the fact that the laws "prohibit conditioning the provision of a loan on the customer buying other goods and services," the DBO noted.

Borrowers also faced overcharges because LendUp wrongly calculated interest rates in contravention of the CFLL, the regulator said.

To settle the charges, the company took corrective actions by identifying the customers impacted by the violations and refunding the fees the DBO highlighted as impermissible as well as the fees paid by customers whose interest rates were miscalculated.

LendUp also agreed to pay a total of $2.68 million. Of that amount, $1.62 million is slated for customer refunds. LendUp already paid $1.08 million in refunds but has been unable to issue refunds to customers with closed or inactive accounts. Pursuant to the deal, the company will e-mail a notice to borrowers about the settlement in order to provide the remaining $537,000.

The rest of the money will be paid to the DBO, including a $100,000 penalty and $965,462 to cover costs. "The illegal fees affected thousands of California borrowers and showed a persistent failure by LendUp to comply with California consumer protection laws," DBO Commissioner Jan Lynn Owen said in a statement. "This settlement will help ensure harmed borrowers are made whole and LendUp is held accountable."

The DBO's investigation was conducted in coordination with the Consumer Financial Protection Bureau (CFPB), which announced a separate settlement with the company for $1.83 million in refunds and a civil penalty of $1.8 million. The CFPB based its action on violations of the Dodd-Frank Wall Street Reform and Consumer Protection Act's prohibition on unfair or deceptive acts or practices, alleging that LendUp promised to help consumers build their credit by providing access to cheaper loans.

But the company failed to follow through, the Bureau said, misleading consumers about the availability to move up the "LendUp Ladder" and providing inaccurate information about the true costs of the loans offered. For example, banner ads on Facebook and other websites allowed consumers to view the repayment terms for various loan amounts but failed to disclose the annual percentage rates (APR) as required by law.

In addition to paying the CFPB a civil penalty of $1.8 million and providing $1.83 million in refunds to more than 50,000 customers, LendUp agreed to review its advertisements to ensure compliance with all regulations and perform regular tests of its APR calculations for accuracy. The company also said it will stop overstating the benefits of borrowing and what fees are charged to borrowers.

To read the settlement agreement with the DBO in In the Matter of Commissioner v. Flurish, Inc., click here.

To read the consent order with the CFPB in In the Matter of Flurish, Inc., click here.

Why it matters

LendUp did not admit guilt in either action and attributed the regulator deals to the company's "early days … when we were a seed-stage startup with limited resources and as few as five employees," the company said in a statement on its website about the regulator actions. "In those days we didn't have a fully built out compliance department. We should have." The CFPB said the action should send a warning message to other startups, with a reminder that they "are just like established companies in that they must treat consumers fairly and comply with the law," Bureau Director Richard Cordray said.