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A few months ago, the Obama Administration announced efforts to crack down on predatory payday loan companies, attempting to impose some of the underwriting requirements and lending restrictions as regular loans. Payday lenders, the Consumer Financial Protection Bureau said, take advantage of consumers by giving them short-term loans with astronomical interest rates, then charge penalty fees and threaten bank account closures and vehicle seizures if customers can't pay.
And it seems like even the "good guy" payday lenders are behaving badly. San Francisco-based LendUp has agreed to pay $6.3 million in fines for charging customers illegal fees, miscalculating interest rates, and telling customers that borrowing from LendUp would boost their credit score.
CEO Sasha Orloff told TechCrunch that LendUp lacked the legal staff to review all of the company's financial products and ensure compliance with local, state, and federal lending laws. "These regulatory actions address legacy issues that mostly date back to our early days as a company," Orloff said, "when we were a seed-stage startup with limited resources and as few as five employees. In those days we didn't have a fully built out compliance department. We should have."
The lack of compliance led to "widespread violations of payday and installment lending laws," according to the California Department of Business Oversight. Along with charging customers illegal "expedited fees" for quicker access to loan money, LendUp was accused of failing to include those fees in annual percentage rates, charging fees to extend payment periods, forcing customers to take out payday and installment loans, and improperly calculating interest rates which led to overcharging customers.
Orloff can say the violations were merely the result of a fintech startup's growing pains, but they highlight the regulatory morass of lending laws generally and payday lenders especially. Of LendUp's fines, $2.7 million is being paid to California's DBO and $3.6 is headed to the federal Consumer Financial Protection Bureau. (Those figures also include refunds to overcharged customers.) Any lender entering the market needs to be aware of local, state, and federal banking and lending laws, and have an adequate legal and compliance team in place from day one.