Rose-Tinted Cost Estimates Will Have Regulators Seeing Red
Overly optimistic assumptions that can create false impressions for borrowers can easily rise to the level of an unfair and deceptive act or practice. As seen in an administrative action recently filed against an online payday lender, disclosures made to consumers need to reflect the terms of the loan in both the best and worst case scenarios. The action, filed by the Consumer Financial Protection Bureau, alleges that Integrity Advance LLC and its former chief executive officer engaged in unfair and deceptive acts by misrepresenting the cost of loans. The lender notified borrowers of the cost of their loans using the assumption that the short term loans would be repaid on the date the first installment came due. If left unpaid, the loans automatically rolled over multiple times, and in accordance with the default terms of the borrowers’ contracts, accrued additional charges each time. Borrowers’ final charges were then higher than expected based on what the lender led them to believe. While these costs and terms were enumerated in the loan documents, disclosures given to borrowers directly by the lenders used assumptions that borrowers would repay the loans prior to any rollovers, allowing the consumer to rely on misleading information. In addition, the company allegedly required pre-authorizations of automated clearing house debits in, violation of federal laws, and also failed to disclose provisions in the loan documents allowing the company to initiate checks against borrower accounts if the ACH authorization was cancelled. The CFPB’s action seeks unspecified damages for violations of multiple laws, including the Truth-in-Lending Act, and Dodd-Frank’s prohibition of unfair and deceptive acts and practices. It is no longer acceptable to present the rosiest picture to consumers. Lenders wishing to avoid regulatory scrutiny must ensure their business practices align with the consumer’s best interest.