Regulators Shut Down Online Lender, YC Alum LendUp
In a rare occurrence in the fintech world, regulators have dropped the guillotine on a VC-backed lending startup. The US Consumer Finance Protection Bureau (CFPB) has ordered LendUp, an online lending startup that graduated from the famous startup accelerator Y Combinator, to shut down its lending operations over allegations of illegal and deceptive marketing. The agency says LendUp violated its order to stop misrepresenting its services and violated fair lending laws.
It’s common to see fintech startups have run-ins with regulators, but it’s rare to see a complete shut-down by regulators’ orders. The CFPB has ordered LendUp to halt making new loans or collecting certain outstanding loans, effectively killing its business. The agency also tacked on a financial penalty for the startup.
- LendUp was founded in 2012 to provide payday loans, installment loans, and credit card services to consumers with low credit scores, a risky demographic. Over time, it became a Silicon Valley darling, raising nearly $400mn from VCs such as Andreessen Horowitz, SV Angel, Kleiner Perkins, Google Ventures, and Reddit co-founder Alexis Ohanian.
LendUp’s first run-in with the CFPB was in 2016, when the agency sued it for misleading marketing. The startup paid $3.6mn in fines that year and was ordered to cease from its act, which included making false claims about the cost of its loans and the benefits of repeated borrowing. Then last year, the CFPB filed another lawsuit against LendUp for violating the US Military Lending Act, which stipulates a maximum 36% annual percentage rate for loans made to active-duty service members.
The CFPB has clashed with LendUp for the third time, with a nail in its coffin. It has effectively sealed up LendUp’s operations, leaving the company no choice but to shut down. In a statement to Reuters, a LendUp spokesperson said the company expects to shut down its operations in early 2022 completely. That’s nearly $400mn in VC funds flushed down the drain.
- “LendUp was backed by some of the biggest names in venture capital,” said CFPB Director Rohit Chopra. “We are shuttering the lending operations of this fintech for repeatedly lying and illegally cheating its customers.” Chopra was appointed to lead the CFPB by President Biden this year and has scored a significant regulatory win with LendUp.
- LendUp was ordered to pay a $100,000 penalty alongside shutting down. The CFPB said it took into account LendUp’s “demonstrated” inability to pay to hand it a relatively small fine. The agency says it’ll work to restitute some LendUp harmed consumers with money from its Civil Penalty Fund.
The market for loan services is a very delicate one that’s familiar with dodgy practices, especially on short-term payday loans which often charge enormous interest. LendUp branded itself as an alternative to the unscrupulous practices of many payday lenders, but it turns out it was just one of the wolves after all.