Fed. Trade Comm'n v. LendingClub Corp.

FEDERAL TRADE COMMISSION, Plaintiff, v. LENDINGCLUB CORPORATION, Defendant.

Case No.18-cv-02454-JSC

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

June 1, 2020

ORDER RE: CROSS MOTIONS FOR SUMMARY JUDGMENT; PLAINTIFF'S MOTION FOR PARTIAL JUDGMENT ON THE PLEADINGS; CROSS MOTIONS TO EXCLUDE EXPERT TESTIMONY; ADMINISTRATIVE MOTIONS TO FILE UNDER SEAL

Re: Dkt. Nos. 137-40, 143, 145-47, 155, 201, 211, 215, 218, 221, 234, 236, 239, 241, 248-265, 268

The Federal Trade Commission ("the FTC") brings causes of action against LendingClub Corporation ("LendingClub" or "Defendant") alleging deceptive and unfair business practices in violation of Section 5(a) of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. § 45(a), and violation of the Gramm-Leach-Bliley Act's ("GLB Act") Privacy of Consumer Financial Information Rule ("Privacy Rule and Regulation P"), 16 C.F.R. § 313, recodified at 12 C.F.R. § 1016. (Dkt. No. 57 at ¶ 1.)¹ Now pending before the Court are LendingClub's motion to exclude expert testimony, (Dkt. No. 138), the FTC's motion for partial judgment on the pleadings on LendingClub's affirmative defenses, (Dkt. No. 139), LendingClub's motion for partial summary judgment, (Dkt. No. 143), the FTC's motion for summary judgment, (Dkt. No. 147), the FTC's motion to exclude expert testimony, (Dkt. No. 155), and the parties' administrative motions to seal portions of those filings, (Dkt. Nos. 137, 140, 145, 146, 201, 211, 215, 218, 221, 234, 236, 239, 241, 248-265).² After careful consideration of the parties' briefing and having had the benefit oforal argument on April 27, 2020, the Court rules as set forth below.

BACKGROUND

I. The Parties

A. The FTC

"The FTC is an independent agency of the United States Government created by statute." (Dkt. No. 57 at ¶ 5 (citing 15 U.S.C. §§ 41-58).) As part of its duties, and as relevant here, "[t]he FTC enforces Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), which prohibits unfair or deceptive acts or practices in or affecting commerce." (Id.) In addition, the FTC "enforces the Privacy Rule, 16 C.F.R. Part 313, recodified at 12 C.F.R. § 1016, which requires financial institutions to protect the privacy of consumer information." (Id.)

B. LendingClub

LendingClub is a Delaware corporation formed in 2006; it is headquartered in San Francisco, California. (Dkt. Nos. 140-4 at 9 (filed under seal) & 140-8, Ex. 1 at 6 (30:21) (filed under seal).) LendingClub has operated an "online peer-to-peer lending platform" since 2007 "that connects borrowers and investors." (Dkt. No. 140-4 at 9.) "Through LendingClub's platform, consumers can apply for and obtain personal loans underwritten and issued by a third-party bank, WebBank." (Id.) LendingClub's platform also "facilitates the purchase of interests in the loans by retail and institutional investors." (Id.) LendingClub is not a lender; instead, it "services the loans, manages customer service, and acts as an intermediary between borrowers and investors." (Id.) More than three million customers "have used LendingClub's platform to obtain loans worth, in aggregate, more than $43 billion." (Id.)

II. Factual Background

The following facts are undisputed.

A. LendingClub's Website and Online Loan Application

1. "No Hidden Fees" and Disclosure of Origination Fee

Lending Club charges borrowers an "origination fee of 1% to 6%" of the total requested loan amount in connection with its unsecured personal loans. (Dkt. No. 81 at ¶ 10.) The origination fee "is deducted up-front from the proceeds disbursed to the borrower." (Id.) Thus,"the amount of money disbursed to a borrower's bank account is less than the total loan amount by the amount of the origination fee." (Id. at ¶ 24.) Between 2013 and 2018, the origination fee averaged nearly 5% of the borrower's requested loan amount. (Id. at ¶ 23.) Borrowers are obligated to repay the entire loan amount they initially requested, including the origination fee. (Dkt. No. 145-4 at ¶ 3 (filed under seal).)

From 2012 until mid-2018, LendingClub advertised its personal loans to consumers through mail, email, and online advertisements as containing "no hidden fees."³ (Dkt. Nos. 81 at ¶ 10 & 145-4 at ¶¶ 1, 31-38.) During that time consumers could apply for personal loans directly through LendingClub's website, www.lendingclub.com. (Dkt. No. 81 at ¶ 15.) Online loan applicants were required to complete a form providing basic information that LendingClub used to assess "baseline creditworthiness criteria" and conduct a "front-end" credit check. (Dkt. No. 81 at 15.) LendingClub rejected applicants who failed to pass the front-end check's baseline criteria. (Id.) Applicants who met the baseline criteria were directed to a loan offer webpage ("Offer page") that included a bold-faced "Loan Amount." (Id. at 15.) The webpage represented that the loan included "[n]o hidden fees" below a masked smiley face ("bandit") icon. (Id.)

Image materials not available for display.(Dkt. No. 145-4 at ¶ 10.)⁴ On desktops, the webpage allowed users to click on a "tooltip," which is "a green dot with a white question mark inside" appearing beside the word "APR." (Dkt. No. 81 at ¶ 20.) If users clicked on or hovered over the tooltip, a pop-up window appeared with text explaining the Annual Percentage Rate ("APR") and notifying users that the APR includes "a one-time origination fee . . . that is collected out of your loan proceeds." (See id.; see also Dkt. No. 145-4 at ¶ 13.) The pop-up window provides the exact dollar amount of the origination fee. (Id.)

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(Dkt. No. 145-4 at ¶ 13.) Users accessing the webpage through a mobile device would have to click on the APR rate itself to produce the same pop-up window. (Dkt. No. 81 at ¶ 22.) An applicant was not required to click on the tooltip to proceed with the loan application.⁵ (Id. at ¶ 21.)

The origination fee was next disclosed on the Loan Rate & Terms webpage containing the federally-required Truth In Lending Disclosure Statement ("TILA disclosure"). (Id. at ¶¶ 29, 30.) The TILA disclosure's Federal Box accounted for the origination fee in the amount listed in the "Amount Financed" box stating: "The amount of credit provided to you or on your behalf."

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(Dkt. No. 53 at 13.)⁶

"[I]n most standard screen configurations," the user must then scroll down webpage to seean itemized breakdown that includes the "Origination Fee[ ]." (Dkt. No. 81 at ¶ 30.)

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(Dkt. No. 53 at 14.) Applicants must scroll to the bottom of the page and click "Next" to complete the loan application. (Dkt. No. 81 at ¶ 30.) Prior to January 2017, some mobile users could click "I Agree" to complete the loan application without having to scroll past the TILA disclosure and itemized breakdown listing the origination fee. (Id. at ¶ 32.)

After clicking "Next," applicants entered their bank account information and were taken to an "Account Summary" page that until November 2017, stated: "Your $[amount requested] loan is on the way. What's next?" (Id. at ¶ 34; see also Dkt. No. 145-4 at ¶ 80.)

Image materials not available for display.(Dkt. No. 220-5, Ex. 26 (redacted version of document filed under seal).) The loan amount listed did not reflect subtraction of the origination fee. The Account Summary page is the final page of the application flow. (Dkt. No. 145-4 at ¶ 80.)

2. Disclosure of the Origination Fee on the "Rates & Fees" Webpage

LendingClub's website contains a "Rates & Fees" page that is separate from the online loan application flow. (Id. at ¶ 29.) To access the page from the website's homepage, users navigate to the "Personal Loans" page and then click on "Rates & Fees." (Id.) The page explains that the origination fee is an up-front fee that is deducted from the amount applied-for.

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(Dkt. No. 223-3, Ex. 2 at 5.) Because the "Rates & Fees" page is not included in the loan application flow, an applicant need not view the page to apply for a loan.

During the relevant time period, LendingClub received tens of thousands of inquiries and hundreds of formal complaints from consumers regarding the origination fee. (Dkt. No. 145-4 at ¶¶ 45-52.) LendingClub's internal consumer studies and surveys, compliance reviews, employee training materials, and communications among employees also addressed issues regarding disclosure of the origination fee. (Id. at ¶¶ 53, 55, 59-66, 73-75.) Between April 2013 and February 2019, LendingClub issued over 3 million personal loans and collected over $2 billion in origination fees. (Dkt. No. 152-1, Ex. 8 at ¶ 13 (filed under seal).)

B. Communication of Loan Approval

Until November 2017, the Account Summary page informed applicants that their loanswere "on the way"; however, the page also included a "To-Do List" and informed applicants that they must complete the items on the list and LendingClub would then "finish the final review" of the application. (See Dkt. No. 220-5, Ex. 26 ("Please complete all tasks on your To-Do List. Once complete, we can finish the final review of the application."); see also Dkt. No. 145-4 at ¶ 80.)

Between April 2015 and mid-November 2015, LendingClub sent applicants who had completed the application through the Account Summary page an email stating in large bold type: "Your Loan is 100% Backed." (Dkt. No. 177-1, Ex. 128 at 5-11 (filed under seal).) One version stated:

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(Id. at 7.) Other versions stated that the applicant had to complete the "To-Do List" and LendingClub had to complete its "final review" before the applicant received the loan.

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(Id. at 11.)

Another version provided additional detail regarding the final review process.

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(Id. at 9.)

Beginning in mid-November 2015, LendingClub replaced the "Your Loan is 100% Backed" large-print language with "You're one step...