Is MoneyLion the 'Columbia House' of Predatory Loans?
Is MoneyLion the 'Columbia House' of Predatory Loans?
Chase Hits 1 Million UK Customers, Nexo's Legal Woes Mount
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Is MoneyLion the 'Columbia House' of Predatory Loans?
Readers of a certain age are likely to remember Columbia House, the CD mail order company.
Columbia House lured customers with an upfront promise of cheap music, if they agreed (sometimes unknowingly) to receive subsequent CDs at (inflated) “regular Club prices.” Users would keep receiving (and being billed for) shipments until they explicitly told Columbia House to stop — something that wasn’t always easy.
In fact, I remember, around the age of 10 or so, signing up for this without my parents’ permission, and my ‘punishment’ was drafting a sternly worded letter informing the company I was underage and thus they should let me out of the agreement. I kept the CDs though.
Columbia House is widely credited with pioneering this distinctly consumer-unfriendly model known as “negative option billing.”
In allegations detailed in the CFPB’s lawsuit filed last week against neobank MoneyLion, it sounds like the company lifted a page from the Columbia House playbook.
CFPB’s Case Against MoneyLion: Military Lending Act and UDAAP Violations
The two main allegations driving the CFPB’s suit center around MoneyLion’s product design and membership program practices and its lack of compliance with key provisions of the Military Lending Act (MLA).
An early version of of MoneyLion’s membership program, the “ML Plus Membership Program,” offered consumers the chance to take out a 12-month, $500 installment loan at a 5.99% APR — if they paid a $29 per month “membership fee.”
In addition to their monthly loan payment (approximately $43) and $29 membership fee, users were required to pay an additional $50 into an “investment account,” which was used to partially secure the loan (eg, MoneyLion would tap this for repayment if users defaulted.)
Altogether, a user of this $500 loan product would be paying about $122 per month for 12 months — a total of $1,464 over a year, though they would get $600 of that back upon successful repayment of the loan.
Around 2019, MoneyLion redesigned and rebranded the product as its “Credit Builder Loan.” For $19.99 per month, users could access a 12-month installment loan from $500 - $1,000 at APRs from 5.99% to 29.99%. Borrowers would receive half the loan proceeds upfront and half would be held in escrow, which borrowers would receive upon fully paying off the loan.
The CFPB’s case argues that, apart from being able to access the loan, the “membership” had few actual benefits. According to the CFPB’s suit:
“Other than the loans themselves, the only actual products or services provided to consumers as part of the fee-based memberships—that is, not available under the free memberships—have been:
(1) a “members-only Facebook Group” (later discontinued); and
(2) credit-monitoring tools, which were initially included in free memberships but then limited to fee-based memberships after mid-2019.”
Likewise, the CFPB argues the “cashback” and “rewards” included in the membership program provided little actual benefit to consumers (emphasis added):
“[MoneyLion] marketed the ‘rewards programs’ to consumers as a way to ‘earn back’ or ‘recoup’ some of the monthly membership fees or get ‘cashback’ by engaging in specified actions each month—including logging in daily to [MoneyLion]’s mobile app and making purchases over $10 using a debit card tied to an [MoneyLion]-offered account.
But consumers who have ‘earned’ rewards are still obligated to pay full monthly membership fees. And the ‘reward’ is not immediately available to consumers; it is a credit issued to consumers’ investment accounts or managed accounts, which many consumers could not readily access.”
But the biggest problem here was that MoneyLion marketed the membership program as something users could cancel for any reason, including stating this in users’ contracts.
In reality, however, MoneyLion disallowed users with outstanding loan balances from canceling their membership, forcing them to continue paying $19.99 per month until they were able to pay back their loan in full — something many borrowers struggled to do.
According to the CFPB’s suit, in many cases, even when users had paid off their loan, they were unable to cancel their membership if they owed outstanding membership fees — meaning users would continue wracking up new monthly fees for a membership they did not want and were unable to cancel.
Per the CFPB’s suit (emphasis added):
“As a result of [MoneyLion’s] practices, many consumers have incurred monthly membership-fee charges for a program that they no longer wanted but were unable to exit. Many consumers have not understood or could not reasonably have understood such consequences of borrowing from [MoneyLion] when they took out a Membership-Program Loan.”
According to the suit, MoneyLion’s customer service phone system was “dysfunctional,” with users facing hours-long holds or randomly being disconnected, making it difficult for users to reach an agent. When users asked MoneyLion to stop debiting their bank accounts, the company refused to honor users’ ACH revocation, according to the bureau.
The full scope of actions cited by the CFPB that made it difficult for users to reasonably avoid the recurring membership fee is broad:
“a. refusing to allow consumers to cancel memberships by paying off their loans in full using funds in their investment accounts or refusing to do so until consumers had paid past-due membership fees;
b. telling consumers with paid-off loans that they must pay any past-due membership fees before they could cancel their memberships;
c. using consumers’ investment and credit-reserve accounts to extract unpaid membership fees after consumers had paid off their loans;
d. refusing to honor consumers’ requests to stop ACH withdrawals of membership fees; and
e. suspending the memberships of consumers with unpaid membership fees and thereby cutting off these consumers’ access to their investment or managed accounts and to some membership features (including the ability to participate in rewards programs to offset fee charges) while still charging the full monthly membership fee.”
These and other alleged practices form the basis for counts five, six, and seven in the suit, which argue MoneyLion’s actions constitute unfair, deceptive, and abusive practices.
MoneyLion Allegedly Overcharged Military Members, Illegally Required Arbitration
The second major area where the CFPB is alleging wrongdoing is in relation to the Military Lending Act (MLA). The Military Lending Act is designed to offer certain protections to active duty members of the military and their families.
Among other things, the MLA caps the APR lenders can charge at 36% and requires the inclusion of certain fees in the calculation that are not typically considered part of the cost of credit — including explicitly requiring the inclusion of “participation fees” in the APR calculation. This stricter approach to calculating APR is known as the “Military APR” or MAPR.
According to the CFPB’s suit against MoneyLion:
“‘[C]harges for the MAPR shall include, as applicable to the extension of consumer credit: . . . [a]ny fee imposed for participation in any plan or arrangement for consumer credit.’ 32 C.F.R. § 232.4(c)(1)(iii)(C).
The regulation states that such a participation fee ‘shall be included in the calculation of the MAPR even if that charge would be excluded from the finance charge under Regulation Z.’ 32 C.F.R. § 232.4(c)(1)(iv).”
The MLA also prohibits requiring borrowers to submit to mandatory arbitration or give up certain rights military members may have under State or Federal law, including under the Servicemembers Civil Relief Act (SCRA).
Notably, it is the lender’s responsibility to verify whether or not such protections apply to a given borrower — there are commercial database products available to do so, including from the major credit bureaus.
The CFPB’s case argues that the effective MAPR, including interest and monthly $19.99 membership fee, exceeded the 36% cap imposed by the MLA. MoneyLion also failed to make disclosures to borrowers as required by the MLA, the CFPB says.
Because these loans were made in violation of the MLA, they were void from the inception of the contract. By servicing and collecting on those loans, MoneyLion represented that it was “legally entitled to demand and receive all principal, interest, and fees” — which constitutes a deceptive act, as the contract itself was void, the CFPB argues.
MoneyLion’s loan agreement until around August 2019 also required borrowers to submit to arbitration, with no exception for users covered by the MLA, according to the suit.
The above allegations form the basis for counts one through four of the CFPB’s suit.
What Isn’t In The CFPB’s Suit
The CFPB’s desired outcome here is for the court to:
“a. permanently enjoin all Defendants from committing future violations of the MLA and CFPA;
b. grant additional injunctive relief as the Court deems just and proper;
c. order all Defendants to pay damages, restitution, and other monetary relief to consumers;
d. order disgorgement or compensation for unjust enrichment;
e. impose on all Defendants civil money penalties;
f. award costs against all Defendants; and
g. award additional relief as the Court deems just and proper.”
Now, this suit is notable not only for what it is arguing but also for what it isn’t.
The CFPB’s case isn’t arguing that membership programs are a no-go; rather, it emphasizes the importance of disclosures, consumer opt-in, and program design.
MoneyLion’s problems stem from allegedly misleading users that the membership could be canceled at any time, when, it appears, the program was difficult if not impossible to exit before repaying the loan and any outstanding membership fees.
And while the CFPB argues that the membership and interest exceed 36%, there are multiple reasons why the bureau is making this argument under the Military Lending Act specifically.
First, the CFPB doesn’t directly have authority to take action based solely on APR, as there is no general (non-military) federal usury ceiling. Dodd-Frank specifically denies the CFPB the authority to set such rate caps — though the bureau does have authority to enforce the MLA’s 36% MAPR cap.
Second, it’s an easier case to make. The MLA explicitly states that “participation fees” are included in the MAPR calculation. Arguing the membership fees should be considered part of the finance charge for borrowers not covered by the MLA would be a more complex and thus weaker case.
Third, bringing the case based on MLA violations gives the CFPB political cover. What politician wants to be seen attacking a regulator for defending servicemembers from a ‘predatory’ financial institution?
For average consumers not covered by the MLA, someone looking to make a case that the membership fee should be included in finance charge calculations would need to argue that, because the membership had few to no benefits, it was de facto a finance charge in disguise.
That could be a winnable case, but MoneyLion has clearly gone to some effort to position and market the “membership” has having benefits that go beyond merely access to the loan itself.
It’s also notable this action doesn’t touch on MoneyLion’s other lending product, the payday loan-like “Instacash.”
MoneyLion’s business practices around “tipping” and “expedited funding fees” for its Instacash product are an as-of-yet unexamined area of regulatory risk for the company.
More Trouble Ahead for MoneyLion?
The CFPB case shouldn’t come as a surprise to anyone who has been paying attention.
As MoneyLion was in the process of SPAC’ing, it disclosed a whopping five open investigations into its business practices. As this newsletter wrote in June 2021:
“As part of an SEC filing last week related to the SPAC merger, MoneyLion revealed a civil investigative demand from the CFPB — the third it has received from the agency since 2019 regarding its membership model and compliance with the Military Lending Act (MLA). The MLA prohibits lending to members of the military or their families at APRs above 36%, among other protections.”
At the time, MoneyLion also disclosed probes by the Minnesota, Colorado, and California state regulators and the SEC. MoneyLion ultimately settled with Minnesota.
The company’s most recent 10-Q, filed this August, notes ongoing requests from or investigations by state regulators in California, Virginia, New York, Colorado, and the SEC.
While it’s not clear exactly what concerns the various regulators, possible areas of interest include: MoneyLion’s “tipping” and “expedited funding” fee practices, which could breach state usury caps if determined to be finance charges; how MoneyLion handles auto-renewing subscriptions for membership plans, an area in which states have been broadly cracking down lately; or other consumer protection/UDAAP concerns.
Oh, and if you’re wondering what ever happened to Columbia House, it went bankrupt in 2015.
Representatives for MoneyLion didn’t respond to a request for comment on this story.
Chase Hits 1 Million UK Customers
JPMorgan Chase, which entered the UK market with a neobank-like digital current (checking) account in September of 2021, hit a one million member milestone late last month — just a year after launching. The bank, which operates under the Chase brand in the country, also launched a high-yield savings account this March.
In total, Chase’s UK operation has gathered over £10 billion in deposits in just one year, with savers holding an average of £27,000 at the new bank.
With £10 billion on its book, Chase boasts a larger deposit base than homegrown neobanks like Monzo or Starling, though it lags Goldman Sachs, which launched a high-yield savings account under its “Marcus” brand in the country in 2018. Goldman has accrued some £22 billion of deposits since launching — likely intentionally keeping its total below the £25 billion threshold for “ring fencing” its UK operations.
Lawsuits Mount as Eight States Take Action Against Crypto Platform Nexo
Crypto platform Nexo seems to have walked directly into a similar legal quagmire as competitors like BlockFi and now-bankrupt Celsius and Voyager — despite reportedly being warned by the New York attorney general about the risks of not registering with the state as a securities and commodities broker/dealer.
Now, eight states have joined forces to sue the company. The states bringing the action include California, New York, Washington, Maryland, South Carolina, Oklahoma, Vermont, and Kentucky.
In similar filings, state regulators allege Nexo offered or sold unqualified or unregistered securities in the form of its “Earn Interest Product.” Nexo offered interest rates as high as 36% on customer deposits.
According to Vermont’s lawsuit, around 93,000 US-based users have some $800 million invested in Nexo’s “Earn” product.
The suits also allege Nexo lied to investors by falsely claiming it was a licensed and registered platform.
Regarding the cases, a Nexo spokesperson told the Wall Street Journal, “Nexo is committed to finding a clear path forward for the regulated provision of products and services in the U.S., ideally on a federal level.”
Other Good Reads
The Fintech Factor (Fintech Takes)
Rohit Chopra’s second year at the CFPB could be tougher than his first (Protocol)
Varo’s tech unit looks to speed development, find efficiencies (Banking Dive)
Watch: Skandal! Bringing Down Wirecard (Netflix)
Listen: The Great Pandemic Theft (NYTimes Daily)
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