In the business known as payday lending, one of the biggest players lends no money at all.
MoneyMutual.com promises loans of as much as $1,000 to people in need of quick cash, advertising widely on TV and online with former talk show host Montel Williams as its public face. In small type at the bottom of the screen, the company disclaims that it is “not a lender.”
MoneyMutual.com generates leads for firms specializing in short-term, high-interest loans. It’s the most prominent of a new breed of Internet middlemen who’ve prospered as the $32 billion payday loan market migrates from storefronts to the Web.
Lead generators typically take applications on their websites and then immediately auction the prospects to lenders. As the business grows, regulators have been reviewing complaints from consumers that their financial data has been misused or stolen after entering the auction system.
“The highest bidder may be a legitimate lender, but it could also be a fraudster that has enough of the consumer’s sensitive financial information to make unauthorized withdrawals from their bank account,” Richard Cordray, the director of the Consumer Financial Protection Bureau, said at a January hearing in Birmingham, Alabama.
Cordray said in a subsequent interview that the bureau is reviewing how consumers and their data are treated as a result of the lead generators’ online auctions.
Government regulation isn’t necessary because the industry is policing itself, said Dale Baker, chief executive officer of Selling Source LLC, the Las Vegas-based digital marketing firm that is the parent of MoneyMutual. He said that the company screens lenders who buy its leads and works with customers who have complaints. It would be “hard to do much more,” he said.
“We think we’ve taken extraordinary steps to protect our information,” Baker said.
Williams decided about two years ago to become a paid pitchman for MoneyMutual, said Jonathan Franks, a spokesman for the former talk show host. His decision was based on the firm’s record of customer service and “an industry-leading code of conduct that they impose on their lenders,” Franks said.
Payday lending is a term for small loans to high-risk borrowers, originally meant to tide someone over until their next paycheck. At a brick-and-mortar payday lender, the loans typically are secured by a post-dated check. Online borrowers instead furnish a bank account number for direct debits.
Consumer advocates have long argued that payday lending needs stricter oversight because it takes advantage of people in vulnerable circumstances by charging rates that can work out to more than 500 percent annually.
Federal agencies are probing banking products that resemble payday loans, which are offered by Wells Fargo & Co., U.S. Bancorp, Regions Financial Corp. and Fifth Third Bancorp. Martin J. Gruenberg, acting chairman of the Federal Deposit Insurance Corp., said in a May 29 letter to consumer groups that “such activities appear to be on the rise” and that the FDIC would investigate.
Payday lenders say they are helping clients who have few short-term alternatives. About 35 percent of payday loans made in 2010 originated online and that share will grow to 62 percent by 2016, according to a Jan. 9 report by John Hecht, an analyst with JMP Securities, a San Francisco-based investment bank.
Lead generation is common practice on the Internet, with websites seeking to match prospective customers to products and services ranging from real estate and automobiles to solar panels and for-profit schools. Advertising has made the MoneyMutual website the most-recognized of small loan lead generators, said Hecht, now an analyst with Stephens Inc.
MoneyMutual parent Selling Source, controlled by San Francisco-based London Bay Capital LLC, projects earnings of $65 million this year on revenue of $335 million, according to a September circular from investment bank Greenhill & Co. Inc. The circular said two-thirds of earnings come from lead generation and other services for consumer-finance firms.
The Federal Trade Commission has received 79 consumer complaints citing MoneyMutual or Williams since January 2010, according to a public-records request, including at least a dozen who said their data wasn’t secure. In an FTC lawsuit filed in April against a group of payday lenders for fraudulent practices, the agency noted that some of the affected customers began their search for a loan at MoneyMutual.com.
Charles Goodyear, a spokesman for Selling Source, said that the complaints represent a tiny portion of its business, and that the firm only contracts with reputable lenders.
“It’s important for our lenders to uphold the highest industry standards, particularly concerning consumer experience,” Goodyear said in an e-mail.
Payday lenders pay middlemen like MoneyMutual $50 to $150 per lead, regardless of whether they end up making a loan, according to Jer Ayler, president of Trihouse Inc., a Las Vegas-based payday lending consultancy. That can add up. Lead generators in financial services take in $100 million a year, with the market growing by more than 16 percent annually, New York marketing firm Econsultancy estimated.
The closely held companies don’t publish details about how they operate. But three people in the industry who spoke on condition of anonymity described the process like this: First, lead generators seek prior bids from lenders. A lender might bid $100 for the first look at an applicant, for example, while another might offer $80 for the second look.
As the borrower fills out an application, his or her entries are tested for authenticity, keystroke-by-keystroke, against databases of e-mail and home addresses that the lead generator compiles or buys. The applicant’s name and data then flow into an electronic auction system known as a “ping tree,” where lenders have seconds to decide whether to buy or pass.
“In its simplest form, it’s auctioning off a lead to the highest bidder,” Richard Eckman, a lawyer for the lead generation and payday loan industry at Pepper Hamilton LLC in Wilmington, Delaware, said in an interview.
What happens after a customer uses a site is sometimes in dispute.
Jean Ann Fox, director of financial services for the Consumer Federation of America, an advocacy group, calls the process “an extremely risky thing for consumers.”
Cordray, the head of the consumer bureau, said the websites may be selling consumer information “to anybody and everybody and generating all kinds of contacts for people that they didn’t intend.”
In one case, the FTC said it believes information collected by lead generators may have found its way to call centers in India that were browbeating U.S. consumers into paying debts they didn’t owe. “The information they have about the consumers appears to come from list brokers who may have obtained their information from online payday lending lead generators,” FTC Commissioner Julie Brill said in Washington on May 21. She didn’t mention any firms by name.
In the lawsuit filed April 2 in federal court in Nevada, the FTC alleges that payday borrowers wound up with lenders who misrepresented the cost of loans and illegally debited their bank accounts.
Among the companies targeted in the suit is AMG Services Inc., which the FTC identifies as “an Oklahoma tribal entity.” According to a 2009 federal court deposition by Alton Irby, a co-founder of London Bay, AMG is Selling Source’s largest customer for payday borrowers. AMG didn’t respond to e-mails or faxes seeking comment. The lawsuit doesn’t allege wrongdoing by Selling Source or MoneyMutual.
In an affidavit filed with the FTC case, Inez Hackett, 57, of Sacramento, California, said she got a payday loan by entering her information into MoneyMutual.com in late 2010. “Because I am not good with computers,” Hackett wrote. “I asked my more tech-savvy 16-year-old granddaughter to help me through the application process online.”
According to the affidavit, Hackett was redirected to the website of OneClickCash, a lender operated by the Santee Sioux Nation of Nebraska. She said she got a loan for $250 and later learned she had to pay back $325. By March 30, 2011, Hackett said, she had paid $300 and anticipated wrapping up the loan. Instead, she claimed to the FTC, OneClickCash withdrew an additional $330 from her bank account over the next few months.
The FTC lawsuit also targets OneClickCash, which didn’t respond to calls or e-mails seeking comment.
Borrowers who go through lead generators, wittingly or not, may have less recourse than those who work with a single company that does both marketing and lending. If something goes wrong, the lead generator can blame the lender and vice versa.
“With this system, both sides have a scapegoat,” said Doug Pierce, a co-founder of Digital Due Diligence, a New York investment research firm.
‘Coming So Fast’
Otha Alston, a retired telecommunications worker in Renton, Washington, said he felt caught in the middle. He sought a $300 loan to retrieve his 2000 Chevy Blazer after police impounded it for a parking violation. He said he saw MoneyMutual spokesman Williams in a TV ad and went online to fill out an application.
Soon after he entered the data, Alston told state financial regulators, he was besieged with phone calls and e-mail solicitations from lenders.
“My voice mail, e-mail and text messages were inundated,” Alston, 59, said in an interview. “It was coming so fast I could not turn the phone off.”
Baker, the Selling Source CEO, and Goodyear, the company spokesman, said that MoneyMutual’s records show that Alston wasn’t a customer because he didn’t complete the online application. Goodyear said Alston filled out only the first of multiple pages. Franks, the spokesman for Williams, said that Alston likely fell victim to a counterfeit MoneyMutual site.
Alston insisted he completed the application to the legitimate company and provided his Social Security number, bank account information and references. He said he didn’t keep copies of the Web pages he filled out.
Alston filed a complaint about MoneyMutual in October 2010 with the Washington state attorney general’s office, which was forwarded to the state Department of Financial Institutions. The agencies couldn’t look into the matter, because lead generators fall outside state jurisdiction, said Deborah Bortner, the department’s director of consumer services.
“We can only investigate unfair or deceptive practices that are committed by licensed or unlicensed payday lenders,” she said.
Shortly after sending his complaint to the state, Alston’s banking statements show, funds were withdrawn from his bank account by USFastCash, a firm Alston said he’d never borrowed from. Debt collectors later tried to bully him into paying debts he didn’t owe, he said.
USFastCash, also targeted by the FTC lawsuit, is operated by MNE Services Inc., owned by the Miami Nation of Oklahoma, an Indian tribe. The firm didn’t respond to e-mails or phone calls seeking comment. Goodyear, the Selling Source spokesman, said there couldn’t be a connection between Alston’s financial troubles and MoneyMutual because Alston never provided his data to MoneyMutual.
Eleven states require companies that facilitate payday loans to be licensed, according to Eckman. A bill that would have required licensing of lead generators passed the Washington state House last year but died in the state Senate after lobbying by the Online Lenders Alliance, a Washington-based trade group that includes lead generators, Bortner said.
In Congress, the growth of the business caught the attention of Senator Jeff Merkley, an Oregon Democrat. He said he’s preparing a bill that would outlaw online lead generation, calling it “another trick” of the payday lending industry.
“These websites mask the true identity of the lender so it is harder to track down and prosecute deceptive lenders,” Merkley said in a statement.
For Baker of SellingSource, the best way government can protect consumers from predatory lenders is to rely on lead generators to screen their own buyers.
“If the bigger players don’t do business with the bad guys, they don’t have any place to go,” Baker said.