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Montel Williams Can’t Promote Predatory Payday Loans To New Yorkers Anymore

CREDIT: MONEYMUTUAL/YOUTUBE
CREDIT: MONEYMUTUAL/YOUTUBE

One of the highest-profile companies in the payday loan industry is agreeing to stop promoting predatory loans to New Yorkers, and take their much-loved national pitchman with them.

MoneyMutual will pay a $2.1 million settlement to New York’s Department of Financial Services (DFS) and stop doing business in the state following an investigation that found the loans its customers received violate state law. New York sets a 16 percent annual percentage rate (APR) cap on this type of borrowing, and while MoneyMutual does not make loans itself, it connected hundreds of thousands of New Yorkers to lenders who charge rates as high as 82 times the state limit.

Syndicated talk-show host and actor Montel Williams became the company’s face in 2009, lending a familiar and trusted voice to thousands of print, radio, and TV ads. MoneyMutual has trafficked on his reputation more explicitly than a typical celebrity endorsement. The company often told worried customers that “Montel Williams has endorsed MoneyMutual and would not do so if it were not a legitimate company,” according to DFS. Williams will continue to serve as national pitchman for the company, but all its promotional materials must now state that New York residents are not eligible for the service being advertised due to state law. That message must be recorded at the same meter and volume as the slowest, loudest part of any radio or television ads.

The network of payday lenders that MoneyMutual referred customers to charged anywhere between 261 percent APR and 1,304 percent APR, according to a note toward the bottom of the company website. The nationwide average APR on a payday loan is 339 percent.

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Several other states have similarly restrictive lending rules to New York’s. If regulators elsewhere take similar enforcement actions, MoneyMutual and Williams might have to append a much longer disclaimer to their ads.

The settlement rescues New Yorkers with outstanding loans originated through MoneyMutual’s service. “Those loans are null and void, and thus consumers do not have to pay them back because they are illegal in New York State,” DFS spokesman Matt Anderson said. It may take years for people with outstanding MoneyMutual loans to stop getting collections calls over those voided debts, since lenders often resell loans that have stopped repaying, and Anderson said that consumers should contact DFS for help in such cases.

MoneyMutual auctions off consumer leads to a network of 60 different lenders and pays Williams a flat fee for every customer lead that it sells. He got more than 800,000 such payments for leads relating to New York residents alone in the roughly four-year period in question, the order states. DFS’ Anderson was not immediately sure how much the company paid Williams for each successful sale.

A spokesman for Williams told USA Today that the talk show host and actor “is not blind to the problems of the industry” and added that “we stand by his overall endorsement of Money Mutual.” He also noted that DFS did not find that Williams broke the law himself, and that his client is personally familiar with the utility and risks of short-term loans because he used them himself during his years at the Naval Academy.

The pitchman’s stance reflects a root conundrum for consumer advocates with regard to payday lending. The current business model is predatory, abusive, and economically harmful on net, but the people who turn to these companies rarely have any real alternative. There has long been tension between reformers who argue for a moderate regulatory approach modeled on Colorado’s payday loan regulations and the proponents of more radical fixes such as making payday lending illegal and empowering the postal service to provide far cheaper short-term credit in these communities. That running theoretical dispute will become more concrete this year when the first-ever federal regulations on payday lending are unveiled.

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In the same spot on the website where MoneyMutual reveals the exorbitant APR range that DFS references in the consent order, the company gets defensive. “[T]he loan that you are likely to be offered is intended to be a short-term loans that is repaid in a matter of weeks, so using an APR to represent the fees is not only inaccurate, but also fairly misleading,” the disclaimer says. “Remember, you should pay your loan back on time to avoid fees and penalties. Make sure that you review the terms and conditions of the loan that is offered to you so that you don’t end up with an ‘annual’ loan!”

The disclaimer’s contention that it’s misleading to use year-long interest rates for two-week loans gets at the central problem with how these lenders deal with their low-income, paycheck-to-paycheck customers. While the documents involved in borrowing against your next paycheck certainly describe the agreement as a 14-day loan, that’s not how the business model actually works. Most borrowers spend far longer than two weeks repaying their initial borrowing, and the vast majority of the billions of dollars that these lenders extract from the financially vulnerable is tied to a lengthy cycle of lending and re-lending.

Data from the Consumer Financial Protection Bureau (CFPB) shows that just one in five payday loans gets repaid on that 14-day schedule without any renewal of the debt. Although the majority of payday loans — 55 percent — are paid off either in the initial two-week cycle or after being rolled over into a second loan, the real money comes from the 45 percent of borrowers who end up in a cycle of three or more loans. About 15 percent of all initial loans result in near-endless cycles of 10-plus renewals.

The numbers lead CFPB head Richard Cordray to decide that the industry “depends on people becoming stuck in these loans for the long term.” Since last spring, CFPB has been investigating MoneyMutual on its own as part of its efforts to understand the role that lead-generation firms play in the broader payday loan industry. An agency spokesman declined to comment on whether or not the New York settlement would have any affect on CFPB’s federal inquiry.

Scrutiny of any kind is fairly new for the payday lending business, but the MoneyMutual settlement is even more novel. Previous crackdowns have targeted actual lenders, but MoneyMutual profits by selling consumer data rather than by lending money itself. “We’re the first to bring a successful enforcement action against these lead generators,” Anderson said. “They’re an important cog in the machine of these illegal loans.”