The Consumer Financial Protection Bureau has accused the challenger bank MoneyLion of a slew of violations of consumer protection rules. MoneyLion says the CFPB's allegations are false, and that it will defend itself against them.
The first accusation in the CFPB's complaint, which was filed in a federal court in New York Thursday afternoon, is that MoneyLion violated the Military Lending Act by charging service members interest rates and fees that collectively exceed the law's 36% rate cap. In another alleged infringement of the same law, MoneyLion inserted arbitration clauses into its contracts that prevented service members from challenging the fintech company in court, the CFPB said.
The 30-page complaint also accused MoneyLion of a host of other forms of wrongdoing, from trapping borrowers in its membership program to offering useless reward points to having ineffective customer service.
"MoneyLion targeted military families by illegally extracting fees and making it difficult to cancel monthly subscriptions," CFPB Director Rohit Chopra said in a statement. "Companies are breaking the law when they require monthly membership fees to obtain loans and then create barriers to canceling those memberships."
MoneyLion declined a request for an interview, but in a statement it said the consumer bureau's complaint was without merit.
"MoneyLion has cooperated in good faith with the CFPB for over three years regarding our membership offering," the company said. "Our innovative membership program helps service members and other customers save, invest, build credit and improve their overall financial lives. Despite our cooperation, the Bureau has chosen the sensationalist route of prioritizing headlines instead of engaging in constructive dialogue to address their questions and to achieve better consumer outcomes."
The company will "vigorously defend against these false allegations to set the record straight as we continue to deliver innovative financial products that help our customers," MoneyLion said.
New York-based MoneyLion is a neobank that offers mobile banking, investing and loans to consumers. It has at least nine million users. In May, it began
MoneyLion's stock plunged 29% on Thursday after the CFPB made its announcement.
Some in the industry were unsurprised by the CFPB's allegations against MoneyLion.
"MoneyLion's membership fee and forced savings feature have always been very problematic, in my opinion, as they very clearly increase the cost of borrowing for the consumer," said Ryan Falvey, managing partner at Financial Venture Studio, a fintech venture capital firm. "You have to pay a fee to get access to the product. Then you get a high interest loan. Then you're forced to save. It's fees on fees on fees."
In a tweet about MoneyLion's credit builder loan in February 2021, Alex Johnson, then the director of fintech research at Cornerstone Advisors, wrote: "My opinion about MoneyLion has always been that it has used fintech language ("banking is broken," "banking is elitist," etc.) to distract from the fact that many of its products are just as predatory or more predatory than any traditional bank you could name."
"I also find its 'banking is evil' framing particularly cynical, given that the CEO and co-founder of MoneyLion is a former investment banker himself," wrote Johnson, who is now the author of the Fintech Takes newsletter.
Chris Berthiaume, an advisor at Maquette Advisors, acknowledged the pressure challenger banks are under to make money, and said the CFPB's lawsuit has implications for banks and other fintechs.
"While I certainly appreciate the revenue model of a membership fee, the precedent regarding how to consider charging fees for access to credit products has been clear in my eyes," said Berthiaume, former compliance manager at Upstart. "Such fees are finance charges."
"That said, MoneyLion clearly has a different position. Fintechs and banks should be on notice about membership fees, and hearing from the courts will provide guidance on current assumptions about these fees and APR calculation."
The Military Lending Act imposes a 36% rate cap on installment loans to active-duty members of the military and their families.
The 2006 law also says that any fee a borrower must pay in order to obtain credit has to be included in the APR calculation, noted Todd Baker, senior fellow at the Richman Center for Business, Law & Public Policy at Columbia University and the managing principal of Broadmoor Consulting.
In order to obtain loans from MoneyLion, consumers are forced to join its membership programs and pay monthly membership fees that range from $19.99 to $29, according to the CFPB.
For instance, MoneyLion offers a 12-month credit builder installment loan of $500 to $1,000 at APRs between 5.99% and 29.99%, the CFPB said in its complaint. To access the loan, consumers must join the Credit Builder Plus Membership Program and pay a monthly membership fee of $19.99. According to the CFPB, MoneyLion's policy prohibits consumers with unpaid loan balances from canceling their memberships.
"The CFPB says that MoneyLion required military borrowers to enroll in membership programs and pay membership fees to obtain loans and required borrowers to maintain their memberships and continue paying the monthly fees over the life of the loans," Baker said. "As a result, the CFPB believes that these membership fees qualify as fees that should have been included in the calculation of the loans' maximum annual percentage rate." This would result in annual percentage rates greater than 36%, which makes the loan illegal.
So if MoneyLion did what the CFPB says it did, the claim that it exceeded the Military Lending Act rate cap "seems quite strong," said Baker, who is an attorney and former banker.
The Military Lending Act also prohibits mandatory arbitration.
If MoneyLion included mandatory arbitration provisions in its contracts with military personnel, "this claim appears to be a straightforward win for the CFPB," Baker said. "That's an unforced error."
The CFPB also accused MoneyLion of deceptive practices.
"MoneyLion falsely led many consumers to believe that they could cancel their memberships at any time," the agency said. "In fact, MoneyLion refused customers' requests to cancel memberships, and to stop paying membership fees, if they had outstanding loan balances. In some cases, MoneyLion refused to cancel memberships after loan payoff if consumers had any unpaid membership fees."
If the practices the CFPB describes were widespread, "then there is likely a good claim here" that MoneyLion violated the Consumer Financial Protection Act on the grounds of deceptive practices, Baker said.
In several off-the-record conversations, people in the industry were uncertain whether MoneyLion intended to be predatory.
"I don't think people really intend to be predatory," Falvey said. A startup "just turns into a company, and then the company tries to figure out how to make as much money as possible. And so unless you really make proactive decisions not to do things, I think most companies end up doing the thing that's most profitable."
