Using online ads, payday loan marketers sidestep state laws
What happens when people look for a short-term loan online? Read Upturn’s new report, Led Astray.
October 28 2015What happens when someone looks for a short-term loan on Google or Bing?
Take the hypothetical example of a financially desperate consumer. Someone who, at the end of the month, simply won’t have enough money to pay all her bills — including rent, cable, groceries, utilities, and childcare — before her next paycheck.
Embarrassed or unable to ask family or friends for money, she might go online and type “need money fast” into a search engine. Enticing ads will appear alongside her search results. Some might read “Fast Cash! $100-500! Approved in minutes, direct to your account. Bad credit OK!” If she clicks on that ad, she’ll likely arrive at a website that asks her to enter her name, email address, and zip code. She’ll then fill out another form, which asks more sensitive information, including her bank account and routing numbers. After entering this data,she will finally be redirected to yet another website, where she can agree to loan terms. The next day, money is deposited into her bank account.
In the weeks to come, that borrower will likely not be able to repay the full amount of the loan — most such loans, in fact, are rolled over.
Such is the experience of thousands of American consumers who look for short-term loans online.
Who was behind that initial ad for the short-term loan? It was a “lead generator”: a middleman that collects evidence that a consumer is interested in a product or service. In this case, a payday loan lead generator collected the consumer’s information, and then instantly resold it to lenders and other interested parties. Our new report, Led Astray, focuses on these behind-the-scenes actors.
Lead generators are important to many businesses, but they are a lynchpin in the online payday lending industry: Online payday lenders rely on lead generators to supply as many as 75 percent of their borrowers. Payday lead generators collect consumers’ sensitive financial information — like how much they make, when they are paid, and their bank account and routing numbers.
Payday lead generators expose consumers to two types of risk. First, they connect consumers to payday loans. A longstanding body of research shows that payday loans are harmful to most borrowers’ financial health. And, as we’ve written before, online payday loans can often be worse than their storefront counterparts: they are associated with higher fees, longer-term indebtedness, and higher rates of borrower abuse. Second, payday lead generators can share consumers’ sensitive financial data widely, a practice that promotes financial fraud. (This is not just conjecture: Federal regulators have repeatedly discovered payday lead generators at the center of sweeping financial fraud operations.)
Online payday loans can often be worse than their storefront counterparts.
Unfortunately, these risks disproportionately fall on poor and minority communities.
A major finding of our report is that, today, payday lead generators use ad platforms like Google and Bing to show payday loan ads nationwide, even in states that outlaw both payday lending and payday lead generation. To be clear, Google and Bing already have advertising policies in place that have good aspirations: For example, both Google and Bing require that advertisers comply with applicable state and local laws. But, in practice, these policies are often ignored, and are hard to enforce effectively. The result is that payday ads outbid and displace ads for more consumer-friendly products and services.
In our report, we argue that online ad platforms have an opportunity to adopt a more practical and effective approach to payday loan ads. For example, Google and Bing could simply choose to ban all payday-related advertising, as Facebook has done. Or, they could adopt a policy that prohibits payday loan ads in states that the ad platform (or another trusted third party) has identified as substantially restricting payday lending — Pew’s analysis of state payday lending laws is one potential starting point.
Payday ads outbid and displace ads for more consumer-friendly products and services.
But this isn’t just a story about ads. More can be done elsewhere, too. Federal regulators like the the Federal Trade Commission and Consumer Financial Protection Bureau could consider enhanced oversight of the payday lead generation industry. The CFPB is also making new rules for payday loans, with an eye to preventing consumers from ending up in “debt traps.” New regulations could in turn tighten the market for payday loan leads. And large payday lead generators — like Money Mutual — and their trade groups could also make and enforce stronger commitments to limit the sharing and use of consumers’ data.
This Friday, the FTC will be hosting a workshop on lead generation, with a specific case study on lead generation in lending. The workshop and panel should spark a valuable conversation on how best to protect consumers.