District of Columbia Sues Elevate Credit, Inc.

Washington, DCOn June 5, Karl Racine, Attorney General for the District of Columbia filed a lawsuit against Elevate Credit Inc., alleging that Elevate charged loan interest rates on what are essentially internet payday loans in excess of the District’s usury limits. The interest rates of 149 to 251 percent associated with Elevate’s Rise and Elastic brand loans set a trap for low-income consumers similar to excessive bank overdraft fees many banks charge for “overdraft protection” on a checking account.

Elevate’s predatory, online scheme also evades the District’s bank regulatory and licensing requirements through a “rent-a-bank” arrangement. Such an arrangement allows lenders to evade state laws capping the interest rate that they can charge on loans to “allow unregulated predatory lending across the nation.”

Not entirely as advertised

According to the Complaint, in the last two years, Elevate has made 2,551 loans to District consumers and collected millions of dollars in interest. It advertises its Rise loans with enticing promises such as “fast approval for loans between $500 and $5,000,” “receive cash as soon as tomorrow” and “flexible payment scheduling.” According to the lawsuit, however, the lender fails to disclose an APR between 99 and 149 percent depending upon the borrower’s credit, employment and loan repayment history as well as a number of other factors.

The advertising for its Elastic brand line of credit is similar. Repayment dates are set according to a borrower’s pay date, and the payments due are described as “cash advance fees.” It touts the product as preferable to expensive bank overdraft fees or bounced checks, which generally cost consumers approximately $35. Nowhere does the lender disclose that the effective APR of an Elastic line of credit may run as much as 251 percent.

These rates are well in excess of the District’s usury limits of 24 percent if the loan is provided by a licensed money lender and the interest rate is expressed in the contract or 6 percent if the loan is provided by a licensed money lender and the interest rate is not expressed in the contract. The limits are intended to protect borrowers, especially vulnerable consumers borrowing small sums for everyday expenses, from loan sharking.

How the stratagem works

The District of Columbia’s case will depend largely on its ability to show that Elevate, a Delaware corporation, offered, provided, serviced and advertised loans to District residents. This may be more challenging than initially meets the eye because of Elevate’s contractual relationship with FinWise Bank, a Utah chartered bank, for its Rise brand, and Republic Bank & Trust Company, a Kentucky-chartered bank, for its Elastic brand.

Neither FinWise nor Republic is subject to the District’s usury laws because of both are federally regulated. Federal laws, under the circumstances, preempt state laws.

This is a well-documented dodge known as a “rent-a-bank” arrangement, through which non-bank lenders launder their loans through banks so that they can charge whatever interest rate federally-regulated banks may charge in the states where they are chartered. In rent-a-bank arrangements, the banks nominally fund the loan, but the payday or non-bank lenders do all the work, arranging and collecting payments on the loans, and bearing all or nearly all of the economic risk.

As Sen. Sherrod Brown and five other Senators recently wrote to the Office of the Comptroller of the Currency and the FDIC, these rent-a-bank schemes have reemerged in recent years after the OCC and FDIC shut them down in the 2000s. They effectively “eviscerate” state consumer protection laws designed to shield borrowers from predatory lending.   

Thus, if the case goes to trial, a great deal of the evidence will focus, as the Complaint does, on Elevate’s use of proprietary analytics, predictive underwriting models, software systems, registered trademarks and marketing efforts. Elevate reportedly pockets much of the earnings from Rise and Elastic brand products and absorbs the risk of bad loans.

The Complaint alleges that Elevate’s pursuit of this unregulated lending scheme violates the DC’s Consumer Protections Procedures Act through:

• misrepresentations and omissions in its marketing materials;
• unfair and unconscionable business practices; and
• violation of usury laws.

Wider issues of small consumer loan regulation

In recent years, the regulation of small consumer loans – often in the form checking account overdrafts, payday loans or internet payday loans and lines of credit has increasingly become the province of state law. This has become especially true as the CFPB enforcement actions have become more limited. A  successful end run around state regulation of this segment of the lending industry could have widespread implications for consumer financial protection efforts.