Jan. 10, 2018: This story has been clarified.
Ken Rees has made a fortune selling loans with triple-digit interest rates to borrowers with poor credit history or no credit history.
Over the years, he’s developed a knack for finding loopholes in usury laws in states that cracked down on so-called payday loans — a label that has morphed from describing short-term, small-dollar loans to include longer-term loans that carry sky -high interest rates but still can trap borrowers in a cycle of unsustainable debt.
Rees became the CEO of payday lender ThinkCash in 2004. Starting in 2007, the company started working with First Bank of Delaware, a federally regulated bank that was exempt from state regulations covering higher interest-rate loans outside its home state and could originate the loans and retain a portion of the interest.
More than a decade ago, this so-called “rent-a-bank” arrangement was common among early payday lenders. Federal regulators ruled that the model was deceptive and took enforcement action against the most egregious violators. Since then, the industry has evolved, and it’s unclear what is legitimate and what is deceptive, leaving enforcement spotty.
But in 2008, federal regulators ordered First Delaware to cease and desist alleged violations of law, certain banking practices and to make changes to the bank’s consumer product division that included a ThinkCash product. In 2010, Rees changed his company's name to Think Finance and started striking deals with Native American tribes, which, as sovereign entities, have immunity from some lawsuits.
In 2014, the state of Pennsylvania filed a still-pending lawsuit claiming Think Finance used the tribes as a front to make deceptive loans. Think Finance denies the charges and Rees started a new company, Elevate Credit, which operates from the same building in Fort Worth, Texas. Elevate deals in online installment loans, a cousin to payday loans, and partners with a Kentucky-based bank to offer lines of credit with effective annual interest rates much higher than would otherwise be allowed in some states.
Critics say this arrangement has all the hallmarks of a rent-a-bank relationship that effectively evades state laws limiting payday loans, but the existing rules regarding such rent-a-bank partnerships are murky at best and only intermittently enforced. Now Congress, in trying to help expand credit for poor people, may be inadvertently codifying the rent-a-bank partnerships that allow payday and high-interest lenders legally avoid state usury laws, according to those critics.
Sponsors say the Protecting Consumers Access to Credit Act facilitates bank partnerships by ensuring third parties like debt buyers and rapidly growing financial technology firms can buy, and collect on, loans originated by federally regulated banks regardless of state laws governing interest rates. These partnerships can help make credit available to those left out of the traditional banking system, primarily low-income individuals, backers say. The bill, viewed by many lawmakers on both sides of the aisle as a way to help low-income families, is now embroiled in an intense argument over whether the measure would in fact make state interest-rate caps, designed to protect the working poor from high interest-rate lenders, irrelevant.
“The bill covers every flavor of online lending,” said Adam Levitin, a consumer law professor at Georgetown University. “Some members of Congress have gotten snookered that they are fostering innovation, but a loan is just a loan whether you do it online or not.”