As the payday loan industry faces a crackdown in the United States, an online service that also offers small loans with high interest rates to people with poor credit is preparing to take Wall Street’s biggest stage, even though it admits that its practices could lead to its own doom.
Elevate Credit Inc. ELVT, +0.00% is set to be the first venture-backed initial public offering of 2016, with plans to sell shares this month in a deal that could bring in almost $80 million. The online lender uses its own proprietary technology to offer “approval in seconds” to consumers for two installment loan products and one line of credit.
But those automated approvals and the high interest rates that follow come with a slew of regulatory issues and questionable tactics that have angered consumer advocates and concerned potential investors.
“I think they’re the new face of payday lending,” said Lauren Saunders, associate director at the National Consumer Law Center.
Elevate — which declined to comment for this article, citing its pre-IPO “quiet period” — takes pains to separate itself from the controversial, and potentially illegal, payday lenders. The company says those lenders have an average annual percentage return of close to 400% and typically require one large payment due at the end of the loan term, while Elevate mandates customers pay off their loans throughout the loan period.
Saunders said Elevate is just expanding the loan length and definition of payday lenders, and the rates Elevate charges its customers are much higher than other types of loans. The average weighted annual percentage rate for its three products are 176% for Rise, 255% for United Kingdom-focused Sunny, and 88% for Elastic, the line of credit.
And while Elevate calls its customers the “New Middle Class,” it does little to ensure that consumers can afford to pay off the loans they receive, the same issue the Consumer Financial Protection Bureau is investigating with payday lenders. Elevate automates more than 90% of its loan applications, with humans reviewing the other 10%.
Elevate doesn’t detail the exact metrics it uses to assess consumers, but says it uses data from the National Consumer Reporting Association for “prime-ish” customers and data from Clarity and Teletrak, non-prime credit bureaus for the second tier. For those with no credit history, Elevate uses data including how long the consumer has used the same phone number or email address.
The company says using more documentation to evaluate creditworthiness would just slow them down.
“If Elevate products were required to receive and review additional documentation from consumers such as bank statements, photo identification or pay stubs, this added inconvenience may result in lower consumer applications and loans, which would adversely affect our growth,” the company says in its prospectus.
Beyond establishing creditworthiness, Elevate and its affiliates are subject to several federal and state regulations, including the Truth in Lending Act, a section of the Dodd-Frank Act and the Fair Debt Collection Practices, most of which concern deceptive lending practices and reporting. But Elevate discloses in its prospectus that it may not always follow these laws.
“We may not always have been, and may not always be, in compliance with these laws. Compliance with these laws is also costly, time-consuming and limits our operational flexibility,” the company said in its prospectus.
Elevate has tried to fight those laws through lobbyists. Crossroads Strategies LLC lobbied against CFPB regulations and other laws for the firm, according to disclosure filings, and Polaris Government Relations LLC worked against the implementation of Dodd-Frank on the company’s behalf in 2014 and 2015.
Those lobbyists should expect more paychecks. Regulators have been cracking down on the consumer lending business, particularly those targeting sub-prime consumers and with high interest rates, and Elevate lists several upcoming regulations and laws as risks in the prospectus.
For example, Elevate’s loans use the Automated Clearing House system to take funds owed directly out of the consumer’s bank account, with customer authorization. The U.S. Department of Justice and other regulators, particularly in New York, have taken steps to discourage banks from working with online and short-term loan providers, Elevate says in its prospectus. The Rise product is currently available in 15 states — not New York — and it doesn’t make loans directly in Texas and Ohio.
Its product in the United Kingdom, Sunny, is operating on an interim permission, while the UK increases regulation on the “short-term, high-cost credit industry with the stated expectation that some firms will exit the market.” Due to previous regulation, Elevate had to change Sunny to an installment loan, instead of a line of credit, and it awaits the UK’s decision on the loans by April 1.
“There is no guarantee that we will receive full authorization to continue offering consumer loans in the UK,” the company said in the prospectus.
Because of the possible new regulations, as well as other factors, Lynn Turner, managing director of consulting firm Litinomics and formerly chief accountant at the Securities and Exchange Commission, said investors would be taking a serious gamble.
“I think there’s significant risk here,“ Turner said.
Beyond regulation, the company’s financial structure scares some analysts. Formed in 2014 as a spin-off of Think Finance Inc., a technology licensing platform as well as a lender to consumers with less-than-stellar credit, Elevate reported $2.6 billion in loan originations from 2002 to 2015, involving 1.3 million customers.
The funding for many of those loans, through the Rise and Sunny offerings, comes from one source, Victory Park Management LLC. Elevate owed Venture Park Capital $247.3 million as of Sept. 30, and had an outstanding balance of $50 million in debt to Elastic SPV. Elevate said it plans to use “all or a portion” of its proceeds from the IPO to pay off the Venture Park debt.
Elastic lines of credit are originated through third-party lender Republic Bank, which uses Elevate’s software for loan approval. Elastic SPV, a special purpose vehicle Cayman Island entity that receives its funding from Victory Park Capital, then can buy a 90% participation interest, but Elevate takes on the loan-loss risk.
And those risks are substantial. The company reported net charge-offs, or debt owed to a company that likely won’t be recovered, as a percentage of revenues at 51% for 2014, 43% for 2013 and 48% so far this year, the company said in its prospectus.
Because of the risks and the spin-off from Think Finance, Max Wolff, chief economist at Manhattan Venture Partners, said he’s suspicious of the offering.
“It looks like a cash-out spin-off, not a traditional IPO,” Wolff wrote in an email. “The deal has the full set of caution flags and this model remains to be tested by a coming rise in interest rates and also a recession.”
Elevate can point to its growing revenues, from $72 million in 2013 to $274 million in 2014, with net losses of $45 million and $55 million. It also has well-known venture backers in Sequoia Capital and Technology Crossover Ventures, and company executives, Venture Park Management and Technology Ventures have all indicated intent to buy shares of common stock in the offering at the initial public offering price.
Kathleen Smith, principal at Renaissance Capital, a manager of IPO-focused ETFs, cited those as positives for the company’s IPO, along with ownership of proprietary technology and a customer base in an “under-served market. But the way it assesses creditworthiness, as evidenced by the net charge-offs, causes concern.
“It’s a financial company where you don’t know the [consumer’s] credit history,” Smith said. “The model is still unproven when it comes to their track record.”
– Francine McKenna contributed to this article.
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