In Defense of Non-Prime Credit

Online finance companies are luring cash-strapped borrowers with loans bearing sky-high interest rates.

With interest rates sitting at record lows, this doesn’t seem like the best time to be hawking high-interest loans. But Kenneth Rees begs to differ. Rees runs Elevate Credit, a fast-growing online finance company in Fort Worth that’s using Big Data to issue short-term loans to cash-strapped consumers with credit scores so low they can’t get credit cards.

And that’s a lot more people than you might think. Although the so-called subprime credit market used to be a niche, it’s now going mainstream. Rees estimates that there are 160 million Americans in need of non-prime credit, and their options have narrowed as regulators have forced banks to back away from these customers and states cracked down on payday loans.

He calls this America’s new Middle Class. “We believe that financial stresses on the average American are greater than they ever have been,” Rees says. “Half of Americans now have no savings, so they’re living paycheck to paycheck. That is fundamentally different than the situation 20 years ago.”

According to Experian, the average credit score in the United States is 669—well below the 700 seen as a benchmark for snagging the best interest rates. And Texas ranks near the bottom among states for credit scores, with an average of about 650.  

“The biggest myth is that when you’re serving non-prime customers, you are somehow serving odd damaged people. That is really not the case,” Rees says. “This is a mainstream customer that has faced economic stresses and wants to improve their financial health.”

Thanks to the Internet, entrepreneurs can more easily find these customers. Elevate Credit is one of dozens of largely unregulated “fintech” companies using cutting-edge technology to crunch data from credit histories to social media footprints into automated underwriting models.  

Backed with venture capital from Sequoia Partners and Technology Crossover Ventures in Silicon Valley, Elevate is marketing products with catchy names: Rise, an installment loan up to $5,000, and Elastic, a personal line of credit. Interest rates for these non-prime products can reach as high as 176 percent. Believe it or not, that’s only half the rate of a typical payday loan, and Elevate says it can fall as low as 36 percent if their customer consistently makes payments. 

In North Richland Hills, Jet Capital is blazing a similar path with small business owners. Jet is targeting mom-and-pops with sales ranging from $500,000 to $5 million, offering merchant cash advances averaging $25,000, for a typical fee of $8,000 to $10,000. A sister company, Balance Credit in Irving, is making short-term installment loans with rates in Texas listed on its website from 390 to 611 percent. 

Regulators have taken notice. In March, the Consumer Financial Protection Bureau announced that it plans to police “online marketplace lending,” encouraging borrowers who encounter problems to submit complaints. And this spring the bureau was expected to issue new regulations for short-term loans, aiming to put limits on payday loans and force lenders to ensure that consumers have the capacity to pay the money back.

Rees is used to adapting to a shifting legal landscape. While running Think Finance, which launched Elevate, Rees went so far as to join with Indian tribes to offer loans, using their sovereign immunity to dodge predatory lending rules being enacted by states. The so-called “rent-a-tribe” scheme is the subject of a federal lawsuit filed by the state of Pennsylvania.

At Elevate, Rees believes a transparent approach to products and no add-on fees will “fit very well with what the CFPB is looking to do.”

So what’s next? Last year, Elevate Credit filed papers with the Securities and Exchange Commission to go public in early 2016. The IPO was postponed in January amidst a sharp market downturn, but Rees still hopes to list his shares on the New York Stock Exchange this year.  There’s nothing more mainstream than that.


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