Depending on how you feel about borrowing and lending, Texas-based Elevate Credit could be the first hot new tech stock of 2016 — or an ignoble, consumer-exploiting failure.

The company, backed by Silicon Valley venture capital heavyweights, set out to reinvent small-dollar lending over a decade ago and now peddles online installment loans that it says can replace traditional, high-interest “payday” loans that have been derided by consumer groups since the 1980s.

With money rolling in — the company had revenues of nearly $400 million in 2015 — Elevate bills itself as the lower-interest alternative to payday lending for people who don’t qualify for credit cards and other mainstream loans.

“Elevate is leading the transformation of the underserved non-prime credit market,” said Ken Rees, the company’s chief executive officer.

Or not. Groups such as the National Consumer Law Center have dubbed Elevate a purveyor of “payday installment loans” — products that might not take the form of payday loans, but still offer credit with such high interest rates as to make them inappropriate for consumers who are already living in fragile financial circumstances.

“All installment loans have lower rates than payday loans,” said Lauren Saunders, the center’s associate director in Washington. “But a longer-term loan that binds you to a triple-digit rate is still dangerous.”


IPO, Regulator and Critics

Elevate wants to debut on public markets at the same time a new federal regulator, the Consumer Financial Protection Bureau, is writing the first federal rules for small-dollar lending. The plan is generating both uncertainty in the marketplace, and an opening for critics of the emerging online industry to seek rules that would prevent consumer harm, even as Silicon Valley makes the case that it’s doing well by doing good.

The plans for Elevate’s IPO — now in flux thanks to recent stock market turbulence — are likely the opening salvo between consumer groups and the technology industry over whether it has truly reinvented a business that’s long been synonymous with exploitative loans, or merely repackaged loan-sharking for the digital age. Silicon Valley is eager to get on the right side of consumer groups that could be valuable allies as tech firms aim to disrupt other areas of finance long dominated by Wall Street.

Other startups, such as Avant, LendUp, ZestFinance, and Activehours are all at work concocting their own formulas for changing payday lending. Paul Leonard, senior vice president for federal policy at the Center for Responsible Lending, a Durham, North Carolina-based advocacy group, said he has yet to see the company that truly breaks the mold.

Some offer marginally better products, but Leonard’s group and others are wary of entrepreneurs who can best traditional payday lenders without really changing the lives of low-income borrowers.


Beat Payday By A Dollar

“I give the Silicon Valley types credit for being very, very transparent. But they are trying to beat payday by a dollar,” Leonard said. “There has not been the storm of innovation that gets affordable credit to people with bad financial histories.”

Elevate spokeswoman Kelly Ann Doherty didn’t respond to a request for comment. Companies that are selling shares on stock markets for the first time generally observe a “quiet period” during which they don’t speak publicly beyond what’s in documents filed with the Securities and Exchange Commission.

The market for small loans used to be dominated by payday lenders, brick-and-mortar establishments that might extend a 2-week loan of $100 for a $20 fee, and hold a post-dated check — after the borrower’s next payday — as collateral. The borrower could either pay back the loan and fee, or simply let the lender deposit the check.

Such loans are legal in about half the U.S. states. Under federal law, lenders have to disclose interest as an annual percentage rate (APR), and on that basis, the cost of payday loans is high. For example, the 2-week $100 loan for $20 would be an APR of 520 percent.

The problem, the consumer bureau found in a 2012 study, is that 80 percent of borrowers either renewed their payday loan after 2 weeks or took out a new one. That pattern leads many borrowers into a spiral of debt, in which new loans cover the interest on old ones.

Entrepreneurs, together with financial investors looking for a decent return on their money in an era of low interest rates, have sought to create more affordable loans either by finding novel ways of underwriting loans, or by turning them into longer-term installment loans, or some mixture of the two.


Use Vast Amounts of Data

Elevate, for example, uses the advanced analytics made possible by crunching vast amounts of data to find borrowers who are good credit risks, but who might not otherwise qualify for a credit card or other bank-based loans. And, it lends larger amounts than traditional payday loans, for longer periods. For example, a person might borrow $2,000 and repay over 24 months.

The average effective APR in Elevate’s portfolio of installment loans is 176 percent — well under what a payday loan might cost, but still far, far higher than the vast majority of credit cards, according to documents Elevate filed with the SEC. Borrowers who take out new loans with Elevate can get lower rates, as far down as 36 percent, according to the documents.

Elevate has come to the threshold of an IPO after over a decade of looking for ideas in online lending that are both lucrative and unlikely to run afoul of regulators — two musts for any company that wants to go public.

The company was spun out from Fort Worth, Texas-based Think Finance, a company that offered a variety of loans and also licensed software that Native American tribes used to set up online lending operations.

Think Finance attracted venture capital from two major Silicon Valley funders, Sequoia Capital, an early backer of Google, and Technology Crossover Ventures, which invested in Facebook. Victory Park, a Chicago-based fund, provided the money that Think Finance then lent online.

But regulators in state and federal agencies didn’t take kindly to the approach of working with Native American tribes in Montana, Oklahoma and Louisiana. The tribes claimed that the doctrine of sovereign immunity, which protects tribal governments from interference by states, allowed them to follow federal, not state laws. Many states limit or ban high-interest, small-dollar lending; the federal government does not.

It’s a situation analogous to the legal status of Native American-owned casinos, except that gamblers must actually travel onto a reservation to try their luck. The Internet allows the tribes to offer their loans anywhere in the country, and they have.


Native American Lenders

Some states, like Washington, have taken to warning consumers against taking out loans with the tribal enterprises. Pennsylvania sued Think Finance. And the Consumer Financial Protection bureau launched its own investigation of the company and its tribal partners. Spinning off its non-tribal lending business into Elevate is a way for investors to cash out, said Jer Ayler, president of Trihouse Inc., a Las Vegas-based payday lending consultancy.

“They are desperate for the founders to get money out of that company,” Ayler said. “They’ve reinvented themselves three or four times.”

Elevate may yet have to reinvent itself again.

The Consumer Financial Protection Bureau is formulating rules on small-dollar lending — the first at the federal level — that would require lenders to assess a borrower’s ability to repay a loan. In other words, online lenders would have to behave in much the same way as mortgage companies, by checking a person’s income, credit history and other expenses.

Elevate charged off loans equal to 51 percent of its revenues in 2014, the last full year for which data is available. In other words, Elevate deemed those loans that its own system approved to be a failure in the sense that customers couldn’t repay them.

“The CFPB is focused on the ability to pay back a loan,” said Saunders, of the National Consumer Law Center. “A high charge-off rate does not tell us they are making loans that the vast majority  of borrowers can pay back.”