DC sues online lender over ‘predatory’ loan scheme

The Attorney General for the District of Columbia is suing online lender Elevate to protect residents from “predatory high-cost lending.”

The trial, filed on Friday, June 5 by Attorney General Karl Racineis the latest salvo in an ongoing battle between consumer advocates and lenders over short-term unsecured loans that opponents say may be too expensive and risky.

Elevate dismissed the lawsuit, saying in a statement to CNBC Make It that the company plans to defend against “this frivolous lawsuit that lacks merit and ignores well-established federal lending laws. Elevate will continue to be the reality of access to credit for millions of Americans.”

The dispute comes at a time when Americans are increasingly looking for credit. One in three Americans has lost income due to the coronavirus pandemic, according to the Financial Health Network. The pulse of financial health in the United States in 2020a survey of more than 2,000 American adults between April 20 and May 7, 2020. Among Americans who report losing income, 3% of survey respondents say they had to borrow money using a loan payday, deposit advance or pawnbroker.

In fact, to help consumers and small businesses impacted by the coronavirus pandemic, federal regulators — the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Bureau Comptroller of the Currency – actually encouraged banks and credit unions to “provide responsible small-dollar lending to consumers and small businesses in response to Covid-19.” Regulators say banks and financial institutions could structure these new loans in a variety of ways, including indefinite lines of credit, installment loans repaid over a fixed term or one-time payment loans.

While the increase in the number of institutions giving out smaller loans may help some Americans access much-needed funds, it could also lead to more predatory lending. “The FDIC has let the banks it oversees launder loans to predatory lenders, so it’s up to states and DC to step up and protect their families from these outrageous and illegal loans,” says Lauren Saundersassociate director of the National Consumer Law Center.

“The last thing we need during the Covid-19 crisis is more predatory lending,” adds Saunders.

Why Experts Say Small Unsecured Loans Can Be Risky

Although it is easy to obtain small unsecured loans, they can be very difficult to repay. A payday loan, for example, is a type of small loan that you can usually take out by going to a lender who offers them with just a valid ID, proof of income, and a bank account. Unlike a mortgage or car loan, no physical collateral is usually required. But they are not available in all states. Currently, Arizona, Arkansas, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, New Mexico, Pennsylvania, Vermont, West Virginia, and DC completely ban these types of loans. Additionally, 37 States have specific statutes that allow payday loans, but with restrictions, such as interest rate caps and maximum loan amounts.

Most lenders who offer payday loans and installment loans require borrowers to pay a “finance charge” (service charge and interest) to obtain the loan, the balance of which is due two weeks later, usually the day of your next repair. Installment loans are very similar to payday loans, but they can have longer repayment periods, usually four to 60 months, depending on Pew Charitable Trusts. About 10 million Americans use installment loans each year.

Both types of loans can be extremely expensive, with many lenders regularly charging interest rates between approximately 100% and 400%. It is relative to personal loan rates ranging from 10% to 28% on average, depending on your credit. Or credit cards, which averaged around 15% interest in February, according to the St. Louis Federal Reserve.

Lenders argue that the high rates are necessary because payday loans are risky to finance. But borrowers often cannot repay these high-cost loans immediately, so they are drawn into a cycle of borrowing and accumulating financial burdens.

The research carried out by the The Consumer Financial Protection Bureau found that nearly one in four payday loans are re-borrowed nine or more times. Additionally, it takes borrowers about five months to repay the loans and costs them an average of $520 in finance charges, Pew Charitable Trusts reports. This is in addition to the original loan amount.

At a time when many Americans may not know when their next paycheck is coming, using a lender that offers a short-term loan that charges a three-digit APR is a bad idea, says Rebecca Borne, Senior Policy Advisor for the Center for Responsible Lending. “Avoid these lenders, they cause problems,” she says.

Recent lawsuit seeks to root out ‘unscrupulous’ lending

Over the past few years, Elevate has entered into more than 2,500 loan agreements with DC residents for two types of loan products at extremely high rates, according to Friday’s lawsuit. To get up, which is an installment loan, charges an interest rate of 99% to 149%, according to Racine’s office. Elevate also offers a line of credit called Elasticwhich actually charges APRs between 129% and 251%, Racine found.

Yet DC does not allow payday loans and is one of 45 states and jurisdictions in the United States that caps interest rates on installment loans and lines of credit, limiting the maximum APR that Approved lenders may charge 6% or 24%, depending on the type of loan. Elevate’s highest interest rates are 42 times the legal limit, according to the lawsuit. To circumvent rate restrictions, the lawsuit claims that Elevate partnered with two state-chartered banks, which are not subject to state interest rate limits. But Elevate ultimately controlled the loans, took the risks and got the profits, according to the lawsuit.

“District law sets the maximum interest rates lenders can charge to protect residents from falling prey to unscrupulous and exploitative lenders. We are suing to keep DC residents from being liable for these illegal loans and for us ensure that Elevate permanently ceases business operations in the district,” Racine said in a statement.

National Consumer Law Center

Lawyers say lenders use these “bank rental programs” like an escape more and more, originally high-cost loans through an FDIC-regulated bank before buying them back in order to continue charging exorbitant interest rates. In fact, the The National Consumer Law Center has compiled a watchlist companies engaging in these tactics.

“Interest rate caps are the most effective tool available to states to protect their residents from predatory lenders, and businesses should be held accountable for knowingly and deceptively evading these caps,” says Rachel Weintraublegislative director and general counsel of the Consumer Federation of America.

Elevate defended its business strategy of partnering with banks. “At a time when federal regulators are asking banks to step in and provide more options for unprivileged Americans, Elevate is making it easier to access transparent and accountable credit,” the company said. “By licensing our financial technology, FDIC-regulated banks are able to serve customers they otherwise couldn’t serve, including 160 million unprivileged, credit-blind Americans.”

Racine’s office issued a cease and desist letter in April 2020, but says he has filed a lawsuit to permanently stop Elevate from “engaging in deceptive marketing practices, demanding that Elevate reverse loans to residents of the district, refunds interest paid by consumers as restitution, and pays civil penalties.” Elevate does not currently offer loans in DC

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