Dec. 24, 2017: This story has been corrected and clarified.

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.

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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.

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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.

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“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.”

"They just disappear"

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Financial technology, or “fintech,” has become a darling of Wall Street and policy makers who view the industry’s innovations — creating credit scores based on nontraditional data and mobile apps that make banking services accessible from home — as a way to make banking cheaper and more convenient. Its laudable end goal is to provide the 34 million American households that have little to no access to credit a way to participate in the financial system.

But now more payday-style lenders are moving online and donning the friendly face of a tech startup. Some, like LendUp, a lender charging more than 200 percent on some loans and counting Google Ventures among its investors, have attracted mainstream support. Like many high-interest online lenders, LendUp says it is “a better alternative to payday loans” because they use alternative data sources to determine interest rates but consumer advocates say the product, a high-interest loan that can quickly lead to a cycle of debt, is essentially the same thing.

Online payday lenders are notorious for exploiting cracks in the regulatory system, said Paul Chessin, a former senior assistant attorney general in Colorado who helped bring some of the earliest cases against payday lenders.

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“They just disappear” behind a network of fronts and shell companies, Chessin said.

Elevate, which went public in April, is quick to distance itself from traditional payday lenders by noting its loans have lower interest rates than payday loans, whose rates can climb close to 600 percent. Elevate said in an email it is committed to lowering rates further, and said its loan terms are more transparent and it doesn’t charge expensive fees associated with payday lenders.

Elevate’s installment loan called RISE is licensed in 17 states which permit higher interest loans. The company charges annual interest rates as high as 299 percent. Elevate says repeat borrowers can eventually qualify for interest rates as low as 36 percent on subsequent loans.

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“Our customers are not being served by banks and have been pushed to products like payday loans, title loans, pawn loans and storefront installment loans,” Elevate officials said in an email. “They are difficult to underwrite and riskier to serve because they have limited savings and volatile income but they rely on credit to deal with everyday issues like needed car repairs.”

Fifteen states and the District of Columbia impose interest-rate caps, most around 36 percent, to protect consumers from high-interest loans.

To do business in states that do have interest-rate caps, Elevate partners with Republic Bank and Trust, based in Louisville, Kentucky. Federally regulated banks such as Republic are only subject to the usury laws of their home states and aren’t required to abide by the legal caps on interest rates or loan fees in other states where they do business.

Through Republic, Elevate offers Elastic, an open-ended line of credit, which means it doesn’t have a fixed repayment date. It carries an average effective annual interest rate of 94 percent. Elevate said Republic Bank follows regulations set by the Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau (CFPB).

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Republic sells all but 10 percent of the economic interest in Elastic loans to investors shortly after origination. This is typical of a rent-a-bank relationship, critics said, where Republic acts as a pass-through enabling Elevate to avoid state usury rate laws.

Rees and his former company, Think Finance, are facing lawsuits filed in several states, including a recent complaint from the CFPB alleging the company collected on loans that were illegal under state laws. Think Finance recently restructured in 2014 as a Limited Liability Company and transferred assets to a subsidiary “in an effort to avoid liability for the illegal loans made to consumers,” according to lawsuits in Virginiaand Florida which are still pending. In October, under new management, Think Finance filed for bankruptcy protection after a hedge fund cut off its funding.

Elevate declined to make Rees available for comment and Think Finance executives didn’t respond to requests for comment.

Congress to the rescue

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As a publicly traded company, Elevate is required to disclose to its investors any risks to future profits. Among those risks, Elevate lists in its most recent filing a 2015 ruling by a federal appellate court in Madden v. Midland, a case from New York. The court ruled that third parties, in this case a debt buyer called Midland Financial LLC, were not entitled to the same exemption from state interest-rate laws as the national banks they partnered with to buy the loans. Therefore, Midland couldn’t pursue the same high-interest rates for the loans it purchased.

The ruling spooked the financial services industry, which claims the decision discourages technology providers and fintech companies from working with national banks, thereby limiting credit options to borrowers.

The fintech market is exploding, attracting more than $13 billion in investments in 2016. Congress has taken notice. In July, Reps. Patrick McHenry, R-N.C., and Gregory Meeks, D-N.Y., introduced the Protecting Consumers Access to Credit Act, which passed the House Financial Services Committee Nov. 15.

According to a press release issued by McHenry and Meeks, the legislation “would help preserve the innovative partnerships banks have forged with financial technology firms” by reaffirming the so-called valid-when-made doctrine, “a 200-year-old legal principle” which states that if a loan is legal with respect to its interest rate, it cannot be invalidated if it is subsequently sold to a third party.”

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In doing so, consumer advocates say the bill would remove states’ ability to enforce their own interest rate laws if a lender partners with a federally regulated bank.

“Our concern is that this legislation would open the floodgates for predatory loans to be made nationwide, even in states that have interest-rate caps that keep payday loans or other kinds of high-interest loans out,” said Rebecca Borné, a senior policy counsel at the Center for Responsible Lending, a nonprofit research and policy group.

Meeks is a member of what the Center for Public Integrity labeled in 2014 the “banking caucus , ” those who have received the most money from the financial industry, and a favorite target for campaign contributions from payday lenders. Over his career, Meeks has received $148,000— the eighth-highest amount among active House members — from payday lenders and their trade groups, such as the Online Lenders Alliance, a group of payday and high-interest lenders, according to the Center for Responsive Politics.

Payday lenders have made $120,999 worth of campaign contributions to McHenry during the same period, placing him 11th among active House members. Elevate CEO Ken Rees personally donated $5,000 to the McHenry campaign in September, just two months after he introduced the protecting consumers bill, Federal Election Commission recordsshow.

McHenry didn’t respond to requests for comment.

Meeks said in an emailed statement sent to the Center for Public Integrity that the bill preserves the ability for federal agencies to regulate rent-a-bank partnerships and expands access to more affordable credit in underserved communities.

When the bill was marked up in the House Financial Services Committee last month, Meeks supported an amendment that would place a 36-percent cap on all loans covered by the bill. The amendment was introduced by Rep. Maxine Waters of California, the ranking Democrat on the committee, but it was not adopted. Meeks said he is working with the Senate to preclude high-interest rate lenders from the bill.

Still, Meeks said in his statement that “claims that the bill's intent is to open the door to high interest rate loans are disingenuous and contradict public facts.”

In the Senate, the legislation is sponsored by Sens. Patrick Toomey, R-Pa. and Mark Warner, D-Va. Toomey has received the second most money from payday lenders in the Senate. He pocketed $110,400 from lenders, second only to Sen. Richard Shelby, R-Ala., over the period since 2007, according to the Center for Responsive Politics.

Toomey didn’t respond to requests for comment.

One of Warner’s top campaign donors over the course of his career is Covington and Burling, one of the firms Elevate hired to lobby for the bill. Covington and Burling’s employees and political action committee have givenWarner more than $100,000 since 2009.

A spokesperson for Warner said in an email that “campaign contributions have never influenced Senator Warner’s decision making on policy matters and never will.”

The spokesperson also said Warner supports cracking down on payday lenders through a CFPB rule requiring lenders to determine upfront that borrowers can afford to repay their loans.

“The scenario that some advocates have described – in which a payday lender uses a nationally-chartered bank as a front for issuing consumer loans – was prohibited prior to the Madden v. Midland ruling, is prohibited now, and would remain prohibited under this bill,” the statement said. “However, Senator Warner is considering adding language to the bill specifically to allay those concerns, and is currently in discussions about the best way to do that.”

The bill is still in committee, and its future is uncertain.

Georgetown’s Levitin said no law prohibits nationally chartered banks from operating as a conduit for high-interest lenders. Banking regulators can only follow “vague, non-binding regulatory guidance,” he said, but they must be willing to take action against bad actors.

However, “in the current environment, it’s hard to believe that they’re going to crack down on them,” he said.

Meek’s office said he believes there needs to be greater regulatory clarity distinguishing between legitimate partnerships and rent-a-bank schemes that lead to potentially abusive products.

Congressional staffers and lobbyists said Elevate told them the Protecting Consumers Access to Credit Act is not relevant to its business model. But Elevate wrote to at least one opponent of the legislation, who asked not to be identified, to stress that, despite its high interest rates, it was not a payday lender, but rather a “fintech,” and the bill is “essential” to support innovative credit products like theirs.

When asked about the legislation, Elevate officials said in an email that the company, “like other fintech lenders, supports any efforts that would clear up regulatory uncertainty, responsible lending and lead to more financial innovation for U.S. consumers."

Correction, Dec. 24, 2017, 11:52 a.m.: An earlier version of this story reported that Ken Rees formed ThinkCash in 2001. Rees joined ThinkCash as CEO in 2004.

Clarification, Dec. 24, 2017, 11:52 a.m.: The story also reported that First Delaware Bank originated ThinkCash loans "for a fee," rather, the bank kept a portion of the interest on those loans. The story has also been updated to reflect Think Finance's claim that the FDIC cease and desist order did not apply to their relationship with First Delaware Bank.

Clarification, Jan. 6, 2017, 3:05 p.m.: An earlier version of the story reported that Native American tribes, as sovereign entities, are exempt from state usury laws. It has been updated to reflect that tribes are immune from certain lawsuits, not exempt from state usury laws.

Clarification, Jan. 12, 2017, 11:20 a.m.: An earlier version of the story reported that First Bank of Delaware was directed to stop working with payday lenders including ThinkCash. The bank was directed to stop certain banking practices and make changes to its consumer product division, which included a ThinkCash product as part of a cease and desist order. The story was also updated to add that Elevate’s RISE product is offered in some states with interest-rate caps. The story was also updated to clarify that Republic Bank & Trust sells economic interest in the loans, rather than loan balances.