Elevate, a venture-backed company that uses big data to assess loan applications from people with low credit scores, has been called out as a predatory lender, including in Fortune last year. One reason among others is that the APR on some of its loans is a stunning 349 percent.
Yet the company’s predecessor, Think Finance, which was founded in 2001 and quietly spun out Elevate into a new entity in 2014, is no hero to those with so-called non-prime credit, either, suggests a new lawsuit that is now moving toward a trial.
According to the suit, plaintiffs are seeking financial relief against a particular payday lender that partnered with Think Finance to avoid state anti-usury laws and that has “taken advantage of people who are struggling financially by charging extortionate interest rates and engaging in illegal lending practices,” it states.
Among the specific claims against Think Finance — as well as its venture backers Sequoia Capital and Technology Crossover Ventures — are that they engaged in racketeering and the collection of unlawful debt.
The payday lender is Plain Green, LLC, which calls itself a “tribal lending entity wholly owned by the Chippewa Cree Tribe of the Rocky Boy’s Indian Reservation.”
But Matthew Byrne, the Burlington, Vermont-based attorney who has filed the complaint, writes in it that “Plain Green was created after existing payday lenders approached the Chippewa Cree Tribe of the Rocky Boy’s Reservation . . . and requested that the Tribe become involved in a payday lending scheme.”
In the U.S., he writes in the complaint, “stringent laws have been enacted to prescribe how loans can be made and to prevent lenders from preying on indigent people. By involving the Tribe in the payday lending scheme, the lenders hoped to circumvent these laws and take advantage of legal doctrines, such as tribal immunity, to avoid liability for their actions.”
All defendants had filed motions to either dismiss the case or compel arbitration. Late last week, a judge ruled instead that the case can proceed to trial.
The Chippewa Cree Tribe isn’t the only Indian reservation with which Think Finance has partnered. A couple of years ago, Pennsylvania’s state’s attorney general filed a consumer protection lawsuit against Think Finance for violating a number of the state’s laws by targeting consumers for payday loans, citing three Native American tribes that Think Finance was using to sell its lending products. Think Finance filed a motion to dismiss the case, but, as with this new case, a Philadelphia judge ruled in January that Think Finance will have to face the claims against it.
If the state’s attorney general wins against Think Finance, it won’t be the government’s first victory against the company. It previously shut down an earlier so-called rent-a-bank scheme used by Think Finance, which reportedly used a Philadelphia bank to provide high-interest rates to consumers.
For Byrne’s suit to move ahead as a class-action suit, the judge has to certify that there’s evidence that there are a number of similarly situated people who suffered the same damage. RIght now, Byrne only has a couple of plaintiffs involved in the case; they are Vermont residents Jessica Gingras and Angela Given, both of whom borrowed money from Plain Green, which is an Internet-only business that asks borrowers to apply for credit through an online application process.
According to the lawsuit, both borrowed small sums of money for up to one year, at interest rates that violate Vermont’s usury laws, which permit a maximum annual APR of 24 percent. In 2011, Gingras borrowed $1,050 at a rate of 198.17 percent, money she repaid with interest. In 2012, she borrowed another $2,900 at a rate of 371.82 percent — repayment with interest she didn’t complete this time. Given, who took out three loans from the company, was variously charged 198.45 percent, 159.46 percent and 59.83 percent.
The lawsuit suggests she was unable to pay back her last loan because the rate was too onerous.
Think Finance had raised at least $60 million from investors, including TCV, Sequoia and Startup Capital Ventures. It has also raised tens of millions in debt from Victory Park Capital, an investor in another lender to consumers with low credit scores: Avant.
The lawsuit asserts that TCV general partner John Rosenberg has served on the board of Think Finance since 2009 and that he and former Sequoia Capital partner Michael Goguen “directed the strategy that Think Finance followed, including its domination and control of Plain Green.”
Asked about the lawsuit, Sequoia Capital declined to comment, as did Technology Crossover Ventures.
A source familiar with the situation says Sequoia never replaced the board seat of Goguen — who left the firm following a separate, explosive lawsuit filed against him earlier this year.
Elevate CEO Ken Rees, who was the CEO of Think Finance until it restructured its business and spun out Elevate, is also named as a defendant. Asked for comment, he offered only a short statement via email, writing, “Elevate is not a party to this lawsuit and it is not our policy to comment on pending litigation.”
A spokesman for Think Finance meanwhile wrote in an email to us that: “We will assess our legal options with this matter, which remains in its preliminary stages, and are confident that we will ultimately prevail on the merits.”
Elevate had planned to go public earlier this year. It shelved that stock offering, citing market conditions, according to sources who spoke with the WSJ.