By Jim Fuquay
jfuquay@star-telegram.com
In an economy still regaining its stride, it's usually considered good news that lenders are extending more credit to borrowers.
Unless the subject is payday loans.Then state and federal regulators look for ways to clamp down on the expensive loans. Just recently, Richard Cordray, director of the Consumer Financial Protection Bureau, told
The Wall Street Journal that he was looking for ways to expand his agency's oversight of short-term personal loans, which he called "debt traps."Ken Rees takes exception to that description, but only to a degree.As the CEO of Fort Worth-based Think Finance, Rees heads a fast-growing online lender that makes payday and other kinds of high-interest, short-term loans to consumers. While the private company doesn't report detailed finances, it says it has made $3.5 billion in various kinds of loans and leases to 1.5 million customers since its launch in 2001.Rees said less than $1 billion of that has been in the form of payday loans, which provided the company's start. By 2006, he said, Think Finance had branched into other services, and the company's growth is predicated on offering different forms of credit."We're a 'tweener' — not a bank, but not a payday lender," he said during a recent interview at the company's southwest Fort Worth offices, where about 400 people work.It has also grown into a sizable enterprise. The company says it had revenue of $502 million last year. That was just about double its 2011 total.Think Finance has a lease-to-own online service called Presta, which offers electronics, jewelry and housewares on weekly payments. It provides back-office processing for other lenders, such as Plain Green, an online payday lender owned by the Chippewa Cree tribe in Montana.It has an affiliate, Rise Credit, that makes online loans through a bank partner, and it has a pilot program for MySalaryLine, which aims to make loans through the borrower's employer. It also has a payday loan operation in the United Kingdom.It's all high-interest lending, and all done online. Rees said the annual percentage rate charged on the company's various loans and leases range from about 60 percent to 364 percent.Those rates are typically calculated by converting one-time fees on short-term loans to an annual percentage rate, or APR. Federal rules require lenders to include an APR on customer disclosures.For example, payday lenders on average charge $15 for every $100 borrowed for what is typically a two-week period. Under those terms, the loan would carry an APR of 391 percent. Loan fees of $20 per $100 borrowed, which also is a relatively common rate, translate into a 521 percent APR for two weeks.That's a lot, but Rees notes Think Finance's relatively lower rates and says "the margins are not unreasonable" in Think Finance's businesses, with the company reporting operating margins between 17 percent and 20 percent. "There is a meaningful expense to delivering small, high-cost credit" that justifies the steep rates, he said."But I also don't agree with the payday lenders' position of charging that customer the same rate over and over," Rees said. Think Finance lowers borrowing rates for repeat customers who have a record of paying back loans. He said Think also reports customers' loan performance to credit bureaus and tries to promote financial literacy resources on its website to educate borrowers about using creditAnother big downside of payday loans, one that regularly draws the scrutiny of consumer advocates, is that relatively few customers pay off their loan the first time it's due or take out multiple loans in a year. A study for the Consumer Financial Protection Bureau found that just 13 percent of payday loan borrowers took out just one or two loans in a year, while 14 percent took out 20 or more.The Consumer Financial Services Association, a payday lenders' trade group, said the study overcounted the most frequent borrowers.Either way, Rees says he's got a solution to that, too: installment loans that have longer terms and APRs that decline as the term grows longer. "It's so inflexible that they have to roll over the loan" by being locked in to a two-week term each time, Rees said. "Installment loans allow them to pay it down over time."For example, he said, a $1,000 installment loan with an eight-month term could carry a rate about half that of a straight payday loan. Still, the longer term also means the borrower is incurring interest charges longer, and the payments still add up to big money.Plain Green, the tribal-sponsored online lender that uses Think Finance's platform, lists a $1,000, 24-week loan that carries a 299 percent APR. But the loan also requires 24 bi-weekly payments of $124.16 each, which over 48 weeks means nearly $3,000 in total payments.Plain Green officials did not return phone calls seeking comment.Big money could also describe the online payday loan industry. According to a study by Stephens Inc., an investment bank, $18.6 billion in online payday loans were made last year, up 10 percent from a year earlier and about 40 percent of all payday loans made.That has attracted regulators' attention. In August, New York's Department of Financial Services sent letters to 35 online and tribal lenders ordering them to stop making loans to New York residents.Rees said Think Finance operates under the laws governing payday lending in each state and simply doesn't do business in states such as North Carolina, with rate caps it considers too low."The need for credit is higher than ever before, particularly for people without access to credit" from banks and other traditional lenders, Rees said. "We're trying to provide real-world products."
Jim Fuquay, 817-390-7552 Twitter: @jimfuquay
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