Post-2008 financial crisis, the alternative lending industry flourished providing access to quick funds to individuals and SMEs left in the lurch by their banks. Behind it’s unprecedented growth was also a weak regulatory framework and a risky business plan that sometimes involved circumventing states’ usury laws. Think Finance is the latest addition to the list of high-flying fintech startups that got crushed due to their inability to navigate lending laws and/or placate their principal backers over their performance.
Think Finance was started in 2001 by Mike Stinson in Fort Worth, Texas. Ken Rees replaced Stinson as CEO in 2004. The company raised $60 million in venture capital from Sequoia Capital and others, and secured a $90 million credit facility from Victory Park Capital Advisors in 2010.
Think Finance is an online provider of software technology, analytics, loan servicing, and marketing services. Working with other companies, the offer and service lines of credit and installment loans over the internet throughout the United States. In 2013, with revenues of over $500 million, Think Finance was ranked #2 on the Forbes list of America’s Most Promising Companies. In 2014, the company did a strategic restructuring, resulting in the spinoff of a new independent company called Elevate, which became a five-time honoree on the Inc. 5000 List of Fastest Growing Companies (2010-2015).
Trouble in the “Think Finance” Paradise: Filing for Bankruptcy
Think Finance former CEO Ken Rees is a serial entrepreneur, innovator, and veteran of the financial services industry. In 2001, he founded CashWorks Inc., a non-bank financial technology company in Dallas, served as CEO and president, and, in 2004, sold it to GE. After that, he founded Payday, one of the first online payday lenders. He moved on to head Elevate after the restructuring. Martin Wong, a financial industry veteran, with stints in Citigroup, Western Union, and Cigna, now leads the company.
Privately held Think Finance and five affiliated debtors filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Northern District of Texas, lead case number 17-33964, on October 23, 2017. The company is represented by Gregory G. Hesse of Hunton & Williams.
According to documents filed with the court, “While Think Finance had intended to leverage its successful track-record and explore opportunities for continued growth and innovation in the fast-moving fintech industry, it has been forced to seek bankruptcy protection because of a liquidity crisis caused by hedge fund Victory Park Capital Advisors, LLC (‘Victory Park’). Victory Park has caused GPL Servicing, Ltd. (‘GPLS’) – an entity that owes Think Finance and its subsidiaries tens of millions of dollars – to stop paying Think Finance for its services and Victory Park has raided GPLS’s bank accounts. The scheduled payments from GPLS that Victory Park has intercepted represent a major component of Think Finance’s near-term cash flow. Without these funds, Think Finance soon could be forced to cease or substantially curtail its operations.”
Think Finance’s Chapter 11 petition indicates total assets greater than $100 million.
The debtors intend to continue in the possession of their respective properties and the management of their respective businesses as debtors in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.
What Caused This Meltdown?
Think Finance has been accused of being a predatory lender in multiple federal lawsuits. Along with the Chicago Hedge Fund, Victory Park Capital Advisors, the company was alleged to be running a “rent-a-tribe” scheme under which they were running investors’ money through a web of shell companies to make it look like legally-exempt Native Americans are making short-term, high-interest loans to needy borrowers.
Many lenders have used Native Tribes to dodge the usury law. The law targets the practice of charging excessively high rates on loans by setting caps on the maximum amount of interest that can be levied. But trouble brewed when Victory Park cut off Think Finance’s access to funds. Pennsylvania Attorney General has accused both of being active participants in this scheme.
Both parties are contesting the case on the grounds they do not fall under the scope of a “lender.” Think Finance is portraying itself as a financial technology provider, and Victory Park stated it merely provided money through “commercial transactions” that was used to make the online loans. Bankruptcy should help clear the air on how these transactions were actually structured. But for now, the company’s future looks bleak.
Final Nail? CFPB Sues Think Finance
“We are suing Think Finance for deceiving consumers into repaying loans they did not legally owe,” said Consumer Financial Protection Bureau (CFPB) Director Richard Cordray. “Think Finance wrongly took money from people’s bank accounts, so we are seeking relief for consumers and a civil money penalty.”
The two main grounds for these accusations against Think Finance are:
- Think Finance allegedly conned consumers into making payments for a debt they did not owe – Usury laws void a loan if the rate charged exceeds the interest rate allowed by the state. Think Finance allegedly duped its customers into paying for the debt even though those loan agreements were void under the state’s usury laws. Moreover, ThinkFinance was allegedly unlicensed in some states thus rendering those loans void, as well.
- Think Finance allegedly collected loan payments that consumers did not owe – Think Finance, without the knowledge of its customers, allegedly transferred loan installments electronically from customer bank accounts and allegedly sent letters to customers asking for payments that they were not obligated to pay.
Therefore, the CFPB is seeking monetary relief for consumers, civil money penalties, and injunctive relief, including a prohibition on Think Finance’s collecting on void loans.
It is safe to say that Think Finance is in an extreme legal quagmire. In the bigger scheme of things, this situation throws light on the “shortcuts” used by fintech companies to grow their lending books. Think Finance’s bankruptcy feels like a tip of the iceberg. With regulations getting more stringent, more such cases are expected to pop up in the future.
Written by Heena Dhir.