Payday Lenders Getting Obama'd

Thanks to reader Link for sending this story via AP -as much as I imagined this massive weakness had something to do with politics. We had the same issue near the turn of the year [Jan 7, 2009: Pawn Shops - Something is Up]

Shares of payday lending companies EZCorp Inc., Cash America International Inc. and First Cash Financial Services Inc. slid Wednesday amid growing expectations that President-elect Barack Obama will tighten regulations on the industry. The statement also says Obama plans "to extend a 36 percent interest cap to all Americans" and "require lenders to provide clear and simplified information about loan fees, payments and penalties."

Unfortunately, despite a company executing over and over [Jan 23, 2009: EZCORP Up 17% on Earnings] [Nov 6, 2008: EZCORP - Executing Well, Raising Guidance for '09] the pattern seems to be surge on earnings and selloff the other 2.9 months of the quarter as hand wringing about legislation dominates. It is too bad we cannot separate the cash advance business (which we don't like) from the pawn business (which we do like) Ironically we chose EZCORP (EZPW) since it had less of a reliance on cash advance than some competitors, but it has not shielded it one bit. Same with First Cash Financial (FCFS) who has a similar ratio of cash advance to pawn shop

• Shares of several payday lenders and pawn shop owners continued to fall for a second day Friday amid signs of tighter short-term consumer loan regulation at the federal and state levels.
• Sterne Agee analyst Henry Coffey said in a research note Friday that a bill expected to be introduced soon in the U.S. House of Representatives would focus on payday lenders, and likely will include a 36 percent cap on interest rates. A broader financial services bill being prepared in the Senate also is expected to include a 36 percent cap, Coffey said.
• "Any bill coming out of Congress is likely to ban or crimp the payday loan product," Coffey wrote.
• Coffey said he considers concerns that Mexico could impose a rate cap on its growing consumer finance industry to be "overblown." But he wrote that the possibility is a "risk factor." He noted that FirstCash Financial Services Inc. has the greatest exposure to the Mexican consumer finance market in a group of companies that also includes Cash America International Inc., Dollar Financial Corp., EZCORP Inc. and World Acceptance Corp.
• Lawmakers in several states also are considering tightening laws governing payday loans, which are short-term, unsecured loans offered to cash-strapped consumers. The loans typically mature in two weeks or on the borrower's next payday. They are often priced at a fixed-dollar fee, but the underlying annual interest rate is usually near 400 percent or more. The possibility of a 36 percent cap would effectively ban current industry practices.

As I said in January

I'd like to add that with the default rate of many people who visit payday lenders, there will be no business at 36%. I've investigated this business very in-depth in a "real world" (non-investing) angle - the default rates are immense. While 400% is egregious, 36% is not a rate that will be profitable considering default rates many times in the 30-70%+ range. These are people with FICOs in the 450-550 range much of the time i.e. they don't pay you back for long.

So effectively this cash advance market will come to a close and people who are already desperate for money will be turning to... well I don't know. Maybe the federal government who is doing a great job of handing money from one group to another. Frankly some credit card companies are putting people with much higher FICO scores into 28% interest rates, so you are going to put the lowest FICO scores into 36%? The model dies.

As to EZCORP for such a broken stock - the only play now is to buy on the dip, sell (and then short) into the rip back up into resistance, so that will be our game plan for now. The sector now has overhang of (at best) potential legislation and (at worst) actual legislation.

Obama does not heart payday lenders. He did the same to "safe" sectors like health care/insurers - one example of destruction below. Remember when Obama used to push stocks up (infrastructure) Those were the days... (60 days ago)

Disclosure: Long EZCORP in fund; no personal position

Comments

[Dan Jacome:]

Nothing safe about managed care - everyone knows its the most vulnerable to the business cycle given its leverage to commercial employment trends.

Mar 01 09:22 PM

[Mr. Ed, Jr.:]

The author is correct that a 36% cap would be the end of the payday loan business.

These loans (generally two or three hundred dollars for about 2 weeks) are made to sub-subprime credit risks who have already tapped all remaining friends and family and have triple-checked between the sofa cushions for loose change. Their only security is a post-dated check.

So, a 36% APR on a 2 week, $300 loan.....
Never mind a ridiculously high default rate-- the lender would be in red ink just from writing the loan, verifying employment and entering it into the computer.

Would this government deliberately put an entire industry out of business as we head into a possible depression ? And especially one that a lot of people might want to use if things start getting really tough ?

I certainly understand that there are differring views on the payday loan business. Some believe it is immoral ; others may feel it takes advantage of people who are desperate. But please remember-- you have to have a job to get a payday loan. Doesn't the very fact that a person holds a job render him or her capable of making these decisions without government intervention ?

Have Americans really become so dimwitted that they cannot make a competent decision about whether to use a payday loan ?

Mar 02 12:54 AM

[iknoknot:]

with all due respect, mr ed,

"Have Americans really become so dimwitted that they cannot make a competent decision about whether to use a payday loan ?"

as i see it, when mr. buffet misses the bottom call three times, can we safely assume that the average joe has enough understanding of the current situation to properly make a rational 400% loan decision? This has nothing to do with competence.

I defy anyone to explain to me why anyone bought (non-short) stocks on Friday. "certainly can't go much lower than this?". And I assure you the guys buying those stocks have much better access to the 'bigger picture' information driving today's markets, and they still bought.

not to miss your point, i abhor government regulation of this sort, but to assume competence is relevant when so little meaningful information is available (via the NYT, etc.) to otherwise bright people... hell, with these kinds of policies making headway, why stop there... perhaps brokerage firms should be shut down as well for allowing this same lunacy.

i'm concerned,

--ikk

Mar 02 03:33 AM

[2houndz:]

Now I wonder where that laborer is going to get the money he needs to repair his car on Tuesday when he doesn't get paid until Friday?
I suppose he can call a taxi - nope, no money for that either - quit his job, or go to Brutus and Luigi for a loan. If he doesn't pay they break his kneecaps and he's out of a job for sure, but at least he will have universal health care.

Mar 02 08:26 AM

[W NEIL:]

JUST ANOTHER EXAMPLE OF GOVERNMENT INTERVENTION INTO THE PRIVATE SECTOR!!! WE HAVEN'T SEEN ANYTHING YET!!!

Mar 02 08:36 AM

[Augustus:]

As noted earlier, there are some real costs involved in putting these small loans on the books. It almost has to be in the $30 range and probably more. $30 on a $300 loan is the first 10% that they are claiming these folks charge in interest. Then come the defaults. Making these loans in a pretty upfront way with high rates is much better than the Luigi lenders will charge them.

Mar 02 10:45 AM

[Mr. Ed, Jr.:]

Well.....the amount of money we are talking about here is probably something most people can figure out. If someone borrows $300, maybe the payback amount is $325.

I am guessing that most people can make that call for themselves. They really aren't operating in Mr. Buffett's financial world.

I guess it comes down to whether people believe the government should be making every little decision for us. Getting a payday loan may indeed be a poor financial decision, but I want the freedom to make that decision. And I think most Americans can figure it out for themselves.

On Mar 02 03:33 AM iknoknot wrote:

> with all due respect, mr ed,
>
> "Have Americans really become so dimwitted that they cannot make
> a competent decision about whether to use a payday loan ?"
>
> as i see it, when mr. buffet misses the bottom call three times,
> can we safely assume that the average joe has enough understanding
> of the current situation to properly make a rational 400% loan decision?
> This has nothing to do with competence.
>
> I defy anyone to explain to me why anyone bought (non-short) stocks
> on Friday. "certainly can't go much lower than this?". And I assure
> you the guys buying those stocks have much better access to the 'bigger
> picture' information driving today's markets, and they still bought.
>
>
> not to miss your point, i abhor government regulation of this sort,
> but to assume competence is relevant when so little meaningful information
> is available (via the NYT, etc.) to otherwise bright people... hell,
> with these kinds of policies making headway, why stop there... perhaps
> brokerage firms should be shut down as well for allowing this same
> lunacy.
>
> i'm concerned,
>
> --ikk

Mar 02 03:14 PM

[Bad Idea:]

Trader Mark states, "...this cash advance market will come to a close and people who are already desperate for money will be turning to... well I don't know".

They will go two places:

(1) The unregulated payday loan market, aka organized crime, where the penalties for late payment are pretty severe.

(2) The corner liquor store, armed with a handgun.

Thank you, President Obama, for wiping out an essential service to the very people who voted for you. Moron.

Mar 02 06:00 PM

[socphd71:]

The article is more about pawnshops than it is about payday loans. The author's point is that pawnshops are being sold because of bad news (?) for payday lenders.

Some states (AR ?) still have strict usury laws and poor people manage to survive without having to resort to personal or organized crime. And, no one knows what, if anything, might survive the legislative process. Tears shed for payday lenders are premature.

Mar 02 09:01 PM

[TXSTRADER:]

I have been seeing this democrat pushed trend against payday loans for awhile now. Where is the outcry against the banks for charging 3500% on NSF checks. I have a friend who wrote 5 checks. She did not have enough to cover all 5. The bank cleared the largest 1st then bounced the other 4. The largest was written last. When all was said and done, she had 550.00 in fees at the bank alone, and the total of the checks, 368.40. Had she borrowed 250.00 from a pay day loan she would have been better off even if she took two extra weeks to pay it off.

Mar 13 03:40 PM

[TXSTRADER:]

The industry will go away. Look what took place when they put the 36% cap on the military lending. An active duty military person can no longer get a loan in most of the pay day loans. The bottom line is how can the government tell you how to handle your finances. I have been in an EZ Money store (ezcorp) they have pamplets on how to build a budget, how to avoid identity theft and a program to help you build your credit score. I would hate to see this go away because the controlling party wants you dependent on the gov. The stores in AZ just went away so the end results are not in yet


On Mar 02 09:01 PM socphd71 wrote:

> The article is more about pawnshops than it is about payday loans.
> The author's point is that pawnshops are being sold because of bad
> news (?) for payday lenders.
>
> Some states (AR ?) still have strict usury laws and poor people manage
> to survive without having to resort to personal or organized crime.
> And, no one knows what, if anything, might survive the legislative
> process. Tears shed for payday lenders are premature.

Mar 13 03:52 PM

[Roselyn:]

Tennessee is the next state on the get-rid-of-payday-loan... Payday loans legislation has been making its way through numerous state legislatures and currently Federal as well, and most popular among them is an outright ban on short term loans, cash advances, or whatever you want to call them. The Tennessee bill is for an interest rate cap, capping interest at 36%, tantamount to a death sentence, and despite numerous studies demonstrating that bans do no one any good at all, lobbyists still try and advocate for the bans anyway. Lenders in Tennessee would likely want some credit repair if the state bans lending payday loans.

Apr 24 10:07 PM

[Fred Swartza:]

Check out how low the rates are at StarAdvance.com

$8.90 per $100 borrowed.

People with a Gold American Express in there pocket have no idea
how important that $100 be sent to there bank account overnight.

Apr 24 10:13 PM

[Roselyn:]

Tennessee is the next state on the get-rid-of-payday-loan... Payday loans legislation has been making its way through numerous state legislatures and currently Federal as well, and most popular among them is an outright ban on short term loans, cash advances, or whatever you want to call them. The Tennessee bill is for an interest rate cap, capping interest at 36%, tantamount to a death sentence, and despite numerous studies demonstrating that bans do no one any good at all, lobbyists still try and advocate for the bans anyway. Lenders in Tennessee would likely want some credit repair if the state bans lending payday loans.

Apr 24 10:13 PM

[Mo Cheng:]

Forget the fact that a 36% interest rate cap will effectively shut down the industry. I ran a store out here in oregon during the 2007 shutdown, and I saw 99.9% of the industry close over night. This movement isn't for the "good of the working class" - it's to help banks keep their revenues up from NSF charges. When the payday industry is around in the state, NSF banking fees go down because we supply credit to the very customers who would usually go NSF and rack up a few hundred dollars in overdraft charges. 20 - 40% of a banking branches revenues come from overdraft charges to give you a small idea...

Whats even more fascinating is if you plug the overdraft charges into an APR calculator... they can be upwards of 7000%!! And that is being conservative!

Jun 22 06:26 PM