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I'm going to stick my neck out and share my view on a battleground stock that is among my largest short positions: World Acceptance Corp. (WRLD).

World Acceptance is an installment lender that makes small, unsecured loans to subprime borrowers via 1,210 offices in 13 states and Mexico. It has highly attractive financial characteristics and has grown strongly for many years, leading to exceptional stock performance. Keep in mind, however, that these statements also characterized subprime mortgage lenders like Countrywide up to the peak of the housing bubble -- just before it collapsed. Like them, I believe that World Acceptance is a truly predatory company, victimizing and exploiting its customers with usurious interest rates, outrageous fees and overpriced, unnecessary credit insurance. This business is so shady and exploitative that it is effectively outlawed in all but the 13 states World Acceptance operates in.

I became aware of the company by reading an expose published by ProPublica, which has won two Pulitzer Prizes for its investigative journalism. Its series of articles on World Acceptance is an extraordinary piece of work that lays out in detail the many ways in which the company deceives and defrauds its customers. Here are the highlights (lowlights) from the series:

Repeat Refinancing of Delinquent Borrowers

• In every World office, employees say, there were loan files that had grown inches thick after dozens of renewals. "That's (World's) favorite phrase: 'pay and renew, pay and renew, pay and renew,'" Simmons said. "It was drilled into us." It's a tempting offer: Instead of just scrambling for the money to make that month's payment, the borrower gets some money back. And the renewal pushes the loan's next due date 30 days into the future, buying time."

• "For Sutton, making her monthly payments was always a struggle. She remembered that when she called World to let them know she was going to be late with a payment, they insisted that she come in and renew the loan instead."

• World's credit quality is a fiction, a substantial number of customers can't repay and are repeatedly refinanced. "At World, a normal month begins with about 30 percent of customers late on their payments, former employees recalled."

Comments on Deceptive Sales of Credit Insurance

• "Former World employees say they were instructed not to tell customers the insurance is voluntary."

• "World can legally understate the true cost of credit because of loopholes in federal law that allow lenders to package nearly useless insurance products with their loans and omit their cost when calculating the annual rate."

• "As part of her loan, Sutton purchased credit life insurance, credit disability insurance, automobile insurance and non-recording insurance. She, like other borrowers ProPublica interviewed, cannot tell you what any of them are for: 'They talk so fast when you get that loan. They go right through it, real gibberish.'"

• "'Every new person who came in, we always hit and maximized with the insurance,' said Matthew Thacker, who worked as an assistant manager at a World branch in Tifton, Ga., from 2006 to 2007. 'That was money that went back to the company.'"

• "When insurance products are optional - meaning the borrower can deny coverage but still get the loan - borrowers must sign a form saying they understand that. 'We were told not to point that out,' said Thacker, the former Tifton, Ga., assistant manager."

• "'You were supposed to tell the customer you could not do the loan without them purchasing all of the insurance products, and you never said 'purchase,''' Buys recalled. 'You said they are 'included with the loan' and focused on how wonderful they are.'"

• A regional supervisor threatened to discipline a sales person for advising customers that the insurance was voluntary.

• World's systems don't let a customer decline the optional insurance: "But World soon made it harder to remove the insurance premiums,' Buys said. She couldn't remove them herself but instead had to submit a form, along with a letter from the customer, to World's central office. That office, she said, sometimes required borrowers to purchase the insurance in order to get the loans."

Threatening Customers in Violation of FTC Rules

• "If the phone calls don't work, the next step is to visit the customer at home, 'chasing,' in the company lingo. 'If somebody hung up on us, we would go chase their house,' said Kristin from Texas. The experience can be intimidating for customers, especially when coupled with threats to seize their possessions, but the former employees said they dreaded it, too. 'That was the scariest part,' recalled Thacker, a former Marine, who as part of his job at World often found himself driving, in the evening, deep into the Georgia countryside to knock on a borrower's door."

• "Visits to the borrower's workplace are also common. The visits and calls at work often continue even after borrowers ask the company to stop, according to complaints from World customers to the Federal Trade Commission. Some borrowers complained the company's harassment risked getting them fired."

• World also threatened to collect personal possessions pledged as collateral even though the FTC bars pledging "household goods" such as a TV and furniture.

The Consumer Financial Protection Bureau was established precisely to combat practices like World's. As the ProPublica article notes:

The Consumer Financial Protection Bureau ... has the power to sue non-bank lenders for violating federal laws. It could also make larger installment lenders subject to regular examinations, but it hasn't yet done so. Installment companies have supported Republican efforts to weaken the agency, echoing concerns raised by the lending industry as a whole.

Will the CFPB act to rein in World and its ilk? I think it's likely, as it's already acting against payday lenders, which utilize similar techniques to victimize consumers. In April, the CFPB released a report entitled Payday Loans & Deposit Advance Products, which the Wall Street Journal covered in an article entitled, U.S. Regulators to Warn Against Payday-Style Loans:

Federal regulators are preparing to crack down on short-term payday loans and similar products offered by banks after concluding they trap consumers into taking on debt that they can't repay.

The Office of the Comptroller of the Currency and Federal Deposit Insurance Corp., in an effort to prevent so-called direct deposit advance loans, plan to warn banks against offering such products and erect hurdles for those that continue doing so, said people familiar with the matter.

The regulators plan to issue guidance mandating that banks evaluate consumers' ability to repay such loans and limit how often they can make repeated loans to the same customer.

Meanwhile, the Consumer Financial Protection Bureau said it also intends to throw up roadblocks to payday loans, suggesting it could limit the number of consecutive loans to discourage consumers from taking on too much debt.

The CFPB, in a report to be released Wednesday, said it expects to use its authority to provide consumer protections to loans issued by nonbank lenders.

Dennis Shaul, chief executive of the Community Financial Services Association of America, which represents payday lenders, said his industry would "work with the CFPB to ensure payday loans are a safe, reliable option for the millions of consumers who need access" to short-term loans.

The crackdown comes amid criticism of short-term loans that are intended to help consumers through a financial rough patch but can quickly trap them in a cycle of debt, in which they need to take out subsequent loans to pay debts they have already incurred.

In late July the company finally issued its 10K, which was delayed, and dropped these bombs (which are most definitely not boilerplate):

Management's assessment of the Company's internal control over financial reporting identified a material weakness related to the documentation of the establishment and assumptions underlying the adequacy of the allowance for loan losses and the documentation of management's assessment of renewals that may be considered loan modifications as of March 31, 2013…

…The material weakness resulted from the aggregation of the following deficiencies:

• The Company did not have a documented policy that addressed the establishment of the allowance for loan losses, including the assumptions underlying the allowance for loan losses and how management would review and conclude on the appropriateness of the allowance for loan losses; and,

• The Company did not have a control to assess whether the accounting treatment of renewals was in accordance with U.S. generally accepted accounting principles and what impact, if any, renewals would have on the estimate of the allowance for loan losses

So I guess it shouldn't be surprising that the company released the news this week that its CFO, Kelly Malson, "retired" (at the age of 43???), which was obviously very sudden given that the company hasn't even begun a search for a new CFO. (In an unrelated note: Malson is Chair of the audit committee at CONN, another highly questionable company.)

What's the proper price for the stock of a highly levered financial company doing unsecured lending to subprime customers, which admits to material weaknesses in calculating loan losses and determining if a loan has been modified, that suddenly and unexpectedly lost its CFO, facing potentially crippling regulatory action? I'd argue that 1x book value would be generous, especially in light of questionable loss reserves. Yet World's shares trade at nearly 3x book value, so I think the stock has at least 67% downside -- and I wouldn't rule out a zero. Simply put, this business should not exist.

Source: World Acceptance: A Battleground Stock I'm Short