More Bearish Developments for Payday Loan Stocks

by: Larry Meyers

Two weeks ago, I alerted readers to some very likely bad news coming out of Washington for payday lenders. The difficulties payday lenders will face once the CFPA opens its doors range from loan limits to unknown regulatory restrictions. At the time, I went through potential revenue hits each company would be likely to experience.

Having had more time to digest the regulatory specifics, and in watching the trading action of the past few days, I regret to inform readers that even more bearish developments are accruing. It’s a dangerous time to be holding these stocks. It pains to me to say it, though. I’ve done very well in them over the years and I love the industry, but a lot of investors have asked me to opine on the situation and I owe them an honest take.

I’ll examine the serious issues facing these companies in a bit more detail today.

Loan Limit Impact

Only Advance America (NYSE: AEA) and Dollar Financial (Nasdaq: DLLR) allow us to determine the average number of payday loans used per year by a customer, which are 8 and 7.25, respectively. After perusing several independent studies, the average across all companies appears to be about 9.25. From this, and using 2009 annual reports for each company, I’ve broken out exactly what the revenue risks are to the six loan limit, as proposed in Sen. Hagan’s misguided amendment to the CFPA, which she filed early last week.


% of Revenue Contribution from PDL Fees

% of Total Revenue at risk



















The problem doesn’t end here. The challenge faced by these companies is that while revenue gets reduced, expenses do not. Yes, there will be some savings since fewer loans translates into reduced principal losses. Operationally, however, there will not be a significant difference, so that means revenue losses go straight to the bottom line – and that means most, and in some cases, net income will vanish.

In other words, everyone will be losing money, no matter how diversified they are.

Now, I expect there are ways that lenders will find to boost revenue. Necessity is the mother of invention, and I would expect some of the damage to be blunted with the introduction of new products. However, we cannot count on that.

The news gets worse. Senator Hagan, along with co-sponsors Sen. Durbin and Sen. Chuck Schumer, seem intent on crushing the entire industry. Another section of the amendment “prohibits the purchase or sale, at the same location at which covered loans are offered, of other products or services”. Well, that’s just great. So even if you are Cash America (NYSE: CSH), and you offer pawn loans and payday loans in the same spot, you can kiss the pawn loans goodbye. If you offer check cashing, goodbye to that. And so on. In that case, the companies will be left with having to choose between offering payday loans or other services. That means all the revenue from payday loans could disappear.

All of this may be moot, however, because the amendment also gives power to the CFPA to establish licensing requirements. Since those licensing requirements are not specified, whomever ends up running this useless agency could create requirements so onerous as to make any lending impossible. Given that the prime candidates to head the CFPA are payday loan hater Elizabeth Warren and Eric Stein, the former head of the Center for Responsible Lending (payday lender’s arch nemesis), well, I just don’t think the payday loan business will be long for this world.

Of course, this is politics, and anything can happen. However, given the likely outcome, and that the trading in these stocks has been anything but bullish, I have to give a sell signal on everything in the near-term. Specifically, we’ve seen more down volume than up volume since this whole debacle began. With the exception of this past Monday, where we did see some strong buying into the close, large blocks of shares are being sold throughout the day. The charts are all broken. Advance America and QC Holdings (Nasdaq: QCCO), being monoline operators, have not surprisingly broken through their 200-day moving averages. The other four players each tested their 200-day averages and bounced off, but the volume on Monday was not impressive.

I wish I had better news for longs, but things are looking exceedingly grim. This, of course, does not even mention the 150,000 jobs at risk, and the millions of people who will be forced into more expensive options for short-term credit.

Full Disclosure: Lawrence Meyers does not own shares in any stocks mentioned.