The Beginning Of The End Of World Acceptance Corporation

| About: World Acceptance (WRLD)
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Summary

The Consumer Financial Protection Bureau's Civil Investigative Demand might be the beginning of the end of World Acceptance Corporation.

Investigative journalism shows that the company is guilty.

Potential Enforcement Action is at conservative assumption 11.54 x adjusted equity of World Acceptance Corporation.

World Acceptance Corporation (NASDAQ:WRLD) filed an 8-K filing announcing that it has received a Civil Investigative Demand ("CID") from the Consumer Financial Protection Bureau ("CFPB") with the stated purpose of determining

"whether finance companies or other unnamed persons have been or are engaging in unlawful acts or practices in connection with the marketing, offering, or extension of credit in violation of Sections 1031 and 1036 of the Consumer Financial Protection Act, 12 U.S.C. §§ 5531, 5536, the Truth in Lending Act, 15 U.S.C. §§ 1601, et seq., Regulation Z, 12 C.F.R. pt. 1026, or any other Federal consumer financial law" and "also to determine whether Bureau action to obtain legal or equitable relief would be in the public interest."

World Acceptance furthermore announced that:

"The CID contains broad requests for production of documents, answers to interrogatories and written reports related to loans made by the Company and numerous other aspects of the Company's business."

The shares of the company closed down 20% on Thursday following the announcement. I will discuss what investors should make of the CID in this article.

Innocent until proven guilty (but highly likely to be guilty…)

Of course the company is innocent until proven guilty, but this probe confirms my short thesis on the company, which I published on Seeking Alpha about a month ago. The potential catalysts of my previous published short thesis were

a) CFPB is highly likely to issue an enforcement action against World Acceptance Corporation, as ProPublica coverage shows that the company is engaging in deceptive marketing practices breaching the guidelines of CFPB. The enforcement action will highly likely bankrupt the company, as the size of the expected payback to customers is expected to be multiples of the company's stated (the stated equity is highly likely to be overstated due to the company's accounting for refinancing and extension of refinancing to delinquent borrowers) and adjusted equity.

b) Correction in the company's accounting, which would make the company breach the covenant on its credit facility and make the stated equity materially lower. It will furthermore show that the company is generating de minimis real earnings. This might make investors realize that the company's premium valuation to peers is not warranted

Catalyst a) is at its beginning, as we are now 100% certain that CFPB is in its final process in determining whether the company has engaged in deceptive marketing practices that ProPublica coverage has showed the company does engage in. What in particular has caught my attention in regards to the CID, is the part of it where the company states that the CFPB is requesting answers to written reports related to loans made by the company. Those reports are highly likely to include the ProPublica ones and mystery shopper reports.

The potential enforcement action

As I detailed in my first piece on the company, the potential repayment excluding interest and assuming that the company will not be required to repay the entire insurance premiums (as the company act as an insurance broker), but only its brokerage commission is USD 620,096,537. That corresponds to 1.89 times the company's equity as of December 31, 2013. Remember the 1.89 times the equity is not adjusting for the overstated quality of the loan book. When I adjust the loan book to what I believe is a realistic allowance for loan losses, the potential repayment excluding interest corresponds to 11.54 times adjusted equity.

Keep in mind that is under the conservative assumption that World Acceptance will only be required to repay the commission it has received from selling add-on products in the last 10.75 fiscal years (2003 to 9M 2014), even though that there are 10-K filings available going back to 1997. Add the interest to that and the civil penalty to that figure and the total bill for the company is likely higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.