All eyes are turning to the payday lending industry again, thanks to the almost-two-year-old Consumer Financial Protection Bureau (CFPB). A recently released white paper called “Payday Loans and Deposit Advance Products” has caused a lot of chatter, bringing me to believe that more regulations for the industry are imminent.
For investors, publicly traded payday lending companies have been attractive, partly due to the lucrative revenues they pull in from the high fees they charge consumers. However, this may wane in the future as more attention and regulation are placed on companies operating in the niche financial space.
In the crosshairs are the usual suspects, not traditional banks. They include storefronts, such as Cash America International, Inc. (NYSE:CSH), EZCORP Inc (NASDAQ:EZPW), and World Acceptance Corp. (NASDAQ:WRLD). However, the lucrativeness of the business has pushed larger financial players into the space. One of them is Wells Fargo & Co (NYSE:WFC). All of them comprise an industry known to make short-term loans at much higher fees than would be attached to typical loans.
The storefront lenders, which are considered non-banks because they don’t have bank, credit union, or thrift charters, have received the most attention from regulators. This has made it difficult for them to be regulated and subjected to the same regulations faced by traditional banks like Wells Fargo & Co (NYSE:WFC). Enter the CFPB, which has been on a mission to rein in payday lenders whose practices take advantage of poor and desperate borrowers who are down on their luck financially.
Protection agency could hurt the industry
If the CFPB has its way, all of them may see profits decline. Remember, payday lenders charge significant fees for making these loans. Investors, and others who follow this industry, have tolerated the bad press these lenders have received, but their interests could wane if revenues are jeopardized.
Payday loans are typically made in $100 increments, with a $15 fee per $100 borrowed. According to the CFPB, such a loan would yield an APR of an astronomical 391% on a typical 14 day loan. This is egregious by the standards of many, but it is often the worse of two evils for borrowers. Many find themselves in need of emergency cash, and these lenders are the only way to go.
Studies like the one recently released by the CFPB are nothing new. Internet searches unveil dozens of such reports that warn of the dangers of payday lenders. Still, this seems to have done little to curb their use. Following the 2008 economic crisis that took its toll on the finances of many Americans, payday lenders saw their customer rolls swell.
Payday lenders’ performance
I took a look at how the stocks of the storefront payday lenders performed since 2008, and they have been relatively solid. In fact, all of them saw their stocks rise after 2008, but World Acceptance Corp. (NASDAQ:WRLD)’s share price skyrocketed and never looked back. Also, all of them have market caps of more than $1 billion, with Cash America International, Inc. (NYSE:CSH) having the largest at roughly $1.2 billion.
Something interesting that I found has to do with their year-over-year returns to investors. According to YCHARTS, the year-over-year returns to investors for these stocks are mixed. World Acceptance Corp. (NASDAQ:WRLD) is the only one that is up at 32.51% for the year compared to last year. Cash America International, Inc. (NYSE:CSH) is down 1.13%, and EZCORP Inc (NASDAQ:EZPW) is down 23%. This is versus the S&P 500’s total return being up 20.6%.
Big banks join the fray
As mentioned above, larger banks have also joined the fray and have offered or facilitated payday loan lending. The largest is Wells Fargo, which has a product called Direct Deposit Advance. For every $20 borrowed, the fee is $1.50.
The CFPB has not said it wants to outright ban these products. However, any move that it takes to protect consumers from these high fees will likely reduce them.
Look out ahead
Another move underfoot by the CFPB has to do with the deposit advance products offered by banks, such as the one I mentioned about Wells Fargo. At the end of the month, the CFPB will begin reviewing what will likely be thousands of comments about how it will pressure the big banks about how these products can be just as damaging to consumers as payday loans. I’ll detail the big banks that have such products in an upcoming post.
The article Good Old Days For Payday Lending Stocks Could Be Ending originally appeared on Fool.com and is written by Tedra DeSue.
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