Yesterday afternoon, World Acceptance revealed news that the Consumer Financial Protection Bureau is going to pursue action against the company for violations of the Consumer Financial Protection Act and the Truth in Lending Act. According to a filing from World, the CFPB's Enforcement Office has petitioned the Bureau to take legal action. World's best hope is to challenge the idea through the Notice and Opportunity to Respond and Advise process.
As a result, the company's shares are cratering this morning. The significance of the CFPB's intentions is underscored by the fact that the shares are off more than 35 percent. Is some of that drop due to their results? No. World's earnings were announced on Thursday, and their shares rose on Friday. This is 100 percent about the CFPB - and it underscores why a group of managers who believe they can can run a business while simultaneously skirting consumer protection laws are completely out of touch.
By the way, World's managers must have felt very strongly about their compliance standards. How strongly? Well, strongly enough that they were comfortable betting with their own money. The people who hold stock options with World - a group that is drawn from top management - were very aggressive in exercising their options to buy shares in recent months. The difference between spring 2014 and spring 2015 is outstanding: those option holders purchased $77,374 in options during the former period, but more than $2.3 million during the same time this year.
a) What about the banks who loan money to World? How will the respond? Will any more decide to walk away? On June 24th, World Acceptance entered into the latest iteration of its commercial loan agreement with a syndicate of banks. Led by Wells Fargo, those banks wrote in tighter terms this time. Whereas the previous revolving credit line was for $630 million, future credit extensions will get progressively smaller and smaller. On June 24th, that sum immediately shrunk to $600 million. The new agreement detailed future contractions to $500 million and then $400 million in March of each of the next two calendar years.
In fact, you could argue that the banks have used their troubles with regulators as a tool for increasing their own returns: In the most recent amendment, the interest rate went up by 1 percentage point.
Will the banks pull out, or will they just use the violation of a covenant as the basis to negotiate a new deal - with a new round of advisory fees?
To their credit, BB&T and TD North have withdrawn from making loans to World Acceptance during the last year.
b) What will be the degree and scope of a CFPB enforcement action? How strong will the penalty be? If history is a guide, then possible outcomes could include restitution to consumers, some kind of a civil penalty, and the placement of conditions upon the operations of the company in the future. It will be interesting to see how the CFPB chooses to treat the collection of World's outstanding pool of receivables. At the moment, the company has more than $800 million in consumer debt on its books.
c) Will the enforcement action spell the beginning of the end for World?
d) Will there be a spillover that touches other high-cost consumer lenders? The answer may already be here: Enova shares dropped 10 percent this morning. Regional Management (credit insurance, small-dollar loans, and buy-here pay-here), saw its stock drop 12.5 percent. Cash America and QC Holdings also fell, albeit by only several percentage points.