By Mark Huffman
ConsumerAffairs.com
May 6, 2010
For years, consumer advocates have waged war against payday lenders, while the industry as a whole has become more and more profitable. But with Congress working on a financial reform bill, traders on Wall Street see big trouble ahead for all payday lenders.
Specifically, the creation of a Consumer Financial Protection Agency (CFPA) is viewed as a deathblow against the industry. Blogger Rick Steier, writing on the financial website Motley Fool, says the bill, with expected amendments, will likely regulate payday lenders out of business.
Steier points to three provisions that are a major threat to the industry.
First, Sen. Dick Durbin (D-IL) has introduced a 36 percent interest rate cap. Instead of charging $15 or more for a two week $100 loan, payday lenders would only be allowed to charge $1.38.
Second, Sen. Kay Hagan (D-NC) introduced an amendment this week that would limit consumers to six payday loans per year. Hagan cited statistics showing 60 percent of payday loans are made to customers who take out at least a dozen loans each year.
Third, the CFPA would have the authority to regulate lending transactions. It could set any rules it chooses.
Stocks take a hit
Since late April, when details of the proposed legislation began to take shape, the stock of publicly traded payday lenders has gone into a freefall. Advance America has taken one of the biggest tumbles. On April 27 it hit an intraday high of $7.45 a share. It closed Wednesday at $4.82, a drop of 35 percent over the course of seven trading session.
Payday lender EZCORP is down 19 percent over the same period, falling from $23.70 to $19.27.
Stock message boards have been filled with alarmed comments in recent days. Some posters express doubt the legislation will pass, but others, like poster IMSmedley of Los Angeles, writing on the EZCORP message board, is among those in sell mode. While noting not all companies in the payday lending business will be affected the same, he says the sector now has too much risk.
"In the near term, all US revenues for all companies are at risk should the Hagan bill pass," he wrote. "Six loans per year cuts revenue as much as 50 percent. You should carefully evaluate your holdings in this sector. I have sold out of all stocks at this time."
Steier has similar advice for investors.
"The uncertainty surrounding this sector makes these stocks difficult to recommend," he wrote. "In fact, in the case of Advance America and QC Holdings, which are concentrated on payday loans in the U.S., I'd definitely recommend selling."
