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.
Payday lenders to the rescue
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.