This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Trouble With Payday Lenders

NEW YORK (TheStreet) -- In the last several years of economic uncertainty and tightened availability of consumer credit, payday lenders including Cash America (CSH), World Acceptance (WRLD - Get Report) and First Cash (FCFS - Get Report) have posted impressive growth.

As traditional lenders tightened underwriting standards, an unsaturated market for short-term, high-risk loans emerged, and payday lenders filled the gaps with great success. As the largest players grew and consolidated smaller pawnshop operations, investors shared in the bounty.

But there is trouble on the horizon from multiple directions.

A recent $19 million settlement between Cash America and the Consumer Financial Protection Bureau has exposed serious potential legal and regulatory risks inherent in the business model.

To understand how fragile the regulatory situation is, it's helpful to examine the $570 case that precipitated the federal investigations and subsequent $19 million settlement.

In May 2009 one of Cash America's subsidiaries filed a collections suit in Ohio against one Rodney Scott for an amount of $570.16, the balance due under his payday loan. The court ruled the loan, which the subsidiary offered under the Ohio Mortgage Loan Act ("OMLA"), was not authorized under OMLA, and should instead have been offered under a different statute (one that allows for significantly lower effective interest and fees).

As it turned out, Scott's case was not the extent of the company's paperwork troubles in Ohio. Shortly after the district court's decision, Cash America's Ohio division announced that it would forgive all debt collections dating back to the beginning of 2008, and reimburse some 14,000 Ohio customers. This decision, a spokesperson said, was due to "technical errors" that the company "discovered in [its] own due diligence."

As a result of the scrutiny surrounding the Ohio case, the CFPB began looking into the company at a federal level. It, in turn, uncovered evidence of illegal robo-signing practices and violations of a law limiting the interest charged on loans to military service members. The CFPB also alleged that the company instructed employees to erase relevant files and phone calls, and coached them in preparation for speaking to examiners.

It seems unlikely that this is the end of CFPB's interest in the industry as a whole. Regulators are keen on cracking down on lenders that charge very high rates, and it is likely that more state and federal laws and regulations will emerge to tighten around the industry in the future.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
CSH $28.81 -3.06%
FCFS $37.38 -1.61%
WRLD $30.43 -4.61%
AAPL $93.70 -0.60%
FB $101.91 0.90%


Chart of I:DJI
DOW 15,660.18 -254.56 -1.60%
S&P 500 1,829.08 -22.78 -1.23%
NASDAQ 4,266.8370 -16.7550 -0.39%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs