Should year-old news cost payday lenders like EZCORP (NASDAQ:EZPW) 15% of their value in one day?
Maybe not, but that's what happened yesterday, after an analyst highlighted a campaign plank from President-elect Obama, issued last February, that would cap the interest rate charged by payday lenders at 36%. While the Sterne Agee analyst said the pledge was "clearly unambiguous," investors ought to know that campaign promises and actual deeds in office are two different things. Remember "Read my lips: No new taxes?"
In reaction to the news, First Cash Financial (NASDAQ:FCFS) dropped 15%, while Cash America (NYSE:CSH) fell a little more than 11% on the day.
EZCORP derives just 27% of its income from payday lending activities, with the rest coming from operating pawn shops. Remember when that was considered an unsavory profession? First Cash Financial derives less than half of its revenue from the payday business, while Cash America gets some 38% from cash advance activities.
Capping the interest rates at 36% would definitely crimp these companies' operations, but it wouldn't necessarily drive them out of business. Full-fledged payday lenders like Advance America (NYSE:AEA), however, might have to find a new line of work.
As fearful as the Obama proposal sounds, there's no indication that it's about to be signed into law. Regulators can't even say that it would be workable. Back in August, the FDIC released the first results of a pilot program it initiated to get traditional financial institutions to offer small loans to the unbanked and underbanked. It tried to put the best spin possible on the program, but as an analysis by the Consumers Rights League highlights, the loans made by banks may not have been as beneficial to consumers as they'd want you to believe.
The CRL reported that the average amount of small-dollar loans in the pilot program was approximately double the average for "payday" loans made by the industry, while the length of the loan was 20 times greater than the typical industry loan. Moreover, though the program supposedly caps interest rates at 36%, many banks charged various fees that "may well cost more than current payday products."
Other banks, like Wells Fargo (NYSE:WFC) and US Bancorp (NYSE:USB), also run payday loan programs of their own -- they don't call them that, mind you -- where interest rates run in excess of 100% annually. Of course, that's a misnomer: Assigning an APR to a loan program meant to run just a few weeks skews reality.
Investors experienced that same sort of reality distortion yesterday, in the wake of the analyst's report. The new administration may indeed be receptive to further restrictions on the industry, but it's manipulative to suggest that an interest-rate cap is imminent. Candidates often make promises during campaigns that they don't intend to keep when elected, assuming they even have the support to do so. Obama's proposed cap may happen, but banks still aren't extending credit to consumers, despite reaping billions in tax dollars. Cutting off a convenient source of credit to those most in need, at a time when they need it most, is just bad public policy.
And selling a basket of stocks based on year-old news? That's just silly.
Further Foolishness you can take to the bank:
- Are payday lenders going to default?
- The industry gets strong-armed in Arkansas.
- Strangling the unbanked.
