What: Shares of World Acceptance Corp. (NASDAQ:WRLD) are down by more than 35% as the company filed a press release indicating that the Consumer Financial Protection Bureau may take legal action against the company for its lending practices.
So what: World Acceptance has come under fire for selling credit insurance to its borrowers, and making loans at interest rates that make it almost impossible to repay a loan in full. In fiscal 2015, 71.5% of the company's loan originations were related to refinancing -- old balances that were rolled into a new loan.
Its insurance products have come under scrutiny because they are, in effect, a way to collect higher interest rates on amounts borrowed. Insurance in name only, the policies rarely pay out, resulting in nearly pure profits for World Acceptance, which earns income from commissions on the sale of each policy. The Consumer Financial Protection Bureau has gone after other financial companies for similar practices, most notably Citi, which was fined $700 million for selling add-on loan products.
Now what: Decisions by the CFPB generally result in multi-million dollar fines and restitution amounts as well as the end to predatory business practices. In the first quarter of fiscal year 2015, insurance commissions generated $47.8 million of revenue, equivalent to 27% of the World Acceptance's pre-tax income.
World Acceptance discloses in its filings that, if loan rates were capped at a 36% annual rate, it would "certainly eliminate our ability to continue our current operations." While the CFPB lacks the power to set its own rate cap, the 36% rate limit was mentioned in an earlier announcement as being an important part of what makes a loan "unfair, deceptive, and abusive." Keep an eye on the CFPB's next moves to see how this will all pan out.
Jordan Wathen has no position in any stocks mentioned. The Motley Fool is short World Acceptance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.