Payday Lender Updates
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Chains of pawn shops and payday lenders, some of Wall Street’s most controversial businesses, had a boom in the longest government shutdown in U.S. history.
The deadlock in Washington over President Donald Trump’s plans to build a border wall with Mexico has deprived hundreds of thousands of government workers and contractors of their salaries. As a result, some have turned to companies specializing in consumer credit to fill the gaps between income and expenditure.
Actions in Global acceptance, a South Carolina-based short-term lender, has risen 22% since the shutdown took effect about a month ago. EZ Corp, an Austin, Texas-based pawnshop, grew 20% during that time. In either case, the increases are more than benchmarks, suggesting that investors could bet on increased demand to cover unforeseen expenses.
“A lot of people… Are looking for short-term cash if they need to pay off the mortgage or something,” said Michael Underhill, chief investment officer at Capital Innovations, a Milwaukee investment firm. Alternative lending platforms have probably entered the void. “
The low-value loan industry has been at the center of the preoccupations of Democratic politicians in recent years, as regulators introduced lighter regimes for agencies such as the Consumer Financial Protection Bureau, which had punished a succession of consumer finance companies under the previous administration. Critics say short-term loans can be predatory, trapping borrowers in cycles of debt.
About 78 percent of American workers live paycheck to paycheck, according to a 2017 study by CareerBuilder, a job portal. A survey conducted the same year by the Federal Reserve found that nearly half of American families could not cover an emergency expense of $ 400 without borrowing or selling something to do so.
Banks have help offered government workers working without pay, saying they will allow customers to skip mortgage or car loan payments, while waiving some fees. But they are unlikely to be able to provide short-term, unsecured loans: many withdrew from these loans in the aftermath of the financial crisis, blaming regulatory risks and higher capital requirements.
Chad Prashad, managing director of World Acceptance, said his company is seeing demand in Texas and the Southeastern United States, where there are large airports employing government officials.
In response to the shutdown, World Acceptance, which specializes in “installment loans” for up to three years, is offering cash-strapped government employees the deferment of their loans without interest or penalties. New customers can get up to $ 1,250 in a 10 month 0% interest free loan.
“Because we lend in our communities, face to face, we see the concerns first hand and decided to help directly,” Mr. Prashad said, adding that the company has put in place similar programs after natural disasters such as hurricanes and tornadoes.
Shares of Lending Tree, a consumer lending portal, have risen 42% since the shutdown took effect, nearly four times the mid-cap market’s gains during that time period. “The government shutdown is likely creating demand on the Lending Tree platform,” said Shweta Khajuria, analyst at RBC Capital Markets.
Tendayi Kapfidze, chief economist at Lending Tree, said the rise in share prices was not “completely linked” to the shutdown. He said the rise was mainly caused by the surge in mortgage applications since interest rates fell since the end of November.
Scott Astrada, director of federal advocacy at the Washington-based Center for Responsible Lending, said borrowers should be wary of products that were “debt traps by design.” They can lead to “a cascade of financial consequences that include bank penalty charges, defaults on other bills and even bankruptcy,” he said.