April 8, 2015 / 1:22 PM / 2 years ago

Pawn to cushion payday lenders from regulatory blow

3 Min Read

Pedestrians are reflected in the window of Pawtucket Pawnbrokers on Main Street in Pawtucket, Rhode Island December 2, 2008.Brian Snyder

(Reuters) - Payday lenders that have substantial pawn operations are better positioned to absorb the blow from proposed U.S. regulations aimed at cracking down on an industry that has been criticized for saddling borrowers with debt they cannot repay.

The Consumer Financial Protection Bureau has proposed a number of guidelines for the industry, including limiting the number of loans per customer to six per year.

The move is expected to hurt lending volumes and revenue by as much as 75 percent, as payday lenders make a majority of their money from borrowers who take out 10 or more loans per year.

The proposals may result in smaller lenders exiting the market, while companies with both payday and pawn operations will benefit, industry experts said.

Payday lenders make small loans that borrowers agree to repay in a short time, such as when they receive a paycheck. Pawnbrokers lend money against valuables such as jewelry.

While payday lenders say they help people who are strapped for cash, critics say borrowers often roll over or refinance loans rather than paying them back, racking up debt due to high interest rates and fees.

U.S. payday lenders extend more than $38 billion in loans annually, according to the Community Financial Services Association of America, an industry body.

"The proposed rules are so far-reaching that they will basically put the entire small-business portion of this industry out of business," said Phil Frohlich, a portfolio manager at hedge fund Prescott Group Capital Management LLC, which owns shares of payday lender Enova International Inc (ENVA.N).

Privately held payday lenders including Advance America, Ace Cash Express, and Check and Go are likely to be hurt the most.

"The good news for most publicly traded companies is that the majority of their revenue and profits come from pawn, not payday," FBR Capital Markets analyst Robert Ramsey said.

Shares of Enova, which has no pawn operations, have fallen about 14 percent since the guidelines were made public in March.

Shares of lenders that offer both pawn and payday loans haven't suffered as much. Cash America International Inc CSH.N has dropped about 2 percent, EZCorp Inc (EZPW.O) about 4 percent and First Cash Financial Services Inc FCFS.O 1 percent.

"We have been strategically divesting our payday operations for a number of years," said First Cash CFO Doug Orr. "Payday now represents less than 5 percent of total revenue and this number will continue to decline as we add more pawn stores."

Enova, spun off from Cash America in November, is increasing its focus on installment lending, which will not be affected by the proposed guidelines.

The proposals, which are expected to be finalized in 2017, give lenders two options. They can verify prospective borrowers' income and debt history upfront, or they can offer cheap repayment options and limit the number of loans.

Editing by Saumyadeb Chakrabarty

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