I confidently predict that ProPublica will win another Pulitzer for this series of articles on installment lender World Acceptance (WRLD) (disclosure: I’m short the stock). It’s an extraordinary piece of journalism that thoroughly exposes a truly predatory company. Reading the details about what the company does makes me sick, especially how they target members of the military. I haven’t seen anything this scummy since the worst of the subprime mortgage lenders at the peak of the housing bubble.
For more on the investment angle (beware: nearly 40% of the float is short), here’s a write-up of WRLD on ValueInvestorsClub.com from last September:www.valueinvestorsclub.com/value2/Idea/ViewIdea/78821, and Citron Research has been covering the story from quite some time. Their take on the ProPublica story is here: www.citronresearch.com/world-acceptance-what-happens-if-credit-insurance-disappears. Citron’s earlier articles from 2009 are here: www.citronresearch.com/world-acceptance-corp-nasdaqwrld-their-business-model-is-a-borderline-legal-ponzi-scheme-whose-day-of-reckoning-has-finally-come, here: www.citronresearch.com/world-acceptance-corp-wrld-part-deux, and here: www.citronresearch.com/bad-news-for-world-acceptance-corp-the-state-by-state-loophole-business-is-now-going-out-of-business
1) Here’s an excellent summary posted on a message board:
The investigative research group ProPublica, which won the Pulitzer for its reporting on subprime CDOs (among other Pulitzers), is out with a tour de force of investigative journalism documenting the massive ongoing fraud at WRLD (see: www.marketplace.org/topics/wealth-poverty/beyond-payday-loans). They’ve essentially given the CFPB grounds for a devastating enforcement action against WRLD. Recall that the CFPB’s first two enforcement actions were against Capital One and Discover for deceptive sales of credit insurance.
The article details how employees are trained to fraudulently require the customers purchase optional credit insurance, and how WRLD’s POS system won’t even allow customers to opt-out of credit insurance. Talk about deception! I believe 50%+ of WRLD’s net income comes from credit insurance. Perhaps even more damning, the article also exposes how WRLD’s loan book is a giant ponzi-accounting fiction. According to employees, 30% of loans are late each month, but employees are “drilled” to repeatedly refinance loans to “buy time.” But, WRLD says only 2.5% of its loans are delinquent, and it trades at over 3x book value.
Comments on Deceptive Sales of Credit Insurance:
· “Former World employees say they were instructed not to tell customers the insurance is voluntary.”
· “World can legally understate the true cost of credit because of loopholes in federal law that allow lenders to package nearly useless insurance products with their loans and omit their cost when calculating the annual rate.”
· “As part of her loan, Sutton purchased credit life insurance, credit disability insurance, automobile insurance and non-recording insurance. She, like other borrowers ProPublica interviewed, cannot tell you what any of them are for: "They talk so fast when you get that loan. They go right through it, real gibberish."”
· "Every new person who came in, we always hit and maximized with the insurance," said Matthew Thacker, who worked as an assistant manager at a World branch in Tifton, Ga., from 2006 to 2007. "That was money that went back to the company."”
· “When insurance products are optional — meaning the borrower can deny coverage but still get the loan — borrowers must sign a form saying they understand that. "We were told not to point that out," said Thacker, the former Tifton, Ga., assistant manager.”
· "You were supposed to tell the customer you could not do the loan without them purchasing all of the insurance products, and you never said 'purchase,' " Buys recalled. "You said they are 'included with the loan' and focused on how wonderful they are."”
· A regional supervisor threatened to discipline a sales person for advising customers that the insurance was voluntary.
· World’s systems don’t let a customer to decline the optional insurance: “But World soon made it harder to remove the insurance premiums, Buys said. She couldn't remove them herself but instead had to submit a form, along with a letter from the customer, to World's central office. That office, she said, sometimes required borrowers to purchase the insurance in order to get the loans.”
Repeat Refinancing of Delinquent Borrowers:
· “In every World office, employees say, there were loan files that had grown inches thick after dozens of renewals.” "That's [World's] favorite phrase: 'Pay and renew, pay and renew, pay and renew,'" Simmons said. "It was drilled into us." It's a tempting offer: Instead of just scrambling for the money to make that month's payment, the borrower gets some money back. And the renewal pushes the loan's next due date 30 days into the future, buying time.”
· “For Sutton, making her monthly payments was always a struggle. She remembered that when she called World to let them know she was going to be late with a payment, they insisted that she come in and renew the loan instead.”
· WRLD’s credit quality is a fiction, a substantial number of customers can’t repay and are repeatedly refinanced. “At World, a normal month begins with about 30 percent of customers late on their payments, former employees recalled.”
Threatening customers in Violation of FTC rules:
· “If the phone calls don't work, the next step is to visit the customer at home: "chasing," in the company lingo. "If somebody hung up on us, we would go chase their house," said Kristin from Texas. The experience can be intimidating for customers, especially when coupled with threats to seize their possessions, but the former employees said they dreaded it, too. "That was the scariest part," recalled Thacker, a former Marine, who as part of his job at World often found himself driving, in the evening, deep into the Georgia countryside to knock on a borrower's door.” “Visits to the borrower's workplace are also common. The visits and calls at work often continue even after borrowers ask the company to stop, according to complaints from World customers to the Federal Trade Commission. Some borrowers complained the company's harassment risked getting them fired.”
· WRLD also threatened to collect personal possessions pledged as collateral even though the FTC bars pledging “household goods” such as a TV and furniture.
2) Here’s the lead article:
One day late last year, Katrina Sutton stood at a gas pump outside Atlanta and swiped her debit card. Insufficient funds. But that couldn't be. She'd been careful to wait until her $270 paycheck from Walmart had hit her account. The money wasn't there? It was all she had. And without gas, she couldn't get to work.
She tried not to panic, but after she called her card company, she couldn't help it. Her funds had been frozen, she was told, by World Finance.
Sutton lives in Georgia, a state that has banned payday loans. But World Finance, a billion-dollar company, peddles installment loans, a product that often drives borrowers into a similar quagmire of debt.
World is one of America's largest providers of installment loans, an industry that thrives in at least 19 states, mostly in the South and Midwest; claims more than 10 million customers; and has survived recent efforts by lawmakers to curtail lending that carries exorbitant interest rates and fees. Installment lenders were not included in a 2006 federal law that banned selling some classes of loans with an annual percentage rate above 36 percent to service members — so the companies often set up shop near the gates of military bases, offering loans with annual rates that can soar into the triple digits.
Installment loans have been around for decades. While payday loans are usually due in a matter of weeks, installment loans get paid back in installments over time — a few months to a few years. Both types of loans are marketed to the same low-income consumers, and both can trap borrowers in a cycle of recurring, expensive loans.
Installment loans can be deceptively expensive. World and its competitors push customers to renew their loans over and over again, transforming what the industry touts as a safe, responsible way to pay down debt into a kind of credit card with sky-high annual rates, sometimes more than 200 percent.
And when state laws force the companies to charge lower rates, they often sell borrowers unnecessary insurance products that rarely provide any benefit to the consumer but can effectively double the loan's annual percentage rate. Former World employees say they were instructed not to tell customers the insurance is voluntary.
When borrowers fall behind on payments, calls to the customer's home and workplace, as well as to friends and relatives, are routine. Next come home visits. And as Sutton and many others have discovered, World's threats to sue its customers are often real.
The Consumer Financial Protection Bureau, the new federal agency charged with overseeing consumer-finance products and services, has the power to sue nonbank lenders for violating federal laws. It could also make larger installment lenders subject to regular examinations, but it hasn't yet done so. Installment companies havesupported Republican efforts to weaken the agency, echoing concerns raised by the lending industry as a whole.
The CFPB declined to comment on any potential rule-making or enforcement action.
Despite a customer base that might best be described as sub-subprime, World comfortably survived the financial crisis. Its stock, which trades on the Nasdaq under the company's corporate name, World Acceptance Corp., has nearly tripled in price in the last three years. The company services more than 800,000 customers at upward of 1,000 offices in 13 states. It also extends into Mexico, where it has about 120,000 customers.
3) Here’s a description by a former employee of World Acceptance’s sleazy tactics:
Matthew Thacker is 29. He lives with his wife near Lexington, Ky., and runs a nonprofit, The Pride and Service Project, to support LGBT service members nationwide. Back in 2006, he was just out of the Marines, newly wed, and recently relocated to the small town of Tifton, in southern Georgia.
He needed $500 for moving expenses, and walked into a loan store owned by World Finance (a World subsidiary called Colonial Finance). The former service-member is six-foot-plus, serious and soft-spoken. He was offered a loan and a job.
“I was the assistant manager,” Thacker explains, “so I was responsible for dealing with the customers, loan delinquency, making loans.”
Thacker worked there for a year, making $10.50-an-hour. He paid off his own high-interest loan right away.
But, he discovered, a lot of his customers couldn’t. Annual percentage rates (APRs) on World’s small-dollar loans typically run in the 50-100-percent range.
“We were persuaded to give loans to people who didn’t have the means to repay them,” says Thacker. “So, essentially we were setting people up for failure.”
Thacker sold the add-on credit insurance products hard. He says he was encouraged to by his bosses -- it was one of the ways the company made money. But he doesn’t think most customers even understood that some of the credit insurance was voluntary.
“From my interactions with people in making loans, they were completely oblivious to the fact that they were being charged insurance,” says Thacker. “They presumed that everything that they weren’t receiving in principal was just interest, a higher interest rate, basically.”
When folks did get behind on their payments, he says his job was to get them to renew -- start the debt again from scratch.
“Renewal of the loans is probably one of the worst parts of the business, because it was a means of catching a loan up,” Thacker explains.
A delinquent borrower would be encouraged to sign up for a renewal to pay off the original loan and clean up their finances with more borrowed money.
“If you had any money available in principal, we could renew the loan," he says. "And we made more money off that because we sell the insurance on it again — more life insurance, more accidental death and dismemberment.”
Not to mention who they were selling the loans to in the first place.
“A lot of the loans that we made were to people on social security, or disability, who were on fixed incomes,” Thacker says. “It was very easy to convince them to renew their loan because it was like ‘oh, do you want an extra $100 today for renewing your loan?’ Many of the customers, whenever it was up for renewal and there was even $30, $50 to get, they would renew it, and they would do it over and over and over again. We would just tell them, they have money available, would they like it? Ninety-nine percent of the time they would say yes.”
Coming to the end of the line
When borrowers said they couldn’t pay, it was the former Marine’s job to lean on them, to threaten to take their stuff. Sometimes, they threatened back.
“We made high-risk loans so we went to parts of town that weren’t the best,” he recalls. “One experience: I had pulled into somebody’s driveway, and then somebody immediately pulled in behind me to block my car. But it wasn’t so much the fact that I was intimidated by collections, it was the fact that I was going to these people’s homes and basically harassing them, on loans that I knew they couldn’t pay.”
4) Here’s the story of how World Acceptance gets around the Military Lending Act and preys on service members:
Seven years ago, Congress passed the Military Lending Act to try to prevent predatory lending to service members.
The Department of Defense had identified a serious problem for morale and force-readiness: the financial troubles soldiers were getting themselves into.
Specifically, they were taking out short-term high-interest cash loans at loan stores that cluster at the entrances to military bases: payday lenders, car-title lenders, pawn shops, installment lenders. All of these non-bank lenders were targeting service members and their families for loans that can prove so costly and complicated, they’re often hard to pay back, leading to an ever-deepening and desperate cycle of debt.
The Military Lending Act set a national interest rate cap of 36 percent APR (annual percentage rate) for loans to military members and their families (excluding mortgages and auto finance loans).
The Act covered three specific types of loans: payday loans (short-term, due in one lump sum after a borrower’s payroll check clears); car-title loans; and tax refund anticipation loans. Further, the loan-terms covered were restricted: 91 days or less for a payday loan, 181 days or less for a car-title loan.
The military said the narrow definitions of ‘covered credit’ under the MLA were necessary to ensure that access to other forms of consumer credit that soldiers might need wouldn’t be curtailed.
There is widespread agreement that the MLA has indeed drastically reduced the availability of payday and car-title loans to military members and their families. Interviews conducted outside two military bases in Georgia — Fort Stewart in Hinesville, and Fort Benning in Columbus — confirmed that most title-loan stores do not serve service members or advertise to them with signs or billboards.
However, there are still plenty of other lenders and high-priced loan products marketed to service members, as a joint investigation by Marketplace and ProPublica found.
The deepening spiral of debt
The MLA did little to regulate open-ended credit, or military installment loans longer than 91 days. Those are still available to service members, and in some cases aggressively sold to them. Some payday and title lenders have found ways to exploit gaps in the MLA, offering longer-term high-interest installment loans, sometimes backed by a car-title, that are not illegal but can send service members into a deepening spiral of debt.
5) More on how service members are victimized:
Seven years after Congress banned payday-loan companies from charging exorbitant interest rates to service members, many of the nation's military bases are surrounded by storefront lenders who charge high annual percentage rates, sometimes exceeding 400 percent.
The Military Lending Act sought to protect service members and their families from predatory loans. But in practice, the law has defined the types of covered loans so narrowly that it's been all too easy for lenders to circumvent it.
"We have to revisit this," said Sen. Dick Durbin, D-Ill., who chairs the defense appropriations subcommittee and is the Senate's second-ranking Democrat. "If we're serious about protecting military families from exploitation, this law has to be a lot tighter."
Members of the military can lose their security clearances for falling into debt. As a result, experts say, service members often avoid taking financial problems to their superior officers and instead resort to high-cost loans they don't fully understand.
The Department of Defense, which defines which loans the Military Lending Act covers, has begun a process to review the law, said Marcus Beauregard, chief of the Pentagon's state liaison office.
The act mainly targets two products: payday loans, usually two-week loans with annual percentage rates often above 400 percent, and auto-title loans, typically one-month loans with rates above 100 percent and secured by the borrower's vehicle. The law caps all covered loans at a 36 percent annual rate.
That limit "did do a great deal of good on the products that it covered," Holly Petraeus, the Consumer Financial Protection Bureau's head of service member affairs, said in an interview. "But there are a lot of products that it doesn't cover."