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Payday lenders are making bank on new, high-interest products
[NEW YORK] Payday lending stocks are beating records. Mostly because they're no longer payday lenders.
Enova International has more than doubled so far this year, the best performer in the Russell 2000 Consumer Lending Index, followed by rival Curo Group Holdings, up 64 per cent.
Helping to drive those gains are a raft of new financing products that carry the same ultra-high interest as payday loans. But, because of their length, size or structure, these offerings aren't subject to the same regulatory scheme.
"We made a big effort over the last five years to diversify our business," said Enova chief executive officer David Fisher in an interview. The diversification was meant, in part, to spread out regulatory exposure, he said.
These products quickly became so popular that Enova and Curo now report that a vast majority of their revenue comes from them rather than payday loans, as before. Enova now mostly offers installment loans and lines of credit. Curo is also largely focused on installment loans too, while also doing some gold-buying, check-cashing and money-transferring.
Whereas payday loans are ideally paid back in a single payment, many of the new products are paid back in installments, over time.
The companies had little choice but to reinvent themselves. Payday lenders were widely criticised for allegedly creating debt traps through their loans, ensnaring debtors in a spiraling vortex of ever-increasing fees and loan renewals.
"Any lender who had the resources at that point in time said, ‘Gosh, if they're going to kill my product - and they're making it very clear that they're trying to - I'm going to diversify,"' Jefferies analyst John Hecht said in an interview.
From 2012 to 2016, revenue from payday lending contracted from US$9.2 billion to US$6 billion, according to data from the Center for Financial Services Innovation. In that time, short-term installment lending revenue jumped from US$4.3 billion to US$6.5 billion.
Enova, one of the biggest subprime consumer lenders in the US, saw revenue from short-term single-payment loans, like payday loans, drop to 22 per cent from of the firm's total 99 per cent in 2008. Curo, which introduced installment loans 10 years ago, now gets only 28 per cent of its revenue from single-pay loans (most from outside the US). Curo didn't respond to multiple requests for comment and earlier figures were not available.
Fair lending advocates say these are the same products that trapped poor Americans in debt.
"It's the same predatory lending schemes in a different package," said Diane Standaert, director of state policy at the Center for Responsible Lending. "What has remained unchanged for all these years is that the debt trap remains the core of the business model."
For Enova's subprime loans, including installment and payday products, APRs can range from 100 per cent to 450 per cent, according to a recent presentation for investors. For near-prime customers, the rates range from 34 per cent to 179 per cent. Most Curo loans have interest rates in the triple digits as well. Enova's Fisher said the profitability of payday loans, installment loans and lines of credit are all similar.
The Consumer Financial Protection Bureau had an early-stage rulemaking process underway for major installment lenders, but that was effectively tabled by the current acting director, Mick Mulvaney. The CFPB said that the move was not intended to signal a substantive decision on the merits of the project, and that the next permanent director will make the final decision on the rulemaking process.
For the moment, though, the diversified companies are certainly stronger, according to Moshe Orenbuch, an analyst at Credit Suisse. "As these companies started diversifying, they were diversifying to protect themselves, but they were also finding products that customers preferred and were successful," Mr Orenbuch said in an interview.