The lowest-risk shorting opportunity in the market right now appears to be in the payday lending stocks:
Cash America International (NYSE: CSH), DFC Global (NASDAQ: DLLR), EZCorp (NASDAQ: EZPW), First Cash Financial Services (NASDAQ: FCFS) and QC Holdings (NASDAQ: QCCO).
The Department of Justice, as part of the covert Operation Choke Point, has launched a new wave of attacks against payday lenders. First, the FDIC and OCC banned bank deposit advance products. Then the DoJ prohibited third-party payment processors from conducting online transactions for online lenders.
Now the latest news, obtained exclusively by this reporter, is the DoJ is pressuring banks to shut off payday lender’s bank accounts. These include daily deposit accounts, where money is deposited at the end of each day from local storefronts.; operational accounts, where overhead and other operating costs and income of the business flow through; and credit line accounts, where the bank extends its credit to the business.
The goal is to choke off the ability of the private lending industry to do business — thus running them out of business. There is no business or legal reason behind any of this. There is no systemic risk to the banks, as payday lending accounts are always loaded with cash. There is no reputational risk, as the banks have endured years of negative publicity from the media regarding payday lending. In fact, the banks — which include B of A, Wells Fargo, Fifth Third, and JPMorgan Chase — generate significant revenue from these operations.
This, in conjunction with the CFPB’s announcement that their rulemaking process on payday lending is almost complete, seems deliberately designed to kill payday lending.
Disclosure: Author is short FCFS, CSH, EZPW and holds puts on all. Long Bank of America.
The following quotes are attributed to anonymous sources, as everyone was too fearful of DoJ reprisal to go on the record.
From the spokesman of a large lending company:
“I think that it is timely and relevant that you are looking into this. I would gather that our experience is substantively no different than others you have spoken with. We have lost some long-term relationships with no warning or real explanation. It is certainly a challenge to operating a business. I am not sure where the program originates…it is ostensibly focusing on a number of “risky’ industries, but so far I am not aware of any others besides ours that has been targeted. ”
From a large lender’s service provider:
“Operation Chokepoint left unfettered is going to cripple this industry. My bank accounts are being closed. Not just ACH, and not just transactional, but operating accounts because we’re in this space. A friend of mine operates a pawn business. He opened a new pawn store, went to the local bank to open an account, and because he operates a payday loan business elsewhere, the bank said they wouldn’t open the account – even though the payday lending operation is in another state, and had nothing to do with that account.”
From a lobbyist:
“[I can ] confirm that I was told by a prominent banker at a large bank located in a Midwestern town that they’ve been threatened with fines for even as much as opening an account for us.”
From another industry service provider:
“Yes, they [the DOJ] are trying to cut off the checking accounts of legitimate payday business and other types in the money service area.”
It’s not just the big players. Even small chains are being told to walk. One lender in the western U.S. tells me, “We’re not getting any more than evasive, general language from Wells Fargo. We’ve been with them for ten years. They make a lot of money on us. It’s shocking. There’s no rational business reason for this. It’s a non-issue from a banking perspective. With all the fees banks can charge us, they should be falling over themselves for us. Instead, we’ve exited the payday space.”
In response to request for comment on the situation, Bank of America spokesman Jefferson George said, “Over the last several years, we have not pursued new credit relationships in the payday lending industry, and over time many clients have moved their banking relationships. In 2013, we made the decision to ultimately discontinue providing extensions of credit to payday lenders. In addition to not pursuing any new business opportunities in this sector, we are also exiting our existing relationships over time.”
Confirmation of this operation comes from a letter from the American Bankers Association to Assistant Attorney General Stuart Delery, in which he wrote, “…Operation Choke Point starts with the premise that businesses of any type cannot effectively operate without access to banking services. It then leverages that premise by pressuring banks to shut down accounts of merchant targeted by the Department of Justice without formal enforcement action or even charges having been brought…”
While the payday lenders are seeking alternatives, one wonders how successful they will be. The DoJ appears to have it in for payday lending. As such, shorting the stocks right now seems to be an asymmetrical risk-reward situation.