Banking, finance, and taxes
Loan Cap Appeal Rejected by US Supreme Court
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The U.S. Supreme Court on Monday refused to hear an appeal from a branch of the Encore Capital Group Inc. (NASDAQ: ECPG) to stop a class-action lawsuit against the firm which had claimed that it should be protected from state usury laws that prohibit lending at very high interest rates.
Encore’s Midland Funding and Midland Credit Management units had argued in the circuit court of appeals that they were national banks and, therefore, protected from state usury laws. The circuit court ruled against Encore units and the Supreme Court has let that decision stand.
While Encore, which is a debt-collection agency, may have been the plaintiff in this case, this ruling is not good news for payday lenders either, with some stocks taking a sharp hit after the court’s decision. EZCorp Inc. (NASDAQ: EZPW), Cash America International Inc. (NYSE: CSH), and World Acceptance Corp. (NASDAQ: WRLD) all traded down more than double the average decline in the early afternoon Monday.
Among the hardest hit of the lenders is LendingClub Corp. (NYSE: LC) which have tried to avoid being held to state usury caps by originating loans only in states without such laws. Peer-to-peer or marketplace lenders such as LendingClub make relatively small loans to high-risk borrowers and then package the loans to sell to investors like hedge funds.
LendingClub said earlier this that it was raising its interest rates to borrowers by an average of 55 basis points across its grade and term spectrum. The company said it was making the change “to boost the attractiveness of the asset to investors, while ensuring that the Company’s offering remains competitive for borrowers.”
The interest rate increases affect all loan grades, but the largest increases were made on lower quality loans. Loans with a grade of ‘A’ saw interest rates rise 43 basis points to 6.7% while loans of grade ‘E’ now carry interest rates of 24.07%, an increase of 117 basis points.
LendingClub stock traded down more than 8% in the early afternoon Monday at $4.31 in a 52-week range of $3.44 to $15.14. The consensus price target is $8.18.
Encore Capital stock traded down nearly 5.5% at $21.99 in a 52-week range of $16.09 to $44.43. The consensus price target on the stock is $38.38, and volume is already double the daily average of around 250,000 shares.
Shares of EZCorp traded down about 8.7% Monday afternoon at $6.85 in a 52-week range of $2.44 to $7.66 although volume is about average. The consensus share price is $6.00.
Cash America stock traded down more than 3% at $40.21 in a 52-week range of $23.77 to $44.77 on relatively light volume. The consensus price target on the stock is $41.17.
World Acceptance Corp. traded down nearly 4% at $40.85 in a 52-week range of $25.30 to $63.06. The stock’s consensus price target is $39.20.
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