DIFFERENT PENALTY FOR UDAAP AND REGULATION Z VIOLATIONS

Recently shares in a South Carolina lending business plummeted after the company disclosed it might face legal action from the Consumer Financial Protection Bureau (CFPB). Shares of World Acceptance Corporation (World), a Greenville-based company, dropped by almost $19, or 36 percent per share, to about $33.

The company disclosed last year that it received a “civil investigative demand” from the CFPB. At that time, the agency said it was trying to determine whether the lender was “engaging in unlawful acts or practices in connection with the marketing, offering, or extension of credit” in violation of the Consumer Financial Protection Act and the Truth in Lending Act.

World recently reported it received a follow-up letter from the CFPB’s enforcement office saying it “is considering recommending” legal action against the company based on alleged violations of the Consumer Financial Protection Act.

World is a consumer finance company that makes small, short-term, unsecured loans. It has more than 1,300 offices in 15 states and Mexico. The company earned $24 million on revenue of $137 million for the second quarter.

The vast majority of World’s loans are refinancings with APRs as high as 100%. The company combines frequent refinancings (every two or three months) with interest calculations using the rule of 78s to result in very high yields. The company also sells credit insurance and earns commissions as high as 64% of the premium. The premiums are financed by the lender.

“The company continues to believe that its marketing and lending practices are lawful,” finance chief John L. Calmes Jr. said in a filing with the Securities and Exchange Commission.

CFPB enforcement actions, such as eliminating credit insurance and frequent refinancings, could force the company to revise its business model. Potential penalties and payments to victims, on top of the loss of revenue resulting from changes to its business plan, raise questions about the company’s survival.

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