A group of national banks have reached an agreement to extend $810 million in a revolving line of credit to Conn's. Conn's, based outside of Dallas, markets retail goods and provides in-house financing through about 100 retail stores in the Southeast.
Conn's is both a retailer and a lender. Those two segments interact in what Conn's equates as the "Product plus Price plus Ye$ Money" call to action. By selling to consumers whose purchasing power is curbed by tarnished credit, the company has the ability to generate high margins on sales of consumer electronics, furniture, and other household goods. Last year, gross margins on furniture sales were only slightly below fifty percent. Some customers come to the stores with higher credit, but Conn's often brokers those loans to third-parties. At the end of their last fiscal year, the company reported that the average weighted credit score of the consumers who used their in-house financing was 596. As a matter of business, the company charges off about ten percent of the loans that it makes.
The $810 million revolving line is secured by the all of the assets of Conn's, including its entire loan portfolio.
- Bank of America
- JPMorgan Chase
- MUFG Union Bank
- Regions Bank
- Compass Bank
- Amegy Bank
- First Tennessee Bank
- Synovus Bank
- MB Financial
- Cathay Bank
- Israel Discount Bank of New York
- Green Bank (Texas)
- City National Bank
- Bank of Texas
In a typical Conn's transaction, a consumer buys approximately $3,000 in goods, puts down about $150, and finances the rest at almost twenty percent per year. If a consumer purchases more than $3,600 in goods, then he or she can possibly qualify for a zero percent promotional rate of interest. Over the last five years, average loan sizes have steadily increased. Both the share of loans that were delinquent and the share of loans currently within the zero interest period have generally trended upward during the last few years. At the end of July, 9.2 percent of receivables were 60 days or more past due and 36.1 percent were in the zero interest period.
Being willing to take a risk on a person with spotty credit can be a courageous decision. It can be the kind of decision that deserves to be commended. But that action is only laudable if it is done prudently. In other cases, it can be harmful. For better or worse, this is best done with hindsight. But we do know that good underwriting leads to good results. In my opinion, the Consumer Financial Protection Bureau gets it right when it gauges lender activity through the lens of an ability-to-repay standard. If there is underwriting on the front end coupled with demonstrated repayment on the back end, lending is positive.
But if there are questions about how Conn's qualifies under an ability-to-repay standard, there are other questions that could be asked of the big banks that finance this process.
Ultimately, the source of financing at Conn's has to be traced back to the banks that fuel Conn's in the first place. While we know that banks are generally shying away from all but the most qualified borrowers when it comes to originating mortgage loans, the fact that they are giving an $810 million line of credit to Conn's underscores that their appetite for risky debt has not diminished. It is a question of channels. There is a light above the front door, but there is certainly another entrance to the money store.