I always look forward to hearing from William "Ted" Saunders, the CEO of Community Choice Financial, because he never holds back from offering an opinion. Part of this could owe to the fact that CCFI is largely capitalized by debt, so his structure is inherently more patient. But a lot of it is probably just a reflection of his style as a leader.
As an analyst from Credit Suisse said during Q & A: "Ted, appreciate your frank commentary, as usual."
Highlights from Saunders' Commentary to CCFI's Creditors:
Short-term lending is imperiled: "I really don’t believe the CFPB fully appreciates, nor did they consider what will happen when consumers can’t get credit when they need it most. The rule of reform in CFPB's release would nearly eliminate small-dollar lending in the US."
The sky is falling: "If the CFPB's current positions became firm rules tomorrow, CCFI could not continue to operate. Millions of consumers would lose credit. I personally feel that the economic recovery would be impacted. Tens of thousands of jobs would be lost, hundreds of businesses would close their doors, and many state laws would be effectively ignored. "
But maybe the CFPB's proposal is not all bad: "The concept is good. The concept is noble. We as a company are all for transparency. It helps the customer to succeed... The concepts are okay. What I hope is a practical application that is going to have to look a lot different in order to be sustainable...This is a process and the CFPB is a very deliberate organization. I'm hopeful that this is at the beginning of a very productive process where the CFPB absorbs the feedback, but I think there is going to be a massive amount of reaction from a wide variety of depositors and non-depositories.
The Force is strong with this one: "The decision of who to be when we grow up post-rulemaking, well we have to know what the rules look like. But the backside of the rulemaking should have a very silver lining. Once the federal government, the great Darth Vader CFPB ending all lending in America comes out and sets up rules, it should be a clear time now that the playing field is hopefully well-defined, for fresh capital, fresh partnerships to come into play."
Chartered banks should be able to make small dollar loans, post-rulemaking: "Frankly, if this is the way it is going to go, there is no reason why nationally-chartered institutions should not be partnering with those that have customers of this nature to work with them for the underwriting, the servicing, and have programs that cross fifty states. If we are going to set a national standard for lending, then there should be no reason why nationally-chartered institutions should not be able to come in and operate under that standard."
But this presents a great exit opportunity! "We will have a great handle on who to work with, how to work with them, how to underwrite them, how to collect them, in a compliant fashion. There is a lot of value in having a platform. And I think that is clearly highlighted by the peer-to-peer lending platforms. The peer-to-peer platforms are getting high valuations and a lot of attention.
Would the re-capitalization of payday lenders under a bank holding company be more efficient? Whether or not the future of the company resides in us being a direct lender and keeping all of the capital on our balance sheets that we raise from traditional services as it has been known for our industry, well, most of the capital that has come to our industry had come to us in expensive format based on that business model."
There is a question of jurisdiction: "Their proposals directly conflict with dozens of state laws. So even if it went into effect tomorrow, I could not do it because I am not licensed to do it. They have ignored that there is no federal standard to do this. It is a pipe dream unless you have conforming legislation passed in dozens of states. Either we are going to have some national lending enabling platform, which I don’t think is going to happen, or realize that they have written loans that look more like they were dealing with a national depository."
Some small-dollar lenders are going to lawyer up: "I’m just one guy and so it is my opinion. But I think you are going to see direct comments. When I say directly interface with a regulator, I think you are going to see widespread public and private comments back to the CFPB from a number of different sectors from which they were not expecting to get the feedback from. I think if you look at the outcome of how mortgage lending began and where it ended at the CFPB – and I am not an expert on it and I cannot answer questions on it – but there was clearly give and take there. So I think that is one path. I think you will see some form of legal challenges along the way from the parties who are most impacted, or [among those for whom it] becomes clear will be deeply impacted or going out of business as a result. I think someone will make a legal challenge if these rules were to go forward as they were. I think there is a high probability that some – I can’t say who or how many – some state Attorneys General are going to take exception to this and make comments and put pressures toward the CFPB. [Here he is interrupted by an analyst from Independent Credit Research] And the last category: I think you will see many trade associations, including those that we participate in, voluntarily providing research with data the CFPB does not have access to, to better define how the impact of the outcomes will be. I think all of that is going to happen."
He is not thrilled with the underwriting rules for repeat lending: The notion of having judgment and clarity into subtle changes in a consumer’s life, even so much as saying if they pay off a loan and want to borrow again, I am supposed to go in and figure out if somehow their situation in life is such that I should make them another loan? Let me be blunt. In the lending business, if you pay me back that is pretty good evidence that you are a good credit risk. Generally my answer would be ‘thank you very much for paying me back. How might I serve you in the future?’ So I don’t know how I get from there to ‘thank you for paying me back. Tell me about your wife and your marriage, how are things going, how many hours are you getting a week at Home Depot, think you are getting enough to get another loan?' Does this feel good?"
A Chokepoint Mention
Saunders also mentioned he appreciated the House Oversight Committee's focus on Chokepoint. In fact, his comments would seem to underscore that the anxieties offered during the Chokepoint hearing are actually out of touch with reality. Saunders noted that the company increased its number of bank relationships during the last quarter.
Saunders and CCFI CFO Michael Durbin spent some time talking about how CCFI's business is changing. Durbin noted that the company continues to shift toward more online lending, as evidenced by the fact that year-over-year online revenue growth increased by 115 percent. The changes from a new channel emphasis are fortified by a simultaneous re-entrenchment toward longer loan terms. Medium-term lending doubled in scope. Overall, their margins shrunk, but that outcome is not a true reflection of current market conditions. It really reflects the fact that moving to online lending while also opening more than twenty new stores creates a lot of bad debt expense.
While check cashing revenues actually declined, Saunders emphasized that stores still have value. "Within our enterprise we do more than lending. We have a physical environment that is not totally dependent on lending, which in some measures and in some states and in some locations can impact the value of a location in terms of servicing a customer in any regulatory environment, attracting customers to do business with them versus competing strictly online."
But unfortunately, new customers can be a problem: "Degradation in margin can be attributed to new stores." said Durbin. "It is not a matter of location. It is a matter of acquiring new customers. You open up new doors; you have all of the expense associated with having your doors open. You have elevated marketing expenses while you seek to attain market share, and then also there is a process of weeding out, if you will, non-performing customers to establish relationships with customers who will perform and then you have significant elevated net bad debt."