Bloomberg News

Hedge Funds Shorting World Acceptance Urge Consumer Bureau Probe

October 30, 2013

Hedge funds betting against shares of World Acceptance Corp. (WRLD:US) have been pressing the U.S. Consumer Financial Protection Bureau to investigate the installment-loan firm, according to people briefed on the discussions.

The overtures from funds including New York-based Kase Capital Management and Boston-based North Run Capital make the bureau the latest target of investors trying to prod Washington regulators and policy makers to take actions that could benefit their trading strategies.

Some funds also have met with congressional aides and consumer advocacy groups to encourage them to focus on World Acceptance, the people said.

A. Alexander McLean, chief executive officer of Greenville, South Carolina-based World Acceptance, said in an interview that he has no reason to believe his company is under investigation by the consumer bureau.

“We are under constant attack from the self-serving short sellers,” McLean said in an interview. The portrayal circulated by the hedge funds is “not representative of the company we are,” he said.

Hedge funds have told officials that the lender is preying on low-income borrowers through unfair practices and should be investigated, according to the people briefed, who spoke on condition of anonymity because the sessions weren’t public.

Staying Short

Another fund, operated by Crosslink Capital Inc. of San Francisco, used the Freedom of Information Act to request consumer bureau documents about World Acceptance, the agency’s records show.

Sam Gilford, a spokesman for the consumer bureau, declined to comment on the agency’s contacts with hedge funds. Whitney Tilson, managing partner of Kase Capital, which had $95.5 million in gross assets under management at the end of last year, said in an interview the fund remains short on the stock. Doug Smith of North Run, which had $1.6 billion under management in its most recent filing, declined to comment, as did Cody Shevitz of Crosslink, a hybrid investment firm that reported $1.6 billion in assets in its latest filings.

World Acceptance offers small loans to customers who may not have access to other forms of credit, such as credit cards. The loans, offered in 14 states, average about $1,200 and are paid off in monthly installments. They contrast with so-called payday loans, which generally must be paid in full over a shorter term with one postdated check.

Largest Lenders

While the consumer bureau oversees payday lenders, “we haven’t reached any conclusions in the installment-lending space yet,” Eleanor Blume, an official with the agency’s research division, told analysts on Oct. 21.

World Acceptance is one of the largest U.S. installment lenders. Competitors include Springleaf Holdings Inc. (LEAF:US), an Evansville, Indiana-based lender partly owned by Fortress Investment Group LLC (FIG:US) that sold shares to the public for the first time Oct. 16. Others are closely held Security Finance Corp. of Spartanburg, South Carolina, and Republic Finance LLC of Baton Rouge, Louisiana.

Since the consumer bureau started work in July 2011, World Acceptance shares have risen (WRLD:US) about 53 percent from $68.53 to $104.60 at the close of trading in New York yesterday as its business has expanded and the firm repurchased stock. Earnings per share grew 37 percent in the past two years from $5.76 to $7.88.

About 32 percent (WRLD:US) of shares have been borrowed and sold on bets that the price will fall and the borrower can buy them back at a lower price, data compiled by Bloomberg show. That compares with a weighted average of 3.45 percent for the companies in the S&P 500 Index. It is the second most-shorted stock of U.S. consumer finance companies after Atlanta-based Atlanticus Holdings Corp. (ATLC:US), another retail lender, according to the data.

Action ‘Likely’

Tilson, of Kase Capital, told investors in a July 1 letter that the fund held a short position on World Acceptance and predicted that consumer bureau action against the company is “likely.”

Kase Capital has publicized other short plays. Tilson said on Oct. 25 that he was betting against the stock of Green Mountain Coffee Roasters Inc. (GMCR:US) on the grounds that it faces rising competition, and has also shorted weight-management product purveyor Herbalife Ltd. (HLF:US)

Hedge funds long have provided tips to regulators including the Securities and Exchange Commission, and in recent years have been increasingly visible in Washington as lobbyists. For example, firms including Paulson & Co. Inc. have pushed Congress to recapitalize Fannie Mae and Freddie Mac while they buy up their preferred stock, long considered worthless.

Credit Insurance

The hedge-fund criticism of World Acceptance centers on its marketing of credit insurance on its loans, which covers payments during an unforeseen event such as job loss. Consumer advocates say the product is unduly expensive mainly because lenders don’t let clients shop around for it.

World Acceptance is vulnerable because credit insurance could represent more than half of its net income, according to a May 14 report by Los Angeles-based Citron Research, a stock commentary site, which said it analyzed financial statements from the company and from Fortegra Financial Corp., which provides the credit insurance World Acceptance sells.

Citron noted the consumer bureau already fined Capital One Financial Corp. (COF:US) and Discover Financial Services (DFS:US) over allegedly deceptive sales practices for similar add-on credit products. The bureau didn’t challenge the companies for offering the products, just for the way they are sold.

‘Regulatory Threat’

The “regulatory threat” to World Acceptance is rising and its shares are “one-of-a-kind: a true sub-sub-sub-prime investment,” the Citron report said.

Andrew Left, Citron’s owner and founder, said in an interview that hedge funds have passed his research to the consumer bureau. Left said he holds a short position on World Acceptance.

McLean, the World Acceptance CEO, said in the interview that the company doesn’t deceive customers about credit insurance. He said the products are voluntary and borrowers always “sign off on what they are getting.”

Hedge funds also have attempted to get lawmakers interested in the company. North Run, the Boston-based fund, organized meetings with Capitol Hill aides and consumer advocates this summer, according to a person involved.

Dodd-Frank Authority

At a July 24 congressional hearing, Senator Ron Wyden, an Oregon Democrat, asked David Silberman, an associate director of the consumer bureau, whether the agency was reviewing World Acceptance and other installment lenders. Wyden cited a story by ProPublica, a nonprofit investigative journalism group, which concluded the company’s loans can carry effective interest rates as high as 182 percent.

Silberman didn’t mention specific companies, telling Wyden that the 2010 Dodd-Frank law that created the consumer bureau gave it the authority to review products such as installment loans.

In her discussion this month with analysts, the bureau’s Blume said the agency can decide to supervise companies on an ad hoc basis if there is a risk to consumers. If it decided to issue a regulation, typically a yearlong process, it could examine large installment lenders on a regular basis, Blume said. There are currently no plans to do so, she said.

Still, Blume said, while it isn’t looking at individual installment companies, the agency is scrutinizing add-on products such as credit insurance “whether that comes with a credit-card account or an installment-loan account.”

‘Drain Borrowers’

She said the bureau is trying to determine whether “the product is simply designed to drain borrowers of cash without delivering some sort of value.”

Ira Rheingold, president of the National Association of Consumer Advocates, said funds including Mangrove Partners of New York, which has $420 million under management, have visited consumer groups in Washington to argue that World Acceptance has a flawed and unfair business model.

Among other groups contacted by the funds were Boston-based National Consumer Law Center, the Durham, North Carolina-based Center for Responsible Lending and the Consumer Federation of America in Washington, two people briefed on the talks said. The hedge funds also suggested that pending changes in military lending rules by the Department of Defense could affect World Acceptance’s business.

“They want to pick our brains, and we have some measure of common interest here,” Rheingold said.

Deepak Gupta, formerly the senior counsel for enforcement strategy at the consumer bureau, said the short-sellers’ interest, properly disclosed, is a good thing when deployed in the name of consumer protection.

“Consumer advocates are perennially short on resources,” Gupta, now a lawyer at Gupta Beck Pllc, said in an e-mail. “We should welcome the help from resource-rich hedge funds or other wealthy investors.”

To contact the reporter on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net


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Companies Mentioned

  • WRLD
    (World Acceptance Corp)
    • $81.99 USD
    • 0.91
    • 1.11%
  • LEAF
    (Springleaf Holdings Inc)
    • $26.01 USD
    • -0.17
    • -0.65%
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