Ace Cash Express Inc., which had bucked the trend among payday lenders of operating in Texas as a "credit service organization," now says it plans to adopt that business model this year.
The Irving, Tex., company originally saw too much legal risk in the CSO setup, in which payday specialists can collect as much as 20% in fees for arranging a short-term loan from a third-party lender.
But this month Texas' attorney general, Greg Abbott, sent a letter to the state's Office of Consumer Credit Commissioner saying that CSOs are permissible. So on an earnings conference call last week Ace said it will begin brokering loans as a credit service organization sometime in the next two quarters.
Many payday lenders adopted the model in Texas and other states last year. They did so after the Federal Deposit Insurance Corp. limited the number of successive loans their partner banks could make to a borrower, and after the Texas Legislature ended its session without voting on legislation to let payday lenders operate independently there.
Jay Shipowitz, Ace's president and chief executive, said on the conference call that it had "not selected a lender yet that will be offering the particular loans in our stores." However, Ace has "identified two to three very capable lenders that would fit that product extremely well," he said.
The product "will have a positive impact on earnings" almost immediately, Mr. Shipowitz said, but the company will need to assume "training costs as well as marketing costs and IT costs that we will have to incur up front, and particularly initially, as we offer the product."
"You've got to balance the costs against that," Mr. Shipowitz said. He would not say whether the transition would be accretive to earnings in Ace's current fiscal year, which will end June 30.
For months the company had been offering short-term payday loans in Texas through a bank subsidiary of Republic Bancorp Inc. of Louisville and limiting to six the number of successive loans to one borrower.
Last year it also began offering a longer-term installment loan product through First Bank of Delaware.
Ace will continue to offer the two products, Mr. Shipowitz said in answer to a question from Mark Sproule, an analyst for Thomas Weisel Partners.
"Consumers truly like" the installment loans, he said. "I don't think we want to put, at this point in time, all of our eggs in one basket, and that basket being either the CSO basket or the Republic basket."
From a strategic standpoint, Mr. Shipowitz said, "what we are trying to offer people is a whole suite of products," including prepaid debit cards and bill-payment services.
"We believe that the First Bank of Delaware product is a great product … [for] a customer who has either used the payday loan product too much or is looking for a longer-term solution to their problem."
Ace charges $17.64 in fees per $100 borrowed on payday loans in Texas, he said in response to a question from Dan Mazur, a JMP Asset Management analyst. "We would expect, in the CSO model as we're currently contemplating it, to probably have a charge similar to that."
As for "how we're going to roll this out and exactly how the products are going to be offered," Ace will provide more details on its next quarterly earnings conference call.
The transition in Texas, Pennsylvania, and Arkansas to the six-loan limit and installment loans seems to have been rocky.
In the quarter that ended Dec. 31 the shift resulted in a 7.9% drop in comparable-store loan fees in the three states, said Bill McCalmont, an executive vice president and the chief financial officer. He told American Banker that Ace does not disclose the dollar amount of those fees.
Ace increased its provisioning for loan losses on Republic loans in the quarter, reducing its gross margin by about $800,000 from the year-earlier figure, Mr. McCalmont said.
Mr. Shipowitz said that because the company was concentrating on new products, "we probably took our eye off the ball a little bit as it relates to getting people to come back into the stores and pay off their loans."
"We were really just focused in the stores relative to getting customers into our new product, where we had it," he said. "In some cases in Pennsylvania and Arkansas we didn't even have a product."
