The day of reckoning arrived for Enova International, and the sun came up anyway.
Enova, which started more than 12 years ago as an internet-based payday lender, sees a future as a lender to poor-credit borrowers now that federal regulators have unveiled a long-awaited proposal to clamp down on the predatory practices of subprime lenders.
Not only is the revenue loss manageable, but the company's existing payday loan business will continue in altered form, Enova CEO David Fisher told analysts on a conference call yesterday.
Investors appear to agree. Stock in the Chicago-based online consumer lender has climbed 5 percent since June 2, when the U.S. Consumer Financial Protection Bureau's proposed regulations surfaced. That increase has come despite the fact that one analyst predicts the company's revenue will fall 18 to 26 percent because of the rules.
Enova itself projects the rule will result in a 30 to 35 percent decline in revenue from products accounting for nearly two-thirds of its overall business.
The company generated $653 million in revenue last year. Its net income was $44 million, or $1.33 per share, down 61 percent from the year before.
The CFPB itself forecasts its rule will cause U.S. subprime lending revenue to decline by about 70 percent, so Enova clearly believes it is well positioned to benefit at competitors' expense.
Of course, that modest exhale of relief from investors came after Enova's stock had fallen 61 percent over the past year, mainly out of fear that its primary business would shrivel after the rules came out.
That won't happen, Fisher said.
“Contrary to the doomsayers out there, our U.S. subprime business will survive and be profitable,” he said.
Fisher pointed to Enova's experience in Great Britain, where a strong clampdown on short-term lenders caused Enova's revenue to fall more than 20 percent there. After overhauling its short-term products in the U.K. to comply, Enova started growing again.
Enova says it's now the leading short-term consumer lender in Britain. It was the fourth-largest before the rules took hold.
Fisher forecasted similar market share gains in the U.S. once the rules become final here. Right now, Enova has about 7 percent of the subprime consumer lending market here, he said.
Adjusting to regulatory changes “is clearly something we know how to do,” he said.
The centerpiece of the rule, which Fisher believes will take effect in two years, would require companies making consumer loans shorter than 45 days or charging rates higher than 36 percent to assess the borrower's ability to repay the debt before providing the money. That would include verifying a borrower's income and major debts.
The idea is to stop lenders from trapping consumers in a cycle of debt, as short-term loans are extended, more fees are charged and sometimes borrowers end up paying more in fees and interest than they borrowed initially.
Fisher said Enova is well positioned to comply and can do that work electronically.
“We will not be investing in fax machines,” he said.
Also helping Enova is that Fisher has moved the company to diversify.
It's making longer-term unsecured loans to consumers with better credit ratings than its traditional clientele. But that business will be subject to the CFPB rules because the interest rates Enova is charging in that business generally exceed 36 percent.
Enova also has established a new unit, Enova Decisions, to provide real-time predictive analytics services to outside companies.
The company is a big Chicago employer. Most of its 1,200 workers are here.
By Steve Daniels