World Acceptance Corp (NASDAQ:WRLD) : Their Business Model is a borderline-legal Ponzi scheme whose day of reckoning has finally come.


Over the past almost 8 years Citron has put together an unparalleled track record of uncovering scams.  It is our opinion that as this story unfolds, it will rank right up there with the best of them. 

Citron exposes the only publicly traded “Installment Loan” Company as a potential ZERO!!

Citron uncovers appalling consumer loan practices, at least two ominous and previously-undisclosed consumer class action lawsuits, potentially catastrophic regulatory risk, and the worst portfolio loan risk we have ever seen in a publicly traded company.

Citron introduces World Acceptance Corp (NASDAQ:WRLD) and advises readers that there is a lot of substance to this story.   There is a huge disconnect between reality and the image that World Finance presents to its customers and Wall Street.  Citron will lay out the contrast with its customary links, and as usual, invites readers to judge for themselves.

Undisclosed Lawsuits  ( Yes, plural intended ! )  and Insider Stock Sale

First and foremost Citron notes a lawsuit filed in New Mexico, just affirmed by the State Supreme Court clears the way for class action status, overturning the mandatory arbitration clause in World Finance’s loan contract terms.

Second, a separate suit filed Feb 9, 2009 in Illinois state court, also seeking class action status, alleges the company’s loan forms violate the Federal Truth in Lending laws.  The company has not disclosed either of these suits, or the direct business risks they pose to WRLD.

Meanwhile the company just reported “great earnings” in an 8-K, and two days later, WRLD’s CEO filed and sold stock.  As a matter of fact, the insider selling has been so constant that as of writing, the CEO holds only 125,000 shares of stock — not very much skin in this game.

The company has had years to disclose the New Mexico suit and over three months to disclose the Illinois suit, and has not done so as of today, probably because they are  in a legal fight for their lives to just keep the business operating.  In part 3 Citron will show how almost every state they operate in, as well as the federal government, is taking a long hard look at these predatory practices.
Citron believes that if the federal government or any state that they operate in imposes even slight changes on the way they do business, the catastrophic risks of WRLD’s entire loan portfolio will be exposed and this entire company could just “go away”.

Citron Research Roadmap

In this report, part 1 of a multi-part series, Citron will introduce you to a business so unbelievably abusive of society’s most economically vulnerable citizens, you simply will not believe it is even legal.  In fact, it might not be legal for long — in its current form.  In the regulatory risk section, we will show you, in the freshly penned words of the company’s own business association, that they indeed fear they may soon be put out of business.

In part 2 we will reveal how the company indulges in accounting shenanigans which, in combination with its inconceivable fee structure, allow it to front-load earnings exaggeratedly while burying a growing mass of loans of dubious collectability on its balance sheet.

In part 3, we will review the various regulatory initiatives underway at the state and national level aimed specifically at preventing the type of abuse World Finance inflicts on its borrowers.  We will describe the lawsuits challenging World Acceptance’s business practices and the validity of its existing loans.  We will also review a civil case won against the installment loan industry with facts so outrageous that it serves as a “poster child” story for why sweeping regulation is required.

Business Summary
Shares Outstanding 16.16 million shares
Recent Market Cap $440.4 million
Cash: $6.3 million
Loan Book (net) $460.4 million
Outstanding Debt $  208.3 million

World Acceptance’s business is consumer “installment” loans, small (averaging under $1,000) unsecured loans extended to society’s most economically vulnerable people from low-rent storefront locations.  It operates in 11 mostly southern states as well as Mexico.  Here’s a typical location:,+South+Carolina&sll=37.0625,-95.677068&sspn=50.69072,78.398437&ie=UTF8&ll=33.984857,-81.071087&spn=0,359.994308&z=18&iwloc=A&layer=c&cbll=33.98489,-81.071547&panoid=idaPdp46U049Qyl7H9BZRg&cbp=12,242.62991203665985,,1,0.6314797360980203

Dirty Secret #1:  Entire Business Model Runs on “Loan Flipping”

The company claims these loans are for the unexpected medical bill or car repair — which sounds like a fair rationale….until you read WRLD’s 10-K, where you come upon this:

In fiscal 2008, approximately 83.0% of the Company’s loans were generated through refinancings of outstanding loans and the origination of new loans to previous customers. A refinancing represents a new loan transaction with a present customer in which a portion of the new loan proceeds is used to repay the balance of an existing loan and the remaining portion is advanced to the customer. The Company actively markets the opportunity to refinance existing loans prior to maturity, thereby increasing the amount borrowed and increasing the fees and other income realized. For fiscal 2008, 2007 and 2006, the percentages of the Company’s loan originations that were refinancings of existing loans were 73.3%, 74.3% and 75.6%, respectively.”

This statistic proves that WRLD’s business model is overwhelmingly dependent on an unsavory and increasingly prohibited practice called Loan Flippping.  Not only do they engage in loan flipping, they brag to Wall Street that they actively market the flipping of loans!  They try so hard to stay under the radar that they are the only business with 900 branches and no branch locator on their corporate website.

Here is how the business really works:

Someone walks into one of these storefront locations to borrow a small sum, say $100 to $300.  With just a signature and a list of references, he gets an 8-month loan with a fee payable up front (tacked onto the loan balance), and a loan with interest calculated using a frontloaded method.  After two months, whether he tries to pay off the loan, just make his monthly payment or neither, he is aggressively sold a renewal loan.  In appx 80% of the company’s loan transactions, the customer has signed a “renewal” and is handed a few more dollars.  The catch is there is a new set of fees tacked onto the loan balance, bookable as immediate revenue to the company, as well as more front-loaded interest (more about this later).  Any subsequent installment payments made by the borrower will go almost exclusively to interest, and the borrower will face a higher payment threshold to reduce his principal.  This is how the effective APR on these loans can quickly spiral to above 100%.

The dark purpose of the “active marketing” of refinancings is to ratchet up a borrower’s balance to a value that exceeds their next check, be it SSI, unemployment, social security or welfare, assuring that they will be unable to pay off their loan in full.  (Yes, industry employees have already testified to this practice in court cases.)  This traps borrowers in a cycle where most of their payments will be applied to fees and interest, and not reduction of principal. That is the “sweet spot” for the company’s profits.

Even though the company charges off a hefty sum for bad loans, Citron asks the question that the market will have to decide:
What is the real value of a loan book comprised of appx. 700,000 unsecured loans averaging $800, owed by borrowers who have been flipped multiple times, have already paid MORE than their fair share of interest, who have been exposed to intense collection harassment as documented in class-action lawsuits, and whose total payments have already far exceeded the principal…..but still owe more than they ever borrowed?

That is the question that we will all soon be able to answer.

Dirty Secret #2:  The Face of Installment Loans Victims.

A human face was given to this shadowy business when a lawsuit was won in usually business-friendly Oklahoma, on behalf of a mentally disabled man whose installment loan was handled with such abuse that he was driven into homelessness.  Although WRLD was not the primary defendant, they were an active perpetrator, extending a loan to a man with an IQ of 59, to pay off his previous installment loans to another company – after he had already been flipped 25 times!
Here’s the recap of the lawsuit.
(Please scroll down halfway to “Security Finance Predatory Lending Practices”)

The circumstances of the New Mexico case (Cordova) are just as outrageous (see above links.)    Citron will examine these suits and their implications in parts 2 and 3.

Dirty Secret #3:  The Company Itself Fears The End is Near

Citron notes the obvious changes in the political environment with regard to consumer protection.  These will be detailed in part 3.  For now, let us observe that, regardless of the legislative debate about what level to cap interest rates, if “loan flipping” is prohibited, the music stops for the installment loan business – it is effectively over.

Don’t take our word for it.  Look at the words penned by the hastily-formed industry mouthpiece comprised of World Finance and a few of its competitors to fight regulatory change:

“Enactment of this legislation will not only restrict what installment companies may charge for our services, it could well force us out of business altogether.


As the financial pressures of unemployment, foreclosure, repossessions and bankruptcies take their toll on the country’s most economically disadvantaged, political pressure is mounting within more and more states, as well as federally, to take action to curb predatory lending practices.

Citron believes the prospects for sustainability in this business are bleak, not just in terms of social policy and politics, but WRLD’s exceedingly dubious financials also fail from a business standpoint.  Any reasonable “stress test” of WRLD’s iceberg-size loan portfolio would render the company a zero.

Cautious investing to all.