Evolving State and Federal Regulatory Climate Surrounding Branch-Based Installment Lending

The Request: Capstone was engaged by a consortium of private-equity sponsors that was considering acquiring a branch-based installment lender. Specifically, we analyzed existing and potential future legislative and regulatory initiatives that could affect the Company. At the state level, we explored the climate in the nine states that constitute the majority of the Company’s branches. At the federal level, we explored how current and future leadership at the Consumer Financial Protection Bureau (CFPB) could affect the company—including the potential for future supervision, enforcement actions, or rulemaking. We also evaluated how key stakeholders view certain industry practices, such as sales of credit insurance, originations through “live checks” and “renewals.”

Background: Following the creation of the CFPB a decade ago, state and federal governments have increased their focus on the subprime and near-prime consumer lending markets. Under the Obama administration, the CFPB spearheaded a rule that could affect some installment lenders and also put many payday lenders out of business. Meanwhile, consumer advocates have launched rate-cap initiatives across the states, scoring successes in South Dakota, California, Colorado, and other jurisdictions. Capstone has advised PE clients on many recent transactions in the installment loan space and is closely monitoring policy and market developments nationwide.

Our Process: Over three weeks, Capstone conducted a rigorous review of the public record of existing and proposed regulation and legislation. We combined this research with targeted conversations with relevant regulators, policymakers, and other stakeholders to assess the risks and opportunities the companies face. We also conducted a financial analysis to determine how exposed they are to the evolving policy framework.

Our Outreach: In recent years, Capstone has engaged in hundreds of conversations with stakeholders on all sides of the consumer-lending markets, including regulators, legislators, consumer advocates, industry, and lobbyists. Specifically, during our three-week engagement period for this project, we spoke with approximately two-dozen key stakeholders, including:

✔ Offices of several US senators and members of Congress
✔ State and federal regulators
✔ Trade associations representing the consumer lending markets
✔ Consumer advocates pushing for increased state and federal regulation
✔ Industry stakeholders, including the target company’s management team

The Outcome: Capstone provided our clients with an in-depth final report, in addition to regular update calls and presentations, on the evolving policy environment, policy risks, and opportunities that will affect the target company in the coming years.