Payday lenders' shares may be at risk

Payday loans are short-term, unsecured loans offered to cash-strapped consumers that typically mature in two weeks or on the borrower's next payday. The loans are often priced at a fixed-dollar fee, but the underlying annual interest rate is usually near 400 percent or more.

Ohio governor Ted Strickland signed a bill into law Monday capping payday loan interest at 28 percent--effectively shutting down the industry in the state, Sterne Agee analyst Sean J. Ryan wrote in a note to investors.

"Senator Obama has proposed a similar measure as part of his presidential campaign; he would cap interest rates at 36 percent nationwide, which would function as an effective ban on the payday loan industry," Ryan wrote. "We believe the very real risk of an industry-wide shutdown is not reflected in the stock prices of the potentially affected companies."

In Ohio, the ban came after Democrats captured the statehouse in the 2006 gubernatorial race and the Republican majority in the Ohio House of Representatives was cut. If Sen. Barack Obama wins the presidential election with dominant Democratic Congressional majorities, a national payday loan similar to Ohio's has a strong chance of being implemented, Ryan said.

But a Republican win in November only mitigates the threat somewhat, according to Ryan. Even if Sen. John McCain wins "the industry will likely face a more hostile regulatory environment."

"Extremely vulnerable" companies include Overland Park, Kansas-based QC Holdings which has 17 percent of its total stores in Missouri, he said. The governorship of Missouri looks like it could land in the hands of Attorney General Jay Nixon, a Democrat, who advocates the same interest rate cap on payday loans as Obama, according to Ryan.

QC shares fell 31 cents to $7.62 in afternoon trading Tuesday. Ryan also considers Spartanburg, S.C.-based Advance America Cash Centers as extremely vulnerable. Its shares slipped 4 cents to $6.75.

A representative at QC Holdings wasn't immediately available for comment. On May 14, when the Ohio State Senate voted to pass the bill, Advance America issued a statement saying it and other members of the Community Financial Services Association of America, an industry group, had acted in good faith to reach compromise legislation.

"Today's vote to impose a 28 percent annual percentage rate cap on payday loan, reducing the allowable fees from $15 to $1.08 per $100 borrowed for a two-week period, is not a compromise," Advance America said in the statement.