Loan Shark building in Detroit, MI

Pawnshop chains and payday lenders, some of the most contentious companies on Wall Street, have experienced a big lift during the longest government shutdown in US history.

Gridlock in Washington over President Donald Trump’s plans to build a wall on the border with Mexico has deprived hundreds of thousands of government employees and contractors of their wages. As a result, some have turned to specialist consumer-finance companies to bridge gaps between earnings and outgoings.

Shares in World Acceptance, a South Carolina-based short-term lender, are up 22 per cent since the shutdown took effect about a month ago. EZ Corp, a pawnshop operator based in Austin, Texas, is 20 per cent higher over that period. In both cases, the rises are much more than benchmarks, suggesting investors could be betting on a surge in demand to cover unexpected expenses. 

“Many people . . . are reaching into savings and looking for short-term liquidity if they need to pay the mortgage or something else,” said Michael Underhill, chief investment officer at Capital Innovations, an investment firm in Milwaukee. “Alternative lending platforms have likely stepped into the void.”

The small-dollar lending industry has been a focus for Democratic politicians in recent years, as regulators have introduced lighter-touch regimes for agencies such as the Consumer Financial Protection Bureau, which had punished a succession of consumer-loans companies under the previous administration. Critics claim that short-term lending can be predatory, trapping borrowers in cycles of debt. 

About 78 per cent of US workers live pay cheque to pay cheque, according to a 2017 study by CareerBuilder, a jobs portal. A survey the same year by the Federal Reserve found that nearly half of American families could not cover a $400 emergency expense without borrowing or selling something to do so.

Banks have offered help to government employees working without pay, saying they will allow customers to skip mortgage or car-loan payments, while waiving certain fees. But they are unlikely to be able to provide short-term, unsecured loans: many pulled out of such lending in the aftermath of the financial crisis, blaming regulatory risks and higher capital requirements.

Chad Prashad, chief executive of World Acceptance, said his company was seeing demand in Texas and the south-east of the US where there were big airports employing government workers.

In response to the shutdown, World Acceptance, which specialises in ‘instalment loans’ of up to three years, is offering cash-strapped government employees deferrals on their loans without interest or fee penalties. New customers can get up to $1,250 in a 10-month loan with 0 per cent interest and no fees.

“Because we lend in our communities, face to face, we see the concerns first hand and have decided to help directly,” Mr Prashad said, adding that the company ran similar programmes after natural disasters such as hurricanes and tornadoes.

Shares in Lending Tree, a consumer-loans portal, are up 42 per cent since the shutdown took effect, almost four times the gains of the mid-cap market over that period. “The government shutdown is likely creating demand on Lending Tree’s platform,” said Shweta Khajuria, analyst at RBC Capital Markets.

Tendayi Kapfidze, chief economist at Lending Tree, said the share price rally was not “completely related” to the shutdown. He said the rise was mostly caused by higher mortgage applications since a fall in interest rates since the end of November. 

Scott Astrada, director of federal advocacy at the Washington-based Center for Responsible Lending, said borrowers needed to be wary of products that were “debt traps by design”. They can lead to “a cascade of financial consequences that include bank penalty fees, delinquency on other bills, and even bankruptcy,” he said.

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