09/09/20 10:52 AM EDT

ECPG | CFPB Suit Reads Like a Nothing-Burger and Shakes Out Weak Hands

Josh Steiner, CFA

Drago Malesevic, CFA

Takeaway: We maintain a strong conviction in our longer-term thesis, viewing this latest action as favorable noise allowing for a better entry-point.

In an 8-K released this morning, Encore disclosed that the Consumer Financial Protection Bureau (CFPB) has filed a lawsuit against the company and its U.S.-based subsidiaries alleging a failure to implement certain practices required under a consent order entered into with the CFPB back in 2015.

The largest debt collector in the U.S., Encore is no stranger to finding itself in regulatory cross-hairs, although this latest lawsuit is the first regulatory move against Encore under the Trump administration.

In summary, the CFPB is seemingly accusing Encore of three things:

Since 2016, the company collected more than $300M from accounts using practices deemed improper in the 2015 order

Recall, the 2015 order required Encore to acquire and maintain proper documentation for all debts it sought to collect on
This sum represents 3.5% of cumulative collections from 1Q16-2Q20

Encore pursued time-barred debts

Recall, in most states, there is a statute of limitations of about 8 year on debt collection, and debt collectors are required, but often fail to tell consumers that the debt they are attempting to collect on is in fact time-barred

Encore used an offshore company to process debit and credit card payments, failing to disclose the accompanying international transaction fee and the option for consumers to pay, without fee, through their bank accounts

It remains unclear exactly how much money the CFPB is seeking here, although for reference, in the 2015 order, Encore settled for $42 million in consumer redress as well as another $10 million in penalties.

Based on Encore's 8-K, the company does not expect the outcome of this suit to be material, and our sense is the same as, in all likelihood, any impact will be dragged and fizzled out over several years of litigation.

This news has clearly triggered selling among those without proper context, whereas we continue to maintain a strong conviction in our longer-term thesis and view this latest regulatory development as favorable noise allowing for a better entry-point.

ECPG | CFPB Suit Reads Like a Nothing-Burger and Shakes Out Weak Hands

Cartoon of the Day: Synonyms

Real Conversation | Stephanie Pomboy: Talking Turkey

Cartoon of the Day: No End In Sight

Capitalizing on Big Oil Earnings Moves | $CVX $XOM

Market Situation Report: Impending Quantitative Tightening Tapering

CHART OF THE DAY: Go Anywhere Outperforming the Market

EDUCATIONAL CONCEPT: THE TREASURY GENERAL ACCOUNT

Short $META: Hedgeye Analyst Andrew Freedman Nails It

McCullough: Cut the Losers, Ride Your Winners

McCullough: This Market Setup Is ‘Really Nasty’ $SPY $NVDA

Cartoon of the Day: Powell Gump

Cartoon of the Day: Nothing New

CHART OF THE DAY: Go Anywhere Process Paying Off

Cartoon of the Day: Torched

EDUCATIONAL CONCEPT: THE TREASURY GENERAL ACCOUNT

Invest Smart(er): Hedgeye Research + Simplify ETFs

Sign up for free: Hedgeye's Market Brief