A lot is written about payday lending, but not all of it is accurate – get the facts from the Financial Service Centers of Washington.

March 4, 2008
Source: FISCWA.com

Summary of Research Released in 2007 on the Payday Loan Industry

A number of recent, independent studies have been conducted on the payday lending industry and the payday loan product. This research confirms that payday loans are appropriately priced credit options that benefit consumers. Below is a summary of the third-party studies that were released in 2007 on this important consumer credit choice .

A November 2007, preliminary study from Research Officer for the Federal Reserve Bank of New York, Donald Morgan, and Cornell University graduate student, Michael Strain entitled: “ Payday Holiday: How Households Fare After Payday Credit Bans ,” “[t]ests the predatory debt trap claim of industry opponents] by researching how households in Georgia and North Carolina have fared since those states banned payday loans. . . .” This study concludes that consumers in Georgia and North Carolina are worse off than consumers in states with payday lending: “[C]ompared with households in all other states, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same. This negative correlation – reduced payday credit supply, increased credit problems – contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as bounced check ‘protection [products]' . . .“ ( http://www.ny.frb.org/research/staff_reports/sr309.pdf )

In August 2007, the Government Accountability Office released its review ( GAO 07-1148R – Military Personnel – DOD's Lending Report ) of the methodology and conclusions of an August 2006 Department of Defense (DOD) report to Congress on predatory lending. According to the GAO, the DOD's report to Congress was flawed and the resulting conclusions – including restrictions on military lending – should be reconsidered. The GAO found the DOD's r ecommendations "were not directly linked to the report's findings, were based on research studies that had some methodological problems, or did not address implementation issues." For example, GAO noted that the DOD failed to establish a direct relationship between the use of a credit product and the financial problems of the service member. "The shortcomings we identified in some of the methods and approach indicate that caution is necessary when interpreting the findings for some areas of DOD's report," concluded the GAO. "DOD issued a report on predatory lending that addressed the mandated issues, but it contained limited support for some of its findings and recommendations." ( http://www.gao.gov/new.items/d071148r.pdf ).

A July 2007 study, " Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts, " by Dean Karlan, Assistant Professor of Economics at Yale University and Jonathan Zinman, Assist. Prof. of Economics at Dartmouth College , concludes that consumer lending benefits borrowers. The study assessed the impact of high-risk loans on consumers by expanding high-interest credit to rejected applicants in South Africa . The lender used in the study shared many characteristics with the American payday loan industry by offering small, high-interest, short-term, cash loans to the public. Among other things this study concludes: “[T] he most common purpose for household borrowing is paying off other debt. This suggests that [loans] may be used to economize on interest expenses, and to maintain access to other credit sources by permitting timely repayment.” http://research.yale.edu/karlan/deankarlan/papers/index.php )

An article published in the Fordham Journal of Corporate & Financial Law in July 2007, entitled “ Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits? ,” by Aaron Huckstep concludes payday lending fees do not deliver high profits to lenders and advises state legislators to "refrain from acting in haste" when enacting payday lending legislation: "legislators would be wise to carefully consider and study the industry's explanations of its operating costs and profitability." The article supports the position that payday loan fees are in line with the costs of operating a payday loan business and are “less than half that of their mainstream lending counterparts.” Among other things, the article concludes: "Depending on the borrower's situation, each of these alternatives [bounce protection, borrowing from family] may come with its own set of monetary or other social costs. In the end, choosing a payday loan may be the most convenient and cost-effective alternative for some people.” Read the full article in the Fordham Journal of Corporate and Financial Law at : 12 Fordham J. Corp. & Fin. L. 203 (July 2007); ( http://www.cfsa.net/downloads/HUCKSTEP%20JCI4%20FJCFL%20XII.1.pdf ).

A January 2007 study, " Defining and Detecting Predatory Lending ," by Donald P. Morgan, Research Officer, Federal Reserve Bank of New York , concludes that payday loans represent a legitimate source of credit that is "welfare enhancing" to the people with access to it. The study also notes: “[h] igher prices are neither necessary nor sufficient to conclude that a certain class of credit is predatory." The Staff Paper also found: “[V]ery small, short-term loans may not have been worthwhile for banks. Payday lending technology may have lowered those fixed costs, thus increasing the supply of credit . . . . That version of the genesis of payday lending suggests the payday innovation was welfare improving, not predatory." ( http:// www.newyorkfed.org/research/staff_reports/sr273.pdf )

For more recent research see:

Payday Lending and Public Policy: What Elected Officials Should Know , Tom Lehman, Ph.D., adjunct scholar of the Indiana Policy Review Foundation and professor of economics at Indiana Wesleyan University , (August, 2006) ( http://www.cfsa.net/downloads/Payday_Lending_and_Public_Policy_What%20Elected_Officials_Should_Know.pdf )

Contrasting Payday Loans to Bounced Check Fees , Thomas E. Lehman, Ph.D., Associate Professor of Economics, Wesleyan University, prepared for the Consumer Credit Research Foundation (2005) (http:// www.consumercreditresearchfou n dation.com ).

Payday Lending: Do the costs justify the price? , Mark J. Flannery, Co-director of the Center for Financial Research, Federal Deposit Insurance Corporation, Katherine Samolyk, Senior Financial Economist, Federal Deposit Insurance Corporation, Division of Insurance and Research (April, 2005) ( www.fdic.gov/bank/analytical/cfr/cfr_wp2005/CFRWP_2005-09_Flannery_Samolyk.pdf ).

Credit Union Payday Loan Alternatives , Jim Jerving, A White Paper from the National Association of Community Credit Unions (December, 2005); ( www.naccu.coop/white_papers.html ).