Hilary B. MillerNovember 2010

History of Payday Research Prior to 2004, little scholarship regarding

the consumer-welfare effects of payday lending

Consumer Credit Research Foundation formed to promote industry-supported research (I.R.C. § 501[c][3]) and policy

Since 2005, numerous papers published Consumer welfare conclusions are

ambiguous Access to payday credit is likely beneficial

to most consumers but harmful if misused

Competing Economic Theories Neoclassical theory

Credit - even very expensive credit - enables consumers to survive “shocks” (smoothing income and expenses)

Inter-temporal shifting Some consumers may

be harmed by overuse Removing any

economic choice is welfare-reducing

Behavioral theory Imperfect self-control Optimism bias:

Consumers overestimate their repayment ability

Consumers have place unrealistic value on immediate consumption (hyperbolic discounting)

TILA disclosures don’t contain the right info

Key research re $64 question: welfare issue Payday Loans Are

“Good” for People Morgan Morgan/Strain Morse Wilson* Stoianovici/Maloney* Zinman*

_________*CCRF funded

Payday Loans Are “Bad” for People Melzer Skiba/Tobacman Carrell/Zinman

Maybe Good/Maybe Bad Elliehausen/

Lawrence

Results are ambiguous

Caskey (2010) (collecting studies): Evidence is ambiguous regarding consumer welfare; more study required to answer “the Big Question”

Parsons and Van Weep (2010): “Welfare impact of payday lending is ambiguous.”

Key consumer welfare results Morgan and Strain (2007):

Numerous indicators of consumer distress worsened after payday was banned in NC and GA

Results compared to control states with no change in payday regulation

Wilson et al. (2006):* Simulated borrowing in economic laboratory Borrowers better off – unless they roll over too often

Zinman (2009):* Self-reported indicators of consumer distress

worsened following ban in OR Results compared to control state with no change in

payday regulation (WA)_______*CCRF funded

Pricing is “fair”

Plenty of evidence that payday lending does not provide excess economic profits: Flannery & Samolyk (2005) Huckstep (2007) Skiba (2008) Ernst & Young (2008)

Who cares?

Additional research

Stango (2010):* Adjusted for risk, credit union loans are no cheaper

than storefront payday loans Payday is more user-friendly than credit union Consumers prefer payday

Zywicki (2009):* No logic to “protecting” consumers from high

interest costs but not from, e.g., high milk costs No benefit to consumers from enhanced regulation

Luea (2010):* Access to payday credit reduces certain types of

crime___________*CCRF Funded

Disclosure Issues

Betrand and Morse (2009):* Borrowers understand that most payday

customers do not repay in two weeks and are not “misled”

Enhanced, draconian disclosures reduce borrowing by 5% in first-time borrowers but no material effect on experienced borrowers

___________*CCRF funded field work

Synthesis

Considerable research shows that payday loans are helpful, at least on balance

Payday loans are overwhelmingly used for longer time periods than the industry represents

Overuse is harmful to some consumers Use of payday loans probably makes no

difference to welfare of majority of borrowers

Pipeline

Increased demand for online loans following MT ban

Comprehensive lit survey (Edmiston?) Debunk optimism bias claims Model cost-driven consumer credit

(Evans) Simulate controlled experiment re

welfare “Thought” piece re alternative products

Next steps

All research to date is epidemiological or experimental

Need real-life randomized controlled experiment – but nearly impossible – can be simulated

But: very subtle treatment effects Need to use existing research effectively

and give it a longer shelf life than one news cycle

Expect BCFP policy to be fact-driven Research primarily addresses storefronts:

is there an evidence-based rationale for separate online treatment?