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Payday Loans Good for Consumers? Fed and UNC studies say "yes!"
This entry was posted on 12/6/2007 12:00 PM and is filed under Lending.
WASHINGTON, Dec. 4 /PRNewswire-USNewswire/ — Households without
access to payday loans are forced to use costlier credit products and
suffer greater financial difficulties, according to new research
prepared by staff of the Federal Reserve Bank of New York.
Preliminary findings in the November 2007 working paper, "Payday
Holiday: How Households Fare after Payday Credit Bans," by Donald P.
Morgan and Michael R. Strain, Research Officers with the Federal
Reserve Bank of New York, conclude that payday loan bans result in
increased credit problems for consumers.
The study compares households in states with payday loans with
households in both Georgia and North Carolina, states which eliminated
payday loans in May 2004 and December 2005 respectively.
They found, "Georgians and North Carolinians do not seem better off
since their states outlawed payday credit: they have bounced more
checks, complained more about lenders and debt collectors, and have
filed for Chapter 7 ("not asset") bankruptcy at a higher rate." The
authors note that, "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 the bounced-check
'protection' sold by credit unions and banks or loans from pawnshops."
The findings in the Federal Reserve Staff Report track closely with
consumer responses given in a survey by the University of North
Carolina Center for Community Capital, part of a recent study to
determine how North Carolina consumers fared without the option of
payday loans.
"While the UNC study concluded that consumers were better off
without payday loans, this conclusion does not match the actual
findings," said Darrin Andersen, president of the Community Financial
Services Association of America (CFSA). "In fact, respondents' answers
to the survey clearly show that the elimination of payday loans in
North Carolina did nothing about the demand and forced consumers to
replace payday loans with costly, less desirable and sometimes even
dangerous options."
The survey found that consumers most frequently "did not pay/paid
late" [an expense] when faced with a financial crisis. Other frequently
cited strategies were "bounced checks/used overdrafts" or "used credit
card/cash advance." Some admitted to having utilities disconnected,
going without a prescription medication or ending up with a damaged
credit rating.
Andersen added, "In each case, consumers may have been better served
by payday advances, which often offer lower fees and do not negatively
impact credit ratings."
An independent analysis by Bretton Woods Inc. reported that, in
2006, North Carolinians paid an estimated $652 million to banks and
credit unions in non-sufficient funds or over-draft protection fees. In
fact, following three straight years of losing fee income, North
Carolina's credit unions had their first increase once payday loans
were no longer available in the state.
"There is a growing body of evidence by objective, independent
researchers that validates what we have learned from our own
customers," said Andersen. "Taken together, these studies demonstrate
that people need access to short-term, low-denomination loans, and
deprived of these, they are forced into other less desirable
alternatives. This research demonstrates that state-regulated payday
advances are an important credit option."
Highlights and links to the full studies are available at:
Federal Reserve of New York Report, "Payday Holiday: How Households Fare after Payday Credit Bans"
http://www.cfsa.net/FedReserve.html
University of North Carolina Study
http://www.cfsa.net/UNC.html
About the Community Financial Services Association of America
The Community Financial Services Association of America (CFSA) (http://www.cfsa.net/)
is the only national organization dedicated solely to promoting
responsible regulation of the payday advance industry and consumer
protections through CFSA's Best Practices. As such, we are committed to
working with policymakers, consumer advocates and CFSA member companies
to ensure that the payday advance is a safe and viable credit option
for consumers.
Source: Community Financial Services Association of America (CFSA)
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