“Two new Payday Loan Studies Cast Doubt on Need for New CFPB Rules for the Payday Loan Industry.”

Two new payday loan studies were issued recently whose results “fly in the face” of the standard “muck” thrown about by the CFPB, the CRL and the DOJ .

1) A Columbia Law School Professor, Ronald Mann, released a study entitled, “Do Defaults on Payday Loans Matter?” Professor Mann compared the credit score change over time of borrowers who default on payday loans to the credit score change over the same period of those who do not default.

His study revealed:

• Professor Mann’s study revealed credit score changes for borrowers who default on payday loans differ immaterially from credit score changes for borrowers who do not default.
• The fall in credit score in the year of the borrower’s default overstates the net effect of the default because the credit scores of those who default experience disproportionately large increases for at least two years after the year of the default.
• The payday loan default cannot be regarded as the cause of the borrower’s financial distress since borrowers who default on payday loans have experienced large drops in their credit scores for at least two years before their default.

Professor Mann’s findings “suggest that default on a payday loan plays at most a small part in the overall timeline of the borrower’s financial distress.” He further states that the small size of the effect of default “is difficult to reconcile with the idea that any substantial improvement to borrower welfare would come from the imposition of an “ability-to-repay” requirement in payday loan underwriting.”

2)Kennesaw State University Professor of statistics and data science, Jebnnifer Lewsi Priestly, released a second study entitled, “Payday Loan Rollovers and Consumer Welfare.” Professor Priestley evaluated the effects of sustained use of payday loans.  She concluded that borrowers having a higher number of rollovers experienced more positive changes in their credit scores than borrowers with fewer rollovers.  She observes that such results “provide evidence for the proposition that borrowers who face fewer restrictions on sustained use have better financial outcomes, defined as increases in credit scores.” [My dear readers, this is HUGE!]

According to Professor Priestley, “not only did sustained usage not contribute to a negative outcome, it contributed to a positive outcome for borrowers.” She also notes that her findings are consistent with findings of other studies that because consumers’ inability to access payday credit, whether generally or at the time of refinancing, does not end their need for credit, denying access to original or refinance payday credit may have welfare-reducing consequences.

Professor Priestley also found that a majority of payday borrowers experienced an increase in credit scores over the time period studied.  However, of the borrowers who experienced a decline in their credit scores, such borrowers were most likely to live in states with greater restrictions on payday rollovers.   She concludes her study with the comment that “despite several years of finger-pointing by interest groups, it is fairly clear that, whatever the “culprit” is in producing adverse outcomes for payday borrowers, it is almost certainly something other than rollovers—and apparently some as yet unstudied alternative factor.”

Now the question for you, Reader: Will these two academic reports be considered by the fine regulators at the CFPB? Will these reports see the light of day? Or will our opponents: the banks, the credit unions, CRL, pawn, BHPH, RTO… overshadow our efforts with lobbying and political contributions that exceed ours? Will our 14M+ clients jump in the frey and tell the CFPB to “Let our people be free to choose?”

U.S.residents are hoping the CFPB gets this right. A loss of access to small dollar credit products would have a devastating effect on our economy. Families unable to borrow a few hundred dollars to buy medicine, fix the car in order to keep their job, or buy some groceries to last until the end of the week will not be better off than they are today.

We have little expectation that the CFPB will consider these studies.  It’s a shame the CFPB has not had the wherewithal to launch their own research studies.    A data driven regulator as our expectation. It appears this may not be the case. Too bad!

Jer@PaydayLoanIndustryBlog.com