Regulation and the Payday Lending Industry

Abstract

Using a unique, multistate data set and exploiting policy heterogeneity across states and time, I examine average and marginal effects of changing payday‐lending policies on county‐month‐level branch counts between January 2001 and December 2010. Average results on operating branches are mixed: the effects of adopting liquidity requirements and fee ceilings are negative while the effects of adopting balance and rollover limits are positive. Adopting balance limits decreases new branch counts. Marginal effects of relaxing rollover ceilings are positive for operating branches, though negative for new branches. Results highlight the need to consider both consumer‐ and producer‐interest perspectives when examining the relationship between industry and regulation. (JEL L22, G28, D22)

Payday lenders and premature mortality

“…Much of the decline by 2011 is likely due to regulatory interventions that several states enacted, rather than a decline in demand. Use of payday loans increased during the Great Recession ( 100 ), but payday lenders also faced increased oversight in several states, which has an impact on where they operate ( 101 ). Many of the counties that have suppressed CDC data also have few payday lenders (e.g., central United States).…”

“…This might be due in part to compositional changes that occur when regulation takes effect. For example, when a state shifts from moderate to strong regulations, there are some counties where all lenders leave, as shown by prior work (101)(102)(103). When this occurs, the county would get reclassified as part of the "no lenders, strong regulations" group in our models.…”

(Un)conditional consumer protections in high‐cost lending regulation: Impacts on local lending geographies

“…Regulatory design matters, with some designs, like fee ceilings, demonstrated to be more effective at reducing lender storefronts than others (Ramirez, 2020). Some states have had to revisit and strengthen laws more than once as lenders find loopholes or develop new products that side-step existing regulations (Kiel, 2013), and certain regulations, like those limiting loan rollovers, have been found to actually increase the number of storefronts, on average (Ramirez, 2020). And, even in the 16 states that currently prohibit payday lending, an estimated one in 10 residents report using payday loans (Harvey et al, 2021), suggesting that payday loans remain accessible in even the most restrictive circumstances.…”

“…This work adds to prior research evaluating the effectiveness of particular regulatory mechanisms (e.g., interest rate caps or restricting loan rollovers, see Barth et al, 2016;McKernan et al, 2013;Ramirez, 2020) to understand how consumer eligibility parameters impact industry responses to regulation. By comparing the effectiveness of policies that have consumer eligibility requirements and those that apply to all consumers, we find that in this case the industry is not responsive to regulations that conditionally apply to some consumers but not others.…”

“…In the aggregate, consumers residing in states with strong laws typically have lower exposure to payday lenders in their communities. Lenders are sensitive to state regulations, with an inverse relationship between the strength of regulation and the prevalence of storefronts within the state, all else equal (Barth et al, 2016; Ramirez, 2020). Regulatory design matters, with some designs, like fee ceilings, demonstrated to be more effective at reducing lender storefronts than others (Ramirez, 2020).…”