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Empirical Economics

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31-07-2018

Payday-loan bans: evidence of indirect effects on supply

Author: Stefanie R. Ramirez

Published in: Empirical Economics | Issue 3/2019

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Abstract

In November 2008, Ohio enacted the Short-Term Loan Law which imposed a 28% APR on payday loans, effectively banning the industry. Using licensing records from 2006 to 2010, I examine if there are changes in the supply side of the pawnbroker, precious-metals, small-loan, and second-mortgage lending industries during periods when the ban is effective. Seemingly unrelated regression results show the ban increases the average county-level operating small-loan, second-mortgage, and pawnbroker licensees per million by 156, 43, and 97%, respectively.

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Zinman (2010), Bhutta et al. (2015), and Bhutta et al. (2016).

Avery and Samolyk (2011) and Bhutta et al. (2016).

Dolmetsch (2008) and Duke (2009)

The following formula is used to determine APR as used by DeYoung and Phillips (2009).

$ \textit{APR} = \frac{Fee * \frac{365}{Term}}{Loan Amount}$

Borrowers can select into having payday loans reported on his or her credit report. This practice is not mandatory and is typically utilized by borrowers seeking to improve his or her credit rating.

The number of operating payday lending branches more than doubled between 2001 and 2004. By 2010, the industry remained highly concentrated with an estimated count of over 20,000 operating branches nationally (Flannery et al. 2005). Loan volume from physical store locations is estimated to have peaked in 2007, with $45 billion in loans (Burtzlaff and Groce 2011).

Versus less than 10% for the general population.

Existing industry studies examine the cost structure and profitability of payday lending firms. Flannery et al. (2005), Huckstep (2007), Skiba and Tobacman (2009), and Prager (2009) all confirm that “excessive” fees do not translate into excessive profits for the industry and that, essentially, the costs do in fact justify the price. Additionally, Prager (2009) examines other alternative financial services in addition to payday lending companies.

A $200 loan extended under the new guidelines, lenders could collect fees only in the amount of $2.15 (Parker and Clark 2013).

See “Appendix A” for the structure of regulations for each industry and identified avenues for payday-like loans.

See “Appendix A” for a more detailed discussion of these regulations.

See Ohio Neighborhood Fin., Inc. v. Scott, 2012-Ohio-5566

As stated by ORC 1321.20, licensing fees for pawnbrokers, precious-metals dealers and small-loan lenders cannot exceed $300. Second-mortgage lender fees cannot exceed $150.

Licensees have to complete both state and national-level training to receive certification.

November 2008 represents the last period before the law became legally effective. Results are robust for June and September of 2008; contact author for robustness results.

Demographic data are collected from the US Census American Community Survey 3-year estimates. See Prager (2009) for discussion on location choice of AFS providers.

See “Appendix A.”

Gold prices are measured using the observed market price per Troy Ounce from the London Bullion Market Association, adjusted for inflation, using 2006 as the base year.

As cited by Ohio Neighborhood Finance, Inc. v. Scott. Decided March 2011 by the Magistrate of Elyria County.

This is confirmed by a search of the Brown County Municipal Court records and the county-level court records of the observed counties in the state of Ohio.

Prager (2009).

January 2000 represents the period for comparison.

Relative to 2006 prices.

This study does not identify which firms are selecting into each markets or where the expansion itself is coming from. These questions are addressed in a subsequent study.

Marginal effects were estimated at the average price of gold, 0.688 thousand dollars per ounce.

Starting in 1981, second-mortgage lenders were permitted to make unsecured loans (Parker and Clark 2013).

Avery RB, Samolyk KA (2011) Payday loans versus pawn shops: the effects of loan fee limits on household use. https://doi.org/10.2139/ssrn.2634584. Accessed 15 Mar 2013

Bhutta N, Goldin J, Homonoff T (2016) Consumer borrowing after payday loan bans. J Law Econ 59(1):225–259CrossRef

Bhutta N, Skiba P, Tobacman J (2015) Payday loan choices and consequences. J Money Credit Bank 47(2–3):223–260CrossRef

Bourke N, Horowitz A, Roche T (2012) Payday lending in America: who borrows, where they borrow, and why. Pew Charitable Trusts, Washington, DC. http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Safe_Small_Dollar_Loans/LOANS_Payday%20Lending%20Report%20Final_web.pdf. Accessed 15 Mar 2013

Burtzlaff D, Groce B (2011) Payday loan industry. Stephens Inc., Industry Report, p 6

Carter SP (2015) Payday loan and pawnshop usage: the impact of allowing payday loan rollovers. J Consum Affairs 49(2):436–456CrossRef

DeYoung R, Phillips R (2009) Payday loan pricing. Technical report, Federal Reserve Bank of Kansas City

Dolmetsch C (2008) Subprime collapse to global financial meltdown: Timeline. Bloomberg News, Oct 13

Duke E (2009) Containing the crisis and promoting economic recovery. Speech given at the women in housing and finance annual meeting, Washington, DC

Flannery MJ, Samolyk KA et al (2005). Payday lending: do the costs justify the price? In: Federal Reserve Bank of Chicago Proceedings, Number 949

Huckstep A (2007) Payday lending: do outrageous prices necessarily mean outrageous profits. Fordham J Corp Financ Law 12:203

Lawrence EC, Elliehausen G (2008) A comparative analysis of payday loan customers. Contemp Econ Policy 26(2):299–316CrossRef

McKernan S-M, Ratcliffe C, Kuehn D (2013) Prohibitions, price caps, and disclosures: a look at state policies and alternative financial product use. J Econ Behav Org 95:207–223CrossRef

Melzer BT (2011) The real costs of credit access: evidence from the payday lending market. Q J Econ 126(1):517–555CrossRef

Morgan DP, Strain MR, Seblani I (2012) How payday credit access affects overdrafts and other outcomes. J Money Credit Bank 44(2–3):519–531CrossRef

Morse A (2011) Payday lenders: heroes or villains? J Financ Econ 102(1):28–44CrossRef

National Conference of State Legislatures (2013) Payday lending statutes. http://www.ncsl.org/issues-research/banking/payday-lending-state-statutes.aspx. Accessed 15 Mar 2013

Parker JA, Clark RD (2013) Payday lending in Ohio. Ohio Legislative Service Commission

Prager RA et al (2009) Determinants of the locations of payday lenders, pawnshops and check-cashing outlets. Federal Reserve Board, Washington, DC

Skiba PM, Tobacman J (2009) Do payday loans cause bankruptcy?

Stegman MA (2007) Payday lending. J Econ Perspect 21(1):169–190CrossRef

Stegman MA, Faris R (2003) Payday lending: a business model that encourages chronic borrowing. Econ Dev Q 17(1):8–32CrossRef

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Title: Payday-loan bans: evidence of indirect effects on supply
Author: Stefanie R. Ramirez
Publication date: 31-07-2018
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 3/2019
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-018-1447-2

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