Study: Oregon Households Hurt by Payday Ban

A new study from Prof. Jonathan Zinman of Dartmouth College was released last week that looked at the effect of a payday loan ban on Oregon households. Like the 2007 New York Federal Reserve report, Payday Holiday, this study found that households fair worse in a state that has banned payday lending.

The study claims that, in the absence of payday loans, borrowers are forced to choose "inferior substitutes," and "restricting access (to payday loan credit) caused deterioration in the overall financial condition of the Oregon households."

Urban Institute Supports Fostering Competition

Access to Small, Short-Term Loans Critical for Working Families :

"Urban Institute report recommends better disclosures and increased competition to protect consumers. [The report] finds that if payday advances are eliminated they 'could be replaced by alternatives that make families even worse off.'"

This study was released in late July and managed to slip past my radar as I was soaking up the sun during what felt like a very brief summer.

I was not familiar with the Urban Institute until today so for those of you who are in the same boat, here is a bit about them, according to their website:

"The Urban Institute gathers data, conducts research, evaluates programs, offers technical assistance overseas, and educates Americans on social and economic issues — to foster sound public policy and effective government."

When they were founded in 1968, U.S. President Lyndon Johnson had this to say:

"The Urban Institute was founded to... bridge the gulf between the lonely scholar in search of truth and the decision-maker in search of progress."

On the topic of payday loans, the study, titled Enabling Families to Weather Emergencies and Develop, recommends "standard, clear, and timely disclosures of the total loan cost so consumers know their full obligation and can easily compare what various lenders charge for loans," and suggests that "stricter regulation coupled with standard and improved disclosures for consumers will increase competition within the alternative financial sector."

The report goes on to say that "the case for regulating fees or interest rates on small loans is less clear and warrants further research and consideration," and asks "does regulating prices charged make fewer small, short-term loans available? Where will families who need these loans turn if they cannot get them?"

One interesting takeaway from the report, is the relationship that they draw between disclosure and competition. Their stance is that better rate disclosure will make it easier for consumers to compare prices between lenders and, as a result, lead to greater price competition. Makes sense to me.

New Data on the Cost of Providing Payday Loans in Canada

Since the passage of Federal Bill C-26 empowered the Provinces to set payday loan rate caps, politicians, bureaucrats, public utility boards and special advisers have all struggled to determine what an appropriate cap would be. Today, Deloitte, one of Canada's largest and most respected accounting firms, provided more data to assist key decision makers with the release of their BC study, creatively titled "Cost of Providing Payday Loans in British Columbia."

While the firm may not receive any style points for the title of their report, they should be praised for its substance. This report, funded by the Canadian Payday Loan Association (CPLA) and completed with the participation of CPLA members and non-members alike, is the most representative study ever completed on the cost of providing payday loans in a Canadian province. The study includes data from 12 BC payday lenders, representing 57 of the estimated 121 private payday loan locations in the province (the study excluded publicly-traded payday lenders).

The result:

This report estimates the cost of providing a $100 payday loan in British Columbia to be $25.21, which can be further illustrated as follows:

The results of this study are particularly relevant in BC because of the approach the government there has taken in its search for an appropriate rate cap. In a payday loan consultation document circulated earlier this year, the BC government defined its objective for a maximum allowable rate as "the lowest charge possible that still allows a viable payday lending market." Deloitte seems to have provided them with their answer.

From MotherJones Blog: Banks make payday lenders look like a bargain

As if to complement 310-LOAN's comments yesterday to the Nova Scotia Utility and Review Board, MotherJones is citing a study today about the high cost of overdraft fees from banks (thanks go to Payday Pundit for this find):

MotherJones Blog: Banks Give New Meaning to Protection Racket:
Payday loans have gotten a lot of bad press lately as state governments attempt to crack down on the 'legal loansharking' outfits that make very short term loans with interest rates going as high as 500 percent. But a new study by Marc Anthony Fusaro, a professor of economics at East Carolina University, found that the overdraft loans given by banks these days make payday lenders look like a bargain.

Hidden Consumer Loans: An Analysis of Implicit Interest Rates on Bounced Checks:
Payday lending attracts attention for its high interest rates, but bounce protection loans are much more expensive. Bounce protection is a program where consumers overdraft – write checks in excess of the checking account balance – and the bank pays the check allowing the account balance to be negative. For this service/loan, banks charge the standard non-sufficient funds (NSF) fee. When the amount borrowed is low and the time outstanding is short, the effective interest rate paid on this loan can be quite high. Using a unique data set we are able to quantify how high the interest rate is. We find that the median implicit interest paid by consumers is over 4,000%.