Financial reformers have consistently criticized payday lending. For example, several months back the Consumer Financial Protection Bureau (CFPB) proposed new rules to prevent “death-trap” payday loans, and New York State is also taking steps to regulate the lenders. New research, though, might provide additional motivation to scrutinize the industry: A paper produced by two academics from New Zealand and Australia finds that increased regulations on payday loans significantly reduces nearby liquor sales. According to the authors there was scant research into borrowers’ consumption changes thanks to payday loans, except for a finding that 9 percent of payday loan borrowers were “temptation spenders.”
A change in lending laws in Washington State gave the authors a novel opportunity. Both Washington and Oregon have state-controlled liquor monopolies, but prior to the change, only Oregon heavily regulated payday loans. These similarities and the one crucial difference facilitated a natural experiment. (Similar methodologies have been used to test changes in minimum wage laws in different U.S. states.)
Washington’s law, which went into effect in early 2010, capped payday loans based on borrowers’ incomes, created a database to track lenders, and eliminating concurrent loans. Essentially, the state made it impossible to pay back one loan with another. The effects were remarkable. Within two years, the number of payday loans in Washington fell from 3.24 million to 900,000 and the total amount borrowed dropped from $1.366 billion only $330 million. Two-thirds of payday lending facilities closed up shop.
The authors also calculated that the law reduced liquor sales in Washington by $23.5 million, or about $5,900 per store per month. This decline represents about 2.5 percent of the change in payday loan volume over that period.
Although the law’s impact on payday lending alone is quite significant, the authors focused more on the behavioral theories explaining the change in liquor sales. Specifically, one states that people respond to “cues,” such as seeing a liquor store, that make them want to buy alcohol. The nearby payday lender allows them to satisfy the impulse to drink that the cue created. Unsurprisingly, the authors found a very strong relationship between the distance separating payday lenders and liquor stores and liquor consumption.
The conclusion the paper draws, then, is that legal restrictions on payday lending can reduce “unproductive borrowing” while leaving “productive borrowing” options available to borrowers who might not otherwise have access to credit. It also illustrates the payday loan “death-trap” that lawmakers already suspect.
The working version of the paper can be found here (pdf).
If you borrowed from a payday lender, or have other substantial debts, and are encountering difficulties repaying your loans, talking to an experienced New York bankruptcy lawyer can help you evaluate your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy adversary proceedings Bruce Weiner for a free initial consultation.
