What We Know and

wish we knew About

Payday Lending

Ronald Mann

Columbia Law School

The Rise of payday

lending

• Rapid growth since “invention” in 1990’s

• 10 million users/year

• Available in storefronts in 2/3 of the States

• 20,000 storefronts nationwide

• Validated (where legal) by narrow usury exception

Market segments

• Large publicly traded chains

• Disciplined by stock markets, reputation, liquidity

• Local “mom and pop” stores

• Closer to customers

• But harder to find/control/regulate

• Internet lenders

• Hardest to find

• Market niche/overlap murky

So customers may

like it, but . . .

• High interest rates

• Fixed 15-18% fee 400% per annum

• > C/C, < overdraft, pawn

Talent-Nelson Amendment (36% cap)

• Repetitive/Frequent Borrowing

• Many customers borrow repetitively

• How to save a large share of a paycheck in one pay period?

• Deceptive

• PEW emphasizes misalignment of frequent borrowing w/ notion of short-term lending

Is this good or bad?

• Harms of higher debt > costs of liquidity constraints?

• Empirical evidence ambiguous, hard to come by

• Limited (legal) alternatives accentuate costs of constraint

• How important are the shadow alternatives??

• Underwriting premise limits spiraling borrowing costs

• Underwritten on the premise of repayment

• Loans stop w/ income interruption/shock

• ≠ credit cards

• How do “rollovers” affect this?

• PLAINLY differs household to household

• What share of “ill-reasoned” borrowers warrants intervention?

Optimism and

deception

• PEW study suggests misunderstanding/mismarketing

• Relies on evidence of repetitive borrowing

• Implies benefits of rollover restrictions

• Is the inference justified?

• Inherent uncertainty

• Knowledge of lender <<< C/C, overdraft

• Transparency of product >>> C/C, overdraft

• Best evidence is customer expectation

Optimism bias survey

• Survey of 1300 payday customers, administered in

stores

• More than twice as many as PEW study

• Matching expectations of borrowing behavior to actual

patterns

• Preliminary results suggest customers know quite a bit

• Most expect to continue borrowing after first pay period

(mean 36 days)

• Predictions surprisingly accurate

• Almost 60% predict debt clearance w/in one pay period

Any questions?

(Preferably Ones I Can Answer)