Payday Lending: A Grab Bag of Regulations—and Perceptions
This industry has attracted controversy lately, accused by some of predatory practices based on outsize interest rates and the areas in which its clients are concentrated. A small minority of borrowers who regularly roll over their loans generate the majority of profits for these lenders. The loans’ rollover feature adds to the high fees that eventually lead to high rates for the consumer. Take, for example, the rates charged in two states: In Indiana, the allowable fee of $15 for a 14-day, $100 loan is equivalent to an annual rate of 390 percent. In Missouri, a $75 fee on the same loan translates into an annualized rate of 1,950 percent. Such wide variation has caught the eyes of state regulators, who have imposed a variety of curbs, from outright bans to caps on loan size.
However, proponents of payday lending assert that the industry aids a community that would otherwise have no access to finance. In addition, payday lenders justify their elevated interest rates by pointing to their small scale and heavy rent obligations as a proportion of revenue, which they pass on to the consumer. Their bank and credit union competitors, on the other hand, do not face this problem, as they have multiple branches and diversified revenue streams.
In the absence of federal guidelines for the industry, we see wide disparities in regulatory action across states. To address the concerns of all sides, the Consumer Financial Protection Bureau (CFPB) had proposed new rules for comment in March, but no final rules have been issued yet. Some of the proposed rules require payday lenders to verify borrowers’ ability to repay their loans and provide repayment options. The CFPB is also trying to make the market attractive for traditional lenders by shifting it toward installment loans with smaller payments. Under the proposed framework, loans would be limited to 5 percent of the borrower’s monthly income and terms would be limited to six months.
Given the wide variation in views of payday lending, it is worthwhile to undertake a landscape study to determine the extent of restrictions and the effects of regulatory curbs. We have posted a dataset on globalbanking.org that examines constraints on payday lenders and correlations between the number of their stores and state regulatory restrictions. The dataset also examines demographic and economic characteristics of neighborhoods to address the concern that these lenders disproportionately target lower-income groups.