1. Hilary B. Miller November 2010

2. History of Payday Research  Prior to 2004, little scholarship regarding the consumer-welfare effects of payday lending  Consumer Credit Research Foundation formed to promote industry-supported research (I.R.C. § 501[c][3]) and policy  Since 2005, numerous papers published  Consumer welfare conclusions are ambiguous  Access to payday credit is likely beneficial to most consumers but harmful if misused

3. Competing Economic Theories  Neoclassical theory  Credit - even very expensive credit - enables consumers to survive “shocks” (smoothing income and expenses)  Inter-temporal shifting  Some consumers may be harmed by overuse  Removing any economic choice is welfare-reducing  Behavioral theory  Imperfect self-control  Optimism bias: Consumers overestimate their repayment ability  Consumers have place unrealistic value on immediate consumption (hyperbolic discounting)  TILA disclosures don’t contain the right info

4. Key research re $64 question: welfare issue  Payday Loans Are “Good” for People  Morgan  Morgan/Strain  Morse  Wilson*  Stoianovici/Maloney*  Zinman* _________ *CCRF funded  Payday Loans Are “Bad” for People  Melzer  Skiba/Tobacman  Carrell/Zinman  Maybe Good/Maybe Bad  Elliehausen/Lawrence

5. Results are ambiguous  Caskey (2010) (collecting studies): Evidence is ambiguous regarding consumer welfare; more study required to answer “the Big Question”  Parsons and Van Weep (2010): “Welfare impact of payday lending is ambiguous.”

6. Key consumer welfare results  Morgan and Strain (2007):  Numerous indicators of consumer distress worsened after payday was banned in NC and GA  Results compared to control states with no change in payday regulation  Wilson et al. (2006):*  Simulated borrowing in economic laboratory  Borrowers better off – unless they roll over too often  Zinman (2009):*  Self-reported indicators of consumer distress worsened following ban in OR  Results compared to control state with no change in payday regulation (WA) _______ *CCRF funded

7. Pricing is “fair”  Plenty of evidence that payday lending does not provide excess economic profits:  Flannery & Samolyk (2005)  Huckstep (2007)  Skiba (2008)  Ernst & Young (2008)  Who cares?

8. Additional research  Stango (2010):*  Adjusted for risk, credit union loans are no cheaper than storefront payday loans  Payday is more user-friendly than credit union  Consumers prefer payday  Zywicki (2009):*  No logic to “protecting” consumers from high interest costs but not from, e.g., high milk costs  No benefit to consumers from enhanced regulation  Luea (2010):*  Access to payday credit reduces certain types of crime ___________ *CCRF Funded

9. Disclosure Issues  Betrand and Morse (2009):*  Borrowers understand that most payday customers do not repay in two weeks and are not “misled”  Enhanced, draconian disclosures reduce borrowing by 5% in first-time borrowers but no material effect on experienced borrowers ___________ *CCRF funded field work

10. Synthesis  Considerable research shows that payday loans are helpful, at least on balance  Payday loans are overwhelmingly used for longer time periods than the industry represents  Overuse is harmful to some consumers  Use of payday loans probably makes no difference to welfare of majority of borrowers

11. Pipeline  Increased demand for online loans following MT ban  Comprehensive lit survey (Edmiston?)  Debunk optimism bias claims  Model cost-driven consumer credit (Evans)  Simulate controlled experiment re welfare  “Thought” piece re alternative products

12. Next steps  All research to date is epidemiological or experimental  Need real-life randomized controlled experiment – but nearly impossible – can be simulated  But: very subtle treatment effects  Need to use existing research effectively and give it a longer shelf life than one news cycle  Expect BCFP policy to be fact-driven  Research primarily addresses storefronts: is there an evidence-based rationale for separate online treatment?