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Payday lending regulation

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  • Alex Kaufman

Abstract

To date the debate over payday lending has focused on whether access to such lending is on net beneficial or harmful to consumer welfare. However, payday loans are not one product but many, and different forms of lending may have different welfare implications. The current diversity in payday lending stems from the diverse ways in which states have regulated the industry. This paper attempts to quantify the effects that various regulatory approaches have had on lending terms and usage. Using a novel institutional dataset of over 56 million payday loans, covering 26 states for nearly 6 years, I find that price caps tend to be strictly binding, size caps tend to be less binding, and prohibitions on simultaneous borrowing appear to have little effect on the total amount borrowed. Minimum loan terms affect loan length while maximum loan terms do not. Repeat borrowing appears to be negatively related to rollover prohibitions and cooling-off periods, as well as to higher price caps. Several states have used law changes to sharply cut their rate of repeat borrowing. However, this process has been disruptive, leading to lower lending volumes and, in at least one case, higher delinquency.

Suggested Citation

  • Alex Kaufman, 2013. "Payday lending regulation," Finance and Economics Discussion Series 2013-62, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2013-62
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    References listed on IDEAS

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    1. Brian T. Melzer, 2011. "The Real Costs of Credit Access: Evidence from the Payday Lending Market," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 517-555.
    2. Morse, Adair, 2011. "Payday lenders: Heroes or villains?," Journal of Financial Economics, Elsevier, vol. 102(1), pages 28-44, October.
    3. Michael A. Stegman, 2007. "Payday Lending," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 169-190, Winter.
    4. Scott Carrell & Jonathan Zinman, 2014. "In Harm's Way? Payday Loan Access and Military Personnel Performance," Review of Financial Studies, Society for Financial Studies, vol. 27(9), pages 2805-2840.
    5. Donald P. Morgan & Michael R. Strain, 2007. "Payday holiday: how households fare after payday credit bans," Staff Reports 309, Federal Reserve Bank of New York.
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