Brian T. Melzer Kellogg School of Management Northwestern University Payday Lending Roundtable, Columbia Law School September 23, 2011 The Real Costs of Credit Access: Evidence from the Payday Lending Market

Overview How does payday lending affect economic hardship among low-income populations? Survey data on economic hardship Difficulty paying mortgage, rent or utilities? Delay/forego medical or dental care? Cut meals due to lack of money? Pair with measure of geographic access to payday loans

Motivation Important economic question, unanswered by theory, whether credit access alleviates or exacerbates economic hardship Access to loans can facilitate the smoothing of income or consumption shocks However, ongoing debt service burden can also inhibit smoothing of future income or consumption shocks Borrowers too optimistic about ability to repay loan in one period? Self-control problems: present-biased preferences?

Challenges for Empirical Analysis Starting point: regress incidence of hardship on measure of geographic access like store presence or concentration? But, store presence and concentration are likely correlated with hardship even absent causal effect Stores locate in response to demand and neighborhood demographics State policies regulating payday lending might be related to safety net policies that independently influence outcomes of interest Need measure of geographic access that excludes variation due to store location and home-state legislative decisions

Research Design Restrict sample to payday-prohibiting states Make use of cross-border loan access, comparing households near payday border to those far from payday borders No identifying variation from store location choices and home-state regulations County-level, individual-level and border controls to ensure comparability Falsification: are payday border and non-border areas comparable before loans become available?

Data Urban Institute’s National Survey of America’s Families (NSAF) Household survey, oversampling low-income individuals Useful measures of economic hardship Repeated cross-section covering 13 focal states in 1997, 1999 and focal states prohibit payday lending: MA, NJ, NY 2000 Census for county-level controls

Results: Non-Health

Results: Health

Additional Results Falsification: no effect before loans are available across border Hardship also increases over time when loans become available across the border Differences across income groups shows effect is concentrated among those with 15 to 50k of income (vast majority of payday borrowers) Border access effect is larger in areas with more commuting flow

Implications Economic hardship – particularly difficulty paying mortgage, rent and utilities – is higher in payday access areas Consistent with view that payday loans cause, rather than alleviate, economic distress for some households