A working paper that claims working families are worse off in states with strong consumer lending laws is coming under fire from consumer protection groups.
The report was issued by the payday lending industry's trade group, Community Financial Services Association (CFSA). The Center for Responsible Lending (CRL) claims the report was based on insufficient data.
Payday loans trap borrowers in loans they cannot afford to pay off at interest rates in the range of 400 percent. Payday lenders have had to stop operating in a dozen states that have interest rate caps at or around 36 percent for consumer loans.
The disputed working paper -- called "Payday Holiday: How Households Fare after Payday Credit Bans" -- was prepared by two researchers affiliated with the Federal Reserve Bank of New York but the paper is not a Federal Reserve Bank report as a CFSA press release implies.
In fact, the authors include a disclaimer on the report's first page, stating that the paper does not reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System.
The paper claims that families are worse off in two states that no longer have payday lending -- Georgia and North Carolina. But it is replete with methodological errors that make its tentative findings flawed, CRL charged.
One example of the paper's unsound methodology, says CRL, is that the authors use data from the Federal Reserve's regional check processing centers as proxies for state credit markets to claim that Georgia and North Carolina had more bounced checks after payday lenders left the states.
But many of the checks processed in the Atlanta, Georgia and Charlotte, North Carolina processing centers come from states that allow payday lending. In fact, beginning during the aftermath of Hurricane Katrina, Louisiana's checks were processed in the Atlanta center. Like many of the states which have checks processed in Atlanta and Charlotte, Louisiana has many payday lenders.
The authors of this working paper were not able to separate out data from states that allow payday lending from those that do not. Therefore, no conclusion can be drawn from these data, CRL said.
The weakness of this paper contrasts starkly with a November report from the University of North Carolina on behalf of the North Carolina Commissioner of Banks, which drew conclusions from direct interviews with past payday borrowers.
The researchers found that low- and middle-income survey respondents do not miss payday lending and that most former payday borrowers are glad the lenders have left the state.
