Thursday, November 13, 2008

Payday Loans in Oregon: An Update

I received an e-mail from a group called the Consumer Credit Research Foundation. This is a non-profit group, funded by payday lenders, that sponsors research on credit markets. They were touting a new study by Jonathan Zinman of Dartmouth College that looks that the effect of the restriction on payday loans in Oregon.

I have posted before with a typical economist's take on the issue: I believe that restricting access to credit (expensive or not) is misguided. If there is a problem with access to credit then do things to enhance access not cut it off. The idea that you are 'helping' people avoid their own bad decisions is government regulation at it worse. What you are really doing, in my view, is punishing the already economically stressed by giving them less flexibility to weather economic turmoil.

So I was really excited that we may have good evidence that these assumptions are correct. Zinman is a young economist with an already stellar research record - he is no hack. Unfortunately Zinman's paper does not provide what I had hoped for. It is not a bad paper, there is no academically dishonest statements, but there are a number of vague and misleading statements that appear to be clearly designed to give the impression to a lay audience that positive evidence is found when it is not.

The study compares pre- and post-restriction surveys in Oregon and Washington of payday loan users. Oregon imposed restrictions while Washington did not. The similarities among the states suggest that these two populations are reasonable for use as treatment and control groups. He finds that payday lending went down significantly in Oregon compared to Washington, which is not a big surprise. Then he finds that former payday loan users shifted:

partially into plausibly inferior substitutes. Additional evidence suggests that restricting access caused deterioration in the overall financial condition of the Oregon households. The results suggest that restricting access to expensive credit harms consumers on average.

First notice the academic-speak: "plausibly inferior," "evidence suggests," "results suggest." Why does he use these terms? Because none of his statistical tests of these effects turn out to be significant. I am quite ready personally to believe that these suggestive results are actually revealing an underlying fact because I believe theoretically that this is likely the case, but it does nobody any good to read ones prior assumptions into a set of results that are not statistically significant - and not just statistically insignificant but with tiny point estimates that are not plausibly different from zero.

Overall there are four serious problems with this study:

1. The data are a set of surveys conducted by the payday loan funded non-profit. This naturally leads to questions about explicit or implicit bias. The questionnaire is not reproduced in the paper and it should be.

2. Respondents to such a survey (especially the ones now excluded from the payday loan market) are likely to be predisposed to suggest that it has adverse effects on their financial situation. Thus the results would be biased toward findings that suggest restrictions lead to financial hardship.

3. The author finds, it turns out, that Oregon and Washington payday borrowers are not good treatment and control groups - the people that utilize payday loans in the two states turn out to be quite different. Efforts to control for these differences are unconvincing, which leads to biased results. [Note, however, that it is not clear in which way the bias would work and may in fact be a cause of the insignificant point estimates]

4. All statements about the adverse consequences of the decline in payday loans in Oregon are not supported by the evidence - they are suppositional.

I believe that restricting access to payday loans is bad policy, but I am still looking for good objective evidence to bolster my theoretical argument. This is a provocative start, but in my view, falls well short.


Torrid said...

I think a (robust, independent) specific study on the Oregon experience would be a very smart thing to do, but are you familiar with the study done by the NY Federal Reserve? That one covered GA and NC, and used some objective benchmarks for making judgements--Chap 7 filings, complaints to the FTC, and bounced checks. I'd love to see your learned take on it, but from my vantage point it goes a long way towards validating your concerns with a wholly punitive approach.

That said, I think there IS value in the state protecting citizens from usury. as well as the deceptive cycle of terms that payday lenders employ to essentially trap their customers. I was definitely uncomfortable watching our Senator-elect preen and celebrate the outright closure of now-legal lending shops. If the law worked, then lenders--at least some of them, anyway--should be able to make a living under the new rate structure. If they can't, then something is wrong with the way the law was put together (since it was not DESIGNED to crush the entire industry, I hope), and to grin about regular employees losing jobs and businesses going vacant sickened me.

Wednesday's Child said...

I have a hard time faulting the author of the study on semantics and do not believe it cheapens the value or credibility of the study. I have seen MUCH worse from shoddy studies performed by the Center for Responsible Lending and other socialist minded community organizers.

Jeff Alworth said...

It's going to be hard to do before and after studies on the payday loan restrictions in Oregon because the populations requiring them and their circumstances will be so radically altered by the economy's collapse.

I know you argue that as an economic matter, reducing payday lenders' profit is short-sighted. But it's politically astute. The failure to adequately recognize the underclass in America was abetted by payday loans. Now that we have a growing underclass and an inverted socialism that bails out the financial sector, the rubber will really meet the road on income disparities.

Unlike Wednesday's Child, I welcome the debate that must ensue.

Anonymous said...

But isn't that the point of payday loans ? To give money access to those with bad credit? Why would you want to make it harder for those already having a hard time? I think that it is important to use them wisely but your credit score should be left out of it.

Eraldo said...

Payday loans are good in that there are no credit checks, so anyone can get a loan as long as they have a paycheck.

Simon said...

No type of credit check is done before approving your application for 24 hour payday loans. Not only does this make the processing faster but it is also a great relief for people with bad credit history.

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Assaf Oron said...

Zinman's report has now been thoroughly debunked. Basically, it's a sham.

pdf link:

Here's the beginning of the abstract:

1. A recent unpublished manuscript whose conclusions were widely circulated in the electronic media (Zinman, 2009) claimed that Oregon 2007 payday loan (PL) rate-limiting regulations (hereafter, "Cap") have hurt borrowers.

2. The report's main conclusion, phrased in cause-and-effect language in the abstract - "...restricting access caused deterioration in the overall financial condition of the Oregon households..." - relies on a single, small-sample survey funded by the payday-lending industry (PLI). The survey is fraught with methodological flaws.

3. Moreover, survey results do not support the claim that Oregon borrowers fared worse than Washington borrowers, on any variable that can be plausibly attributed to the Cap.

4. In fact, Oregon respondents fared better than Washington respondents on two key variables: on-time bill payment rate and avoiding phone-line disconnects. On all other relevant variables they fared similarly to Washington respondents. In short, the reported claim is baseless.

seogene said...

That's interesting that in Oregon it goes such way. I'd like to add that in other states different rules on this financial instrument. How it is in Texas read Installment payday loans in Texas.

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