I don’t want to come off as being an advocate of payday lenders
It begins like this: “Except for the ten to twelve million people who use them every year, just about everybody hates payday loans. Their detractors include many law professors, consumer advocates, members of the clergy, journalists, policymakers, and even the President! But is all the enmity justified?”
DEYOUNG: I do have to say that the material in that piece is not necessarily the opinion of the New York Fed or the Federal Reserve System.
They advocate limiting rollovers and cooling-off periods and the research does point out that in states where rollovers are limited, payday lenders have gotten around them by paying the loan off by refinancing
DEYOUNG: That’s a very standard disclaimer. The Federal Reserve System is rather unique among regulators across the world. They see the value in having their researchers exercise scientific and academic freedom because they know that inquiry is a good thing.
But in DeYoung’s view, in the government’s rush to regulate – and maybe shut down – the payday-loan industry, there isn’t nearly enough inquiry going on.
This product, in fact, is particularly badly suited to predict this because the payday lender only gets a small number of pieces of information when she makes the loan, as opposed to the information that a regulated financial institution would collect
DeYOUNG: We need to do more research and try to figure out the best ways to regulate rather than regulations that are being pursued now that would eventually shut down the industry. That’s not my position. My position is I want to make sure the users of payday loans who are using them responsibly and for who are made better off by them don’t lose access to this product.
DUBNER: Now, Bob, the blog post is sort of a pop version of a meta-study, which rolls up other research on different pieces of the issue. Persuade me that the studies that you cite in the post aren’t merely the biased rantings of some ultra-right-wing pro-market-at-all-costs lunatics. And I realize that at least one of the primary studies was authored by yourself, so I guess I’m asking you to prove that you are not an ultra-right-wing pro-market-at-all-costs lunatic.
DEYOUNG: Yes, I like http://www.rksloans.com/installment-loans-pa/ to think of myself as an objective observer of social activity, as an economist. But there’s one section of the blog where we highlight mixed evidence. That in some cases having access to payday loans looks like on balance, it helps reduce financial distress at the household level. And we also point to, I believe, an equal number of studies in that section that find the exact opposite. And then of course there’s another section in the blog where we point directly to rollovers and rollovers is where the rubber hits the road on this. If we can somehow predict which folks will not be able to handle this product and would roll it over incessantly, then we could impress upon payday lenders not to make the loans to those people. The expense of collecting that information, of underwriting the loan in the traditional way that a bank would, would be too high for the payday lender to offer the product. If we load up additional costs on the production function of these loans, the loans won’t be profitable any longer.
On the critic side right now are the Center for Responsible Lending, who advocates a 36 percent cap on payday lending, which we know puts the industry out of business. The CFPB’s proposed policy is to require payday lenders to collect more information at the point of contact and that’s one of the expenses that if avoided allows payday lenders to actually be profitable, deliver the product. Now that’s, that’s not the only plank in the CFPB’s platform. Just starting a separate loan with a separate loan number, evading the regulation. Of course that’s a regulation that was poorly written, if the payday lenders can evade it that easily.