Report: Banning Payday Loans Means Higher Collector Complaints

A preliminary staff report from researchers at the Federal Reserve Bank of New York eschews conventional wisdom on the impact of payday loans on consumers and shows that when payday lenders are forced out of an area, consumers are more likely to file bankruptcy and complain about debt collectors.

Released last month, the report, “Payday Holiday: How Households Fare After Payday Credit Bans,” looked at the effect of statewide bans on payday lending in Georgia and North Carolina. Georgia banned payday lending in the state with a law passed in 2004; North Carolina did the same in 2005 and saw its remaining payday lenders leave in 2006 (“Last 3 Payday Lenders Agree to Depart North Carolina,” March 2, 2006).

Since then, according to the report, consumers in the states have bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 bankruptcy at a higher rate. In fact, after the payday lending ban in Georgia that state has the highest per capita rate of collector complaints of any other state; only Washington D.C.’s rate is higher. The report used consumer complaint data from the Federal Trade Commission.

Since the report covered consumer complaints against collectors during a time of dramatic increase in complaints nationwide, the authors – Donald P. Morgan and Michael R. Strain – looked at the difference in the increase between each state and all other states. The report showed that the gain in Georgia and North Carolina was greater after the payday lending bans than the increase in complaints in all other states in aggregate.

According to the statistical analysis in the report, Georgia’s rate of increase of complaints against collectors was 64 percent faster than consumers in other states. In North Carolina the rate of increase in consumer complaints against collectors after payday lending was banned was roughly 33 percent higher than that of all other states. The report cautioned that North Carolina’s figures should be considered preliminary since payday lenders left the state only in the middle of last year.

The survey consisted of 401 randomly selected respondents in households with annual incomes of less than $45,000 in three urban areas that once had the highest number of payday-lending outlets. In addition, the study held two focus group discussions in Charlotte with people who had taken out payday loans.

The full preliminary report can be found at www.newyorkfed.org/research/staff_reports/sr309.html.

But Uriah King of the Center for Responsible Lending says that the report is questionable due to basic statistical oversights on the part of the authors. “The sample size is just too small,” King told insideARM.com. “There is no compelling logical argument showing a relationship between the absence of payday lending and an increase in consumer complaints against debt collectors.”

King notes that Georgia’s per capita collector complaint is second only to D.C., an area that is saturated with payday loan providers. Also, he said that consumer complaints against collectors are increasing for a wide range of reasons. “Other factors are primarily responsible for driving up the complaint numbers at the FTC,” he said. “We believe that identity theft and increased consumer education have more to do with rising collector complaints than the absence of payday lending.”

Morgan and Strain’s report also stands in contrast to a survey released by the North Carolina Office of the Commissioner of Banks in November. That survey found that residents of the state did not suffer any ill effects from the ban. “Working people don’t miss payday lending,” said Mark Pearce, deputy commissioner, in a release detailing the survey. “They have a lot of financial options, and they use them.”