WASHINGTON, DC – Households without access to payday loans are forced to use costlier credit products and suffer greater financial difficulties, according to new research prepared by staff of the Federal Reserve Bank of New York.
 
Preliminary findings in the November 2007 working paper, “Payday Holiday: How Households Fare after Payday Credit Bans,”by Donald P. Morgan, Research Officer with the Federal Reserve Bank of New York, and Cornell University graduate student Michael R. Strain, conclude that payday loan bans result in increased credit problems for consumers.
 
The study compares households in states with payday loans with households in both Georgia and North Carolina, states which eliminated payday loans in May 2004 and December 2005 respectively.
 
They found, “Georgians and North Carolinians do not seem better off since their states outlawed payday credit: they have bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 (“not asset”) bankruptcy at a higher rate.” The authors note that, “This negative correlation—reduced payday credit supply, increased credit problems—contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced-check ‘protection’ sold by credit unions and banks or loans from pawnshops.”  
 
The findings in the Federal Reserve Staff Report track closely with consumer responses given in a survey by the University of North Carolina Center for Community Capital, part of a recent study to determine how North Carolina consumers fared without the option of payday loans.
 
“While the UNC study concluded that consumers were better off without payday loans, this conclusion does not match the actual findings,” said Darrin Andersen, president of the Community Financial Services Association of America (CFSA). “In fact, respondents’ answers to the survey clearly show that the elimination of payday loans in North Carolina did nothing about the demand and forced consumers to replace payday loans with costly, less desirable and sometimes even dangerous options.”
 
The survey found that consumers most frequently “did not pay/paid late” [an expense] when faced with a financial crisis. Other frequently cited strategies were “bounced checks/used overdrafts” or “used credit card/cash advance.” Some admitted to having utilities disconnected, going without a prescription medication or ending up with a damaged credit rating.
 
Andersen added, “In each case, consumers may have been better served by payday advances, which often offer lower fees and do not negatively impact credit ratings.”
 
An independent analysis by Bretton Woods Inc. reported that, in 2006, North Carolinians paid an estimated $652 million to banks and credit unions in non-sufficient funds or over-draft protection fees. In fact, following three straight years of losing fee income, North Carolina’s credit unions had their first increase once payday loans were no longer available in the state.
 
“There is a growing body of evidence by objective, independent researchers that validates what we have learned from our own customers,” said Andersen. “Taken together, these studies demonstrate that people need access to short-term, low-denomination loans, and deprived of these, they are forced into other less desirable alternatives. This research demonstrates that state-regulated payday advances are an important credit option.”