We recently wrote about two studies, one by Professor Ronald Mann and the other by Professor Jennifer Lewis Priestley, that cast serious doubt on the benefit to payday loan borrowers of an ability-to-repay requirement and limits on rollovers for payday loans, two elements that the CFPB is expected to include in its payday loan proposal.
Another recent study casts doubt on the value of a payment-to-paycheck (PTI) ratio ceiling, another payday loan limit thought to be under consideration by the CFPB and advocated by certain consumer groups. The PTI ratio ceiling would be used either as a maximum payment amount or a safe harbor above which other limits would apply. For example, in a 2013 report, The Pew Charitable Trusts recommended that a payday loan should be presumed unaffordable, and prohibited as a result, if it required payments of more than 5 percent of a borrower’s pretax income. A lender could overcome this presumption only by showing that a borrower had sufficient income to make required payments while meeting all other financial obligations without additional borrowing or using savings.
The study by Peter Toth, a PhD candidate in the Economics Department at the University of Texas at Austin, is titled “Measures of Reduced Form Relationship Between the Payment-Income Ratio and the Default Probability.” The data set to which Mr. Toth had access consisted of over 100 million payday loan records spanning five years that were contributed by five large companies that operate retail outlets. After excluding certain data, Mr. Toth analyzed approximately 87 million loans.
Mr. Toth’s research showed no correlation between individual consumer defaults and a particular PTI ratio. His results therefore suggest that a PTI rule may not be useful in limiting default. In addition, as indicated by the studies of Professors Mann and Priestley, because it would restrict borrower access to credit, a PTI rule could in fact be detrimental to consumer welfare.
As a data-driven agency, we hope that the CFPB will pay attention to the Mann, Priestley and Toth studies since they appear to be much more meaningful in terms of assessing benefits or detriments to payday loan borrowers than the one study done by the CFPB.