We recently wrote about three studies that cast serious doubt on the benefit to payday loan borrowers of an ability-to-repay requirement, a payment-to-income (PTI) ratio ceiling, and rollover limits, three potential payday loan restrictions thought to be under consideration by the CFPB.

The findings of these studies find support in another study released this week by Navigant Economics entitled “Small-Dollar Installment Loans: An Empirical Analysis.”   The study was conducted by Dr. Howard Beales, a professor in the George Washington School of Business, and Dr. Anand Goel of Navigant Economics.  Dr. Beales is a former Director of the FTC’s Bureau of Consumer Protection.

The study analyzed 1.02 million installment loans made in 16 states by four companies between January 2012 and September 2013.  55% of these loans were storefront loans and 45% were online loans.  The loans had the following additional characteristics:

  • An average loan amount of $1,192 and a median loan amount of $900
  • An average loan term of 221 days and a median term of 181 days
  • An average APR of 300% and a median APR of 295%
  • Median gross annual income of borrowers was $35,057

The study made the following key findings:

  • Affordability criteria, such as a PTI ratio limit, risks a substantial reduction in credit availability to the small-dollar credit population, which often has few available alternatives.  The study found, for example, that a 5% PTI ratio limit would limit access to credit for 86% of current borrowers.  (Of the loans analyzed for which PTI ratios were available, only 14% had a ratio of less than 5%.)
  • A PTI ratio is a poor metric for predicting loan repayment.
  • Those who borrow repeatedly are more likely to repay their loans on average and repeat borrowers with the same lender are offered lower interest rates, presumably because they are considered less risky than when the initial loan was made.  Thus, additional loans from the same lender appear to reflect a willingness to extend more credit to borrowers who have demonstrated they can handle their obligations rather than a debt trap.
  • The negligible reduction in default rates resulting from a PTI ratio limit is more than offset by the resulting reduction in credit access.

As it moves forward in the payday loan rulemaking process, we hope the CFPB will carefully consider this growing body of research indicating that the payday loan limits typically advocated by consumer groups could be detrimental to borrowers