NEW STAFF STUDY FROM FEDERAL RESERVE BANK OF NEW YORK FINDS CONSUMERS SUFFER WHEN PAYDAY LOANS ARE BANNED
December 6, 2007A preliminary Federal Reserve staff study that examined the impact of recent bans on payday lending in Georgia and North Carolina found that consumers in those states face long-term, negative consequences when such loans are not available to them.
The study concluded that “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 (“no asset”) bankruptcy at a higher rate.”
Indeed, contradicting the so-called debt trap critique of payday lending, the study said: “Our findings reinforce and extend other recent research on the consumer benefits of payday credit.”
Written by Donald P. Morgan, a research officer with the Federal Reserve Bank of New York, and Michael R. Strain of Cornell University, the preliminary study used several sets of government data to analyze how consumers fared before and after the passage of legislation banning payday advances in Georgia and North Carolina.
The study’s authors assert that taking away a consumer’s option to choose a payday advance for managing cash flow has an immediate and lasting negative effect. “We take our results as evidence of a slipping down in the lives of would-be payday borrowers,” they wrote.
The increase in complaints regarding debt collectors and lenders indicates a higher level of indebtedness among consumers and an inability to make minimum payments on credit cards and utility bills. Further, higher bankruptcy rates suggest that consumers are less able to withstand difficult financial situations over the long term.
“The increased problems are not just ‘withdrawal’ symptoms preceding a healthier financial life without payday credit,” the report said. “The problems do not appear temporary.”
Ken Compton, chief executive officer of Advance America, said the report was the latest evidence pointing to the value of payday advances.
“This independent study bolsters one of our primary positions: payday advances offer consumers a legitimate and competitive credit option,” Compton said. “And we are proud of the service we provide to consumers, helping them to manage their finances and overcome difficult times.”
The study, titled “Payday Holiday: How Households Fare after Payday Credit Bans,” can be found at http://www.newyorkfed.org/research/staff_reports/sr309.html.
About Advance America:
Founded in 1997, Advance America, Cash Advance Centers, Inc. is the country’s leading provider of payday cash advance services with approximately 2,850 centers and 85 limited licensees in 36 states, the United Kingdom and Canada. The Company offers convenient, less-costly credit options to consumers whose needs are not met by traditional financial institutions. The Company is a founding member of the Community Financial Services Association of America (CFSA), whose mission is to promote laws that provide substantive consumer protections and to encourage responsible industry practices.
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