Study Shows Consumers Suffer After Short-term Lending Ban
South Dakota consumers face financial set backs
SPARTANBURG, S.C., April 26, 2017 - A new survey shows that the elimination of regulated short-term lending in South Dakota is causing financial and personal hardship among consumers there. The findings are representative of the impact on consumers in other states where reliable access to such credit has been severely restricted.
Notably, the Consumer Financial Protection Bureau (CFPB) has proposed a federal rule that would effectively prohibit regulated short-term lending in the United States, a financial services sector that serves millions of American each year.
In South Dakota, more than half of those who had borrowed from such lenders in the past, and needed to do so again, say they were forced to pay late fees (58 percent) or neglect their bills (53 percent) because they can no longer obtain loans. In addition, forty percent said they did not fix a vehicle; 37 percent did not pay a medical expense; 25 percent and 23 percent bounced checks and used overdraft protection programs, respectively, when faced with a recent financial short-fall.
"Taking away someone's ability to borrow doesn't erase their need for credit or relieve their financial obligations," said Jamie Fulmer, senior vice president of public affairs for Advance America. "Instead, they are forced to more expensive alternatives or the consequences of missing payments entirely."
The results mirror those found by independent research in other states. A Federal Reserve Bank of New York[i] staff study found that after Georgia and North Carolina effectively banned short-term loans through rate caps, consumers "bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 ('no asset') bankruptcy at a higher rate" than in states with regulated short-term lending. Dartmouth professor Jonathan Zinman found that one year after an Oregon law capped the interest rate there, "Former payday borrowers responded by shifting into incomplete and plausibly inferior substitutes... Most substitution seems to occur through checking account overdrafts of various types and/or late bills."[ii]
The South Dakota law, enacted by ballot initiative, placed a $1.38 fee cap on a $100, two-week loan-a level at which regulated lenders are unable to operate. In the five months since the law was approved, over one-third (37 percent) of former customers surveyed have needed a loan but have been unable to get one. They now have few, if any, state-regulated options for small-dollar, short-term credit, though many unlicensed online lenders appear to still offer loans in the state.
The former short-term loan borrowers viewed storefront lenders positively: 60 percent had a favorable view of storefront lenders-similar to the 61 percent with a favorable view of credit unions-while online, often unregulated, loan providers were viewed negatively: 21 percent favorable and 37 percent unfavorable.
Of those former borrowers who have needed a short-term loan since the ban was enacted, 66 percent say the new law has negatively impacted them, including 36 percent who said it had a very negative impact. This stands in stark contrast to those former borrowers who have not needed a loan since November, only 27 percent of whom said the new law had a negative impact, and 39 percent of whom said it had no impact at all.
These former borrowers who haven't needed a loan recently may be underestimating the difficulty of accessing credit in the absence of regulated, storefront lenders. Tellingly, 55 percent of this group speculated that if they needed a loan today, they would get one from a bank or credit union. However, among those who have actually needed a loan, only 11 percent got one from a bank or credit union.
Similarly, while 37 percent of those who haven't needed a new loan said they would address a theoretical financial gap by not paying bills, that number jumps to 53 percent among those who have faced an actual shortfall since the ban went into effect.
"Former borrowers who haven't had to seek out alternatives may believe there are still lenders offering loans under the new law, or overestimate their ability to access comparable forms of credit," said Fulmer. "But in reality, consumers fare worse when safe, trusted credit options are eliminated."
The research also examined how borrowers used their short-term loans prior to the enactment of the ban:
- 62 percent their loan to cover basic living expenses between paydays;
- 51 percent to pay bills such as utilities;
- 27 percent to repair a vehicle;
- 26 percent to pay rent or mortgage; and
- 25 percent to cover a medical issue.
"After weighing all their options, customers choose short-term loans because they're reliable, transparent and readily accessible," said Fulmer. "Unfortunately, ideologues, activists and elites who failed to understand the rationale and experiences of actual borrowers took away a valuable service, and consumers are suffering the consequences."
The survey was conducted by KRC Research, a public opinion research company, in March, 2017, via 200 telephone interviews. [iii]
More detailed survey results can be found here.
[i] Payday Holiday: How Households Fare after Payday Credit Bans, Federal Reserve Bank of New York
[ii] Restricting Consumer Credit Access: Household Survey Evidence on Effects Around the Oregon Rate Cap," Jonathan Zinman, Dartmouth College, October 2008
[iii] Research Methodology: KRC Research conducted a phone survey among Advance America Customers in South Dakota who are in good standing from a list provided by Advance America. 200 Advance America Customers completed the survey with a +/- 6.82 percent margin of error. This survey was conducted from March 21-31, 2017. Nineteen interviews were completed via landline phones and 181 interviews were completed via cell phones.