Payday lending, crime, and bankruptcy: Is there a connection?

• DOI: http://doi.org/10.1111/joca.12318
• Published date: 01 December 2020
• Date: 01 December 2020

ARTICLE

Payday lending, crime, and bankruptcy: Is there

a connection?

James R. Barth

1,2

| Jitka Hilliard

1

| Jr. John S. Jahera

1

|

Kang B. Lee

1

| Yanfei Sun

3

1

Raymond J. Harbert College of Business,

Auburn University, Auburn, Alabama

2

Milken Institute, Santa Monica,

California

3

Ted Rogers School of Management,

Ryerson University, Toronto, Canada

Correspondence

Jitka Hilliard, Raymond J. Harbert

College of Business at Auburn University,

Auburn, AL 36849.

Email: jitka.hilliard@auburn.edu

Abstract

The payday lending industry has been the subject of

controversy over the years. This is largely due to the

high fee structure of payday loans and the view of some

that the industry targets economically vulnerable

groups. For these reasons, some states prohibit payday

lending, while others impose regulatory restrictions on

their operations. Despite the prohibitions and restric-

tions, the industry nonetheless serves a significant seg-

ment of the U.S. population. Our purpose is to

determine whether in addition to providing loans to

individuals, access to payday lenders is associated with

less property crime and fewer bankruptcies. Using a

unique data set obtained directly from all state regula-

tory authorities, we find evidence, contrary to some

earlier studies, that the presence of payday lenders may

help reduce property crime as well as personal

bankruptcies.

KEYWORDS

bankruptcy, payday lending, property crime

We thank the participants in the 6th European Research Conference on Microfinance in Paris, France, the 9th

International Conference of the Financial Engineering and Banking Society in Prague, Czech Republic, and anonymous

reviewers for their valuable comments and suggestions.

Received: 8 February 2020 Revised: 24 April 2020 Accepted: 3 June 2020

DOI: 10.1111/joca.12318

© 2020 American Council on Consumer Interests

J Consum Aff. 2020;54:1159–1177. wileyonlinelibrary.com/journal/joca 1159

1|INTRODUCTION

Payday loans represent a significant source of short-term, small-dollar funds typically used by

individuals to cover unexpected financial shortfalls. As the Consumer Financial Protection

Bureau (CFPB) states (2019, 7) “[t]hese shortfalls may be due to mismatched timing between

income and expenses, income volatility, unexpected expenses or income shocks, or expenses

that simply exceed income.”CFPB also points out that “40 percent of adults reported they

would either be unable to cover an emergency expense costing $400 or would have to sell some-

thing or borrow money to cover it.”This means that many individuals facing financial shortfalls

seek funds from such places as payday lenders. Indeed, estimates indicate that 12 million Amer-

icans take out payday loans each year.

1

The criteria for receiving a payday loan is evidence of both employment and a checking

account. The maturity of payday loans is most often 2 weeks to coincide with a common pay

cycle and set so that a borrower can repay upon receipt of the next paycheck. At the time a loan

is originated, the borrower writes a postdated personal check for the loan amount and lending

fee to the payday lender,

2

or alternatively provides the lender with electronic authorization to

debit the borrower's checking account for the amount due. When the loan is due, the lender

can deposit the personal check or initiate the electronic withdrawal.

3

The payday lending industry has generated significant controversy regarding the fee struc-

ture of payday loans as well as the customer base. The fees can translate into extremely high

annual rates of interest. In Missouri for instance, a 14-day loan repeatedly renewed for a full

year yields an annualized rate of 1,960%. Some consumer organizations, advocacy groups, and

state attorneys typically consider such high interest rates to be excessively high and hence inap-

propriate. These groups also consider payday lending to be predatory by taking advantage of

lower-income individuals with limited access to more traditional and less costly borrowing

channels.

4

Not surprisingly, these concerns have led many states to adopt restrictive regulations

or outright bans on payday lending.

5

The CFPB, established by the Dodd-Frank Wall Street Reform and Consumer Protection

Act in 2010, issued two white papers on the long-term use of short-term loans by individuals,

referring to a pattern of repeatedly rolling over the loans (CFPB, 2013; Burke et al., 2014). In

the 2013 paper, the CFPB found that the median amount borrowed was $350, with about a third

of borrowers having up to six loans and a total dollar amount borrowed of $1,500 during a one-

year period. In the 2014 paper, using the same data as in the 2013 study, which includes infor-

mation on over 12 million loans in 30 states, the CFPB found that approximately 80% of loans

are renewed with another loan within 14 days. This pattern raised concerns over whether such

loans could be repaid which led the CFPB, in the fall of 2017, to propose new rules that would

require payday lenders to assess the ability of borrowers to repay their loans. The new rules also

imposed further restrictions on payday lenders. However, under a new director of the CFPB

appointed by President Trump, some of these rules were delayed with respect to compliance to

November 2020.

6

A large number of studies on payday lenders focus on the demographics of their customer

base (see, for example, Graves, 2003; Stegman and Faris, 2003; Gallmeyer and Roberts, 2009;

Bhutta, 2014; Barth et al., 2015) and the effect of regulations on their locational decisions (Mor-

gan and Strain, 2008; Zinman, 2010; Barth et al., 2016; Bhutta et al., 2016). A general conclusion

of these studies is that payday lenders tend to concentrate in low-income areas with a relatively

high percentage of African Americans and in which individuals have relatively lower levels of

formal education. This situation is consistent with those who believe the industry targets

1160 BARTH ET AL.