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Critique of Morgan Paper

Tuesday, December 11, 2007

The payday lending trade group Community Financial Services Association (CFSA) is using a working paper based on insufficient data to claim that working families are worse off in states with strong consumer lending laws that cover payday lending. (Read CRL's critique of the paper.)

Payday loans trap borrowers in loans they cannot afford to pay off at interest rates in the range of 400 percent. Payday lenders are not operating in a dozen states that have interest rate caps at or around 36 percent for consumer loans. Two researchers affiliated with the Federal Reserve Bank of New York released a working paper last month, "Payday Holiday: How Households Fare after Payday Credit Bans," but the paper is not a Federal Reserve Bank report as a CFSA press release implies. In fact, the authors include a disclaimer on the report's first page, stating that the paper does not reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System.

The paper claims that families are worse off in two states that no longer have payday lending, Georgia and North Carolina. But the paper is replete with methodological errors that make its tentative findings flawed.

One example of the paper's unsound methodology is that the authors use data from the Federal Reserve's regional check processing centers as proxies for state credit markets to claim that Georgia and North Carolina had more bounced checks after payday lenders left the states. But many of the checks processed in the Atlanta, Georgia and Charlotte, North Carolina processing centers come from states which allow payday lending. In fact, beginning during the aftermath of Hurricane Katrina, Louisiana's checks were processed in the Atlanta center. Like many of the states which have checks processed in Atlanta and Charlotte, Louisiana has many payday lenders.

The authors of this working paper were not able to separate out data from states that allow payday lending from those that do not. Therefore, no conclusion can be drawn from this data.

The weakness of this paper contrasts starkly with a November report from the University of North Carolinaon behalf of the North Carolina Commissioner of Banks, "North Carolina Consumers after Payday Lending," ( which drew conclusions from direct interviews with past payday borrowers. The researchers found that low- and middle-income survey respondents do not miss payday lending and that most former payday borrowers are glad the lenders have left the state.

For more information: Kathleen Day at(202) 349-1871 or; or Sharon Reuss at (919) 313-8527 or