CRL Review of "Defining and Detecting Predatory Lending" by Donald P. Morgan, Federal Reserve Bank of NY, January 2007
Published: January 23, 2007
In a recent working paper, Donald Morgan, a researcher from the Federal Reserve Bank of New York, attempts to determine whether payday lending is predatory by comparing the welfare of households in states where payday lending is unlimited versus states where payday lending is illegal. After a comparative analysis, Morgan concludes that "unlimited" payday lending enhances welfare.
However, Morgan's findings are flawed for three key reasons:
The analysis contains fundamental errors in its characterization of which states allowed payday lending. Example: Morgan identifies North Carolina—which had at least 500 stores during the analysis period—as a non-payday lending state.
Key definitions utilized by the research are overly narrow or are contradicted by available data. Example: Morgan, in part, defines vulnerable households as those with unpredictable future income. However, an industry survey notes that households are nearly three times likely to borrower payday loans because of unexpected expenses.
Morgan's finding that unlimited payday lending leads to lower prices is flatly contradicted by other research. Example: Researchers from the FDIC, using a national, random sample, found that most payday companies charge the maximum rate permitted by state law.
We discuss these points more fully in our critique (link above).