A ban on payday loans may be leading to greater financial burdens for low-income residents of two Southern states, according to a researcher at the Federal Reserve Bank of New York.
The study concluded that "compared with households in all other states, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate."
North Carolina households have fared about the same, said the report, written by Donald P. Morgan, a research officer with the Federal Reserve Bank of New York, and Cornell University graduate student Michael R. Strain.
"This negative correlation _ reduced payday credit supply, increased credit problems _ contradicts the debt trap critique of payday lending," the report concluded.
Payday lenders offer quick cash advances _ for a fee _ that customers are supposed to repay with their next paycheck. Borrowers who cannot repay the loan often "roll over" the loan repeatedly, a cycle that critics of payday loans call the debt trap. Borrowers are drawn to the lenders because, unlike banks and credit unions, they don't run credit checks.
Georgia banned payday lending in May 2004. North Carolina has gone back and forth with payday lenders.
In 1997, the state began allowing payday loans. The law expired in 2001, and many small payday lenders closed, but the largest lending chains linked up with out-of-state banks to keep offering the loans. A banking commissioner's ruling in 2005, followed soon after by a consent agreement between three payday lenders and Attorney General Roy Cooper, essentially shuttered the industry's doors in the state.
"The thing is with payday lending, the business model itself is dependent on the debt trap," said Uriah King, a researcher at the Center for Responsible Lending in Durham. "They couldn't open up their doors if they couldn't put short-term borrowers into long-term debt."
King criticized the report because it drew on data from the Federal Reserve's check cashing centers in Atlanta and Charlotte, which processes tranactions in states other than Georgia and North Carolina, including those that do allow payday loans.
Last month, a report by the University of North Carolina Center for Community Capital prepared for the North Carolina Commissioner of Banks concluded "the absence of storefront payday lending has had no significant impact on the availability of credit for households in North Carolina."
That study was criticized by Community Financial Services Association of America, a trade group that represents 60 percent of the industry, because it included survey response data from people who had never sought a payday loan.
"Households without access to payday loans are forced to use costlier credit and suffer greater financial difficulties," said CFSA president Darrin Andersen.
And while payday lending may not be the correct choice "all the time" for consumers, "it's certainly a smart choice from the alternatives," Andersen said.
May be after the recent incidents, they know that they should be careful...
