Evaluating Options For The Regulation Of Payday Loans

Abstract

This study discusses regulatory options that federal and state legislatures might consider for the payday loan industry. These options include outright prohibition; restricting the implicit annual percentage interest rate; limiting the amount per loan; limiting the number of concurrent loans; setting lower and upper limits on contract length; and defining the waiting period between loans. While other studies examining the payday loan industry have relied on user survey data or data from a specific lender, this study utilizes data collected by the administrative agent for all payday loan activity in several states, including Florida, Illinois, and Oklahoma. A comparison of key empirical results derived from the differing regulatory environments in these states provides guidance to those who consider imposing further regulation. The current regulatory constraints have resulted in a relatively low default rate, a high rate of loan denial, and a troubling industry reliance on the frequent borrower. An analytical framework is suggested for understanding the motivations of the low and high frequency borrowers.