| Payday Lending Impact - Exec Summary 2009 |
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The Financial Stability PartnershipTM and other community organizations commissioned a study on the local economic impact of businesses known as "payday lenders." Here is the executive summary from January 0f 2009. (Honey Creek Resources, Inc. -- Payday Lendings Economic Impact on the Omaha Metro Area -- Financial Stability Partnership) Executive Summary The purpose of this study is to examine the economic impacts of the payday lending industry in Omaha market area, including all households and businesses within Douglas and Sarpy counties. The premise is that the high cost of payday credit reduces households disposable income thereby reducing money retained and circulated throughout the local economy. Payday lending impacts measured in this report are those financial ramifications resulting from excessive payday loans and fees. The analysis includes a measurement of offsetting positive impacts from local spending by payday lending employees or re-investment of business projects to determine the net economic impact. This report addresses the commonly-held belief that policies affecting payday lenders would not result in appreciable changes to the regions economy because, in effect, the local lending industry is a "zero-sum" proposition. This belief suggests that, in the absence of economic leakages from non-local institutions, policies affecting the use of payday lenders would simply result in no net regional economic impacts from the transfer of wealth from low and mid-level households using payday lenders to higher income households receiving dividends from their investment in the payday lending industry. It should be noted that the economic impact portion of this analysis focuses only upon what are described herein as excessive fees stemming from the repeated use of payday lending (greater than 4 times per year), representing fees and repeat borrowings that would likely be far beyond those for more traditional lenders. A portion of these excessive fees would represent a net leakage from the local economy. Additionally, the empirical data supporting the model shows that lower income households in the region tend to spend relatively more on necessities and less on services compared to more affluent households, resulting in higher economic multipliers for the local economy. Highlights of findings from each topic of the report are listed below.
Introduction, Market and Definitions Payday lenders, cash advance firms and check cashers are those defined and regulated under the Nebraska state statute covered by the Delayed Deposit Services. As such, exempted businesses including pawn shops, furniture rental, jewelry and loan, automotive title loan companies and internet lenders are not included in the economic impact analysis. Payday loans are short-term loans intended to cover cash flow shortfalls for borrowers between pay periods and typically averaging $325. Excessive loans are defined as payday loans to individuals who borrow five or more payday loans per year.
Existing Industry Trends and Conditions Payday Lending Overview Payday loans are popular due to their easy process, fast approvals and convenience of store locations. Loan qualification is simple, underwriting processes have been streamlined and they do not require a credit score. Loan repayments are typically made by three methods: postdated check; cash (to avoid overdrafts); or, loan rollover where borrower obtains payday loan from another lender to pay off first loan. The typical payday borrower repays $793 on a $325 loan. Ninety one percent of payday loans go to borrowers with five or more transactions per year. Rollovers have the tendency to cause a cycle of debt for borrowers from additional fees associated with multiple loans and repeated borrowing.
Regulatory Environment In Nebraska, payday loan funds are considered an "advance" and not interest so they are not subject to the 16 percent usury cap. Payday lenders were not legally recognized in Nebraska until 1994 at which time the Nebraska Department of Banking and Finance was selected to license and regulate Delayed Deposit Service (DDS) businesses. Nebraska has statutory limitations to protect borrowers and has set a fee limitation of $15 per $100 advanced equates to roughly a 460 percent annual interest rate. Other Nebraska requirements include that: 1) DDS businesses shall not hold more than two checks from any one borrower; 2) the amount outstanding from a borrower cannot exceed more than $500; 3) checks for repayment cannot be held more than 34 days; 4) DDS businesses cannot cause the borrower to pay additional fees for repayment; renew, rollover or defer by allowing borrower to pay less than total amount owed for loan and fees; 5) Internet payday advance companies are illegal in Nebraska in that the law requires that loans are issued in person from physical sites and are prohibited by electronic transmissions; and, 6) DDS businesses must post a $50,000 surety bond in each county in which they operate and maintain a minimum of $25,000 in their checking account for each location. In addition to state oversight, over 75 municipalities in 17 states have adopted local ordinances to safeguard borrowers and promote economic growth by restricting operations and limiting clustering of stores.
General Customer Profile The majority of payday customers as revealed from national studies fall into these general demographic categories: female, black, Hispanic, renters, average age of 36, and have children younger than 18 years old living in the household. Payday customers typically have a poor credit history, active checking accounts, steady employment and are middle income households with annual incomes under $50,000. Payday customers generally are in a stage of life which has a higher demand for credit given their younger age and presence of children.
Payday Lending in the Omaha Area Estimated Demand Loan volume was derived from loan activity reported from four surrounding states since Nebraska currently has no reporting requirements. Loan volume is projected to be 374,500 generating over $121 million in loan proceeds in the Omaha metro area in 2008. DDS Businesses The largest number of stores are located in zip code area 68134 with other significant concentrations clustered around Offutt Air Force Base and the Douglas/Sarpy county line. West Omaha has a strong presence of payday lending stores; over one-half of store locations are west of 72nd street. This distribution of stores supports the notion that payday advance services are used by households with a wide range of incomes, with the highest concentration among middle incomes. The area median household income for the six areas with the largest number of stores was over $70,000. Overall, the net number of payday lending stores has continued to increase each year although the rate of increase has slowed by 50 percent during in the past two years. This would seem to indicate that the market is nearing saturation. On-site annual compliance visits resulted in violations with 14 DDS businesses in the Omaha area in the past three years. Frequently firms are repeat offenders.
Survey Results of Douglas and Sarpy County Residents Results were collected from 164 callers of whom 10 percent had used payday lenders and 4 percent used check cashers in the Omaha market area. The majority of respondents were very low income, small households. Callers were from a wide distribution in the metro area, with the largest number of calls from zip code area 68104. The majority of loan terms were reported to be one month (67 percent) within the threshold 34 day time limit. Given the majority of respondents were low income, it is likely that monthly terms were based on borrower income from government assistance. A strong tendency for taking multiple loans was indicated by responses. Over 70 percent of respondents who used payday lenders had more than one payday loan at a time. Results indicated a high frequency of securing multiple loans. Over one-half of respondents tended to have multiple loans frequently or always while 20 percent always had more than one loan outstanding at a time. The strong occurrence of loan renewals was established with 69 percent of respondents reporting they renewed or rolled over their payday loans. This renewal rate was comparable to leading national studies which cite a renewal rate of 75 percent of borrowers. Most repeat borrowing appeared to recur without eliminating the indebtedness. Of those Omaha metro borrowers who renewed or rolled over their loan, seventy five percent indicated that the original loan was still not paid off. A substantial portion of repayments came from loans from other payday lenders. Only 15 percent of payday loans were repaid with the original post dated check. The prevalence of renewals seems to indicate that Nebraskas law dissuading renewals is being circumvented by customers merely going to another payday lender to refinance the loan.
Household Impacts of Payday Loans Household Expenditures by Income in Omaha Metro Area The newly developed Family Economic Self Sufficiency Standard (FESS) confirms results herein which demonstrate that two person households with one preschooler and one school age child need an annual income of at least $42,021 to cover direct overhead expenses. Tax returns for metropolitan areas of Nebraska showed over one-half of all returns were filed by those earning less than $35,000 a year signifying that a substantial portion of Nebraska metro households likely earn less than they need to cover household necessities. Expenditures by Payday Customers on Credit Payday customers typically rely more heavily on other types of consumer debt (92%) than the general population (82%). Additionally, consumer credit also represents to a higher debt service burden on payday customers with a high consumer debt to income ratio of roughly three times that of adults in general. Payday customers utilize auto loans at 1-1/2 times the rate of the general population; alternately, they are less likely than others to use retail cards or revolving credit.
Impacts to the Economy of Douglas and Sarpy County from the Use of Payday Lenders Overall Annual Economic Impacts (Losses) to Omaha Metro Area
Loan Volumes and Fees Loan volume per store was estimated to be 3,500 loans, generating over $121 million in total loan proceeds metro-wide in 2008 with associated loan fees estimated at over $21.5 million for the year.
Direct Economic Impact to Households from Excessive Fees Those with household incomes between $25,000 and $50,000 represent one-half of all loans issued, generally coinciding with the distribution of household income across the Omaha area. Approximately one-fourth of DDS users have household incomes less than $25,000 and over $50,000.
Total Impacts to Households from Excessive Fees There is over $26.4 million in annual output, $6.5 million in earnings, and approximately 180 jobs lost, or more precisely, foregone, from the local economy due to excessive loan fees. Impacts of Excessive Fees to Households, 2008.* Direct Indirect Induced Total Output -$19,178,900 -$3,561,800 -$3,692,500 -$26,433,200 Wage earnings -$4,172,600 -$1,216,300 -$1,196,600 -$6,585,500Employment -120 -30 -30 -180 *figures are rounded
Economic Contributions of the Payday Lending Industry For this analysis, three scenarios are considered that likely bracket the proportion of the $19.3 million that stays in the local economy and the proportion that exits. A split between the dollars staying in the region and those exiting were set at three thresholds: 50-50; 25-75; and 75-25 in efforts to quantify a range of impacts.
Net Impacts to the Omaha Area Economy from Excessive Payday Lending Fees Payday lending industry is estimated to reduce local economic output by over $10.6 million per year; reduce local wage earnings by over $3.2 million per year; but not significantly impact local employment. In fact, the model results yield a slight gain in local employment resulting from payday lending.
Net Impacts to Local Economy from the Payday Lending Industry Direct Indirect and Induced Total Output $ (9,528,900) (1,130,600) $ (10,659,500) Labor income $ (1,915,300) (1,338,500) $ (3,253,900) Employment (jobs) 19.4 (1.5) 17.9
Alternatives to Current DDS Lending Prohibiting DDS Lenders Although prohibiting DDS lenders may be a policy option, there is an apparent need for their services by households in a wide range of income classes. With the exception of a pawn shop, the remaining existing alternatives would adversely impact consumer credit ratings. This alternative would not appear to solve the credit problems creating the demand for payday lenders and research confirms that without other viable short-term credit substitutes, households are worse off financially without payday lenders.
Use of Credit Unions and Non-profits as Alternatives for Small Principal Lending
Payday lending Credit Union Alternative Difference Output -$26,433,200 -$1,471,900 -$24,961,300
Policy Implications Payday Advance Community Outreach National examples of philanthropic activities by payday advance industry include grants for promoting financial literacy, supporting community charities and targeted financial assistance to military personnel.
Other State Policies Regulation of Fees or Non-Interest Income Many states have adopted a 36 percent cap on fees as a new, acceptable standard. Other financial institutions besides payday advance stores charge fees. Banks and credit unions charge for bounced checks, late fees and overdraft fees all of which are classified as fees, and also do not fall under the usury laws or federal truth in lending regulations. These fees, or non-interest income, comprise more than one-half of all bank revenues according to the American Bankers Association.Limiting Back-to Back Renewals The most common statewide efforts focus on the issue of loan flipping or repeat borrowing with over 30 states limiting the number of rollovers while others provide a cooling off period between loans ranging from one to fifteen days.
In order to protect borrowers from harassment, some states prohibit the use of criminal charges to collect on payday loan payments At least four states specifically protect military personnel by limiting locations of payday lending stores or prohibiting garnishment of wages.
In order to address serial borrowing, seven states require lenders to report customer loan informational to a central statewide, real-time database and to consult the database before making a new loan.
Proposed Nebraska Legislation 2008 Session One bill (LB 868) proposed to cap of the fee to 36 percent annually. The other bill, LB 1144, proposed to create a real time access database so that DDS businesses would be required to check if applicant has outstanding existing loans before providing a new loan to the customer.
Are Policy Changes Needed in Nebraska? Survey findings showed a strong propensity in the Omaha metro area for borrowers to renew loans and a frequent use of other payday loans to pay off original loans. Since the current structure of payday advances in Nebraska does not, in practice, dissuade renewals, and was found to restrict incomes and perpetuates the need for additional borrowing with its 460% APR, it would be beneficial for Nebraska to follow the lead of other states and amend its regulations to address renewals and real time reporting requirements. In the event the state of Nebraska wishes to strengthen its regulatory posture towards payday lending fees, it seems equitable that a consistent set of disclosures and usury regulations be applied to all lenders with fees for short-term credit, including banks and credit unions. Policies can provide opportunities for households to build assets and safety nets to protect and grow what they have. If one of the goals of Nebraska is to improve the wealth of residents, including income and assets, it will be necessary for borrowers to improve their credit scores. The limited underwriting criteria of payday lending also has a negative repercussion in that the borrowers loan and on-time repayments are not reported within the credit system and therefore will not help improve their credit rating in the future. In addition to addressing rates of fees, renewals and reporting, short-term lending alternatives would be beneficial for borrowers to access loans with longer terms and lower annual percentage interest rates. Who would be alternative sources to offer short-term credit - banks, credit unions, non-profits or public/private partnerships? Payday lending customers already have active bank or credit union accounts; it is estimated that roughly 15 to 30 percent of credit union members already use payday loans. Given banks growing fee revenues, they currently have little incentive to compete in the market for lower-priced payday loans.
New opportunities for analysis Research into public policies enacted by other states and their resulting economic impacts should be analyzed so that intended, and potentially unintended, economic and social impacts are understood prior to adopting new Nebraska legislation. Research into payday lending alternative structures, their partners, and outcomes would help jumpstart interest in providing short-term credit by other for-profit and non-profit providers.
(Honey Creek Resources, Inc. -- Payday Lendings Economic Impact on the Omaha Metro Area -- Financial Stability Partnership TM) |
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