Wrong Number

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February 2, 2008 2:18 p.m.

Statistics can be powerful. That’s why I was struck to see a new study reporting that low income families do better in states that permit payday lending. If families can’t get short term cash, says the study, they are more likely to encounter other expenses like bounced checks. So swallow hard and let payday lenders charge 400% interest rates, because in the long run people will be better off. Wow.

The only problem is that the numbers are wrong. A report from the Center for Responsible Lending points out that the study’s claim is based on the rate of bounced checks, but the study mixed together customers from states that permitted payday lending and states that prohibited it. That makes the data useless for testing the effects of payday lending. But that doesn’t stop the payday lenders from cranking up the press machine.

The University of North Carolina put together a detailed analysis of payday lending by studying low-income households after the ban on payday lending went into effect. Their conclusion? Payday lending had no discernible effect on the availability of credit. In addition, twice as many borrowers reported they were better off without payday lending than they had been with it.

The payday loan study is written by a researcher at the federal reserve and a grad student. (That makes it sound like a study from the federal reserve, but the fed says it is not.) There is no reason to believe the mistakes in the study are intentional, but they are severe. This isn’t one of those academic interpretation questions. Instead, the study relies on an analysis of the rate of bounced checks, but CRL points out that it draws data from a source that mixes payday and no-payday states together. The study also looks at the number of FTC complaints filed, but the higher reporting rate in North Carolina was true both before and after payday lending was banned. (I’m not sure what a higher rate of filing FTC complaints means anyway — maybe just more activists in the state who urge prople to write the FTC?) These data problems aren’t quibbles. They go right to the heart of the support for the claim that payday lending is beneficial.

Let me be clear: hot check charges are out of hand, and some fancy banks have used them to recreate their own form of payday lending. But the solution to that problem is not to let payday lenders and banks compete to see who can squeeze consumers the hardest. The solution should be to put some limits on out-of-control charges from both sources.

The Pentagon went to Congress to say that payday lending was interfering with troop readiness, and Congress outlawed payday loans to military families. Payday lending costs hard-working American families an estimated $4.2 billion every year. State legislatures should be looking hard at exending the same protection to their citizens that Congress extended to military families — and they should do so without being fed bad numbers.

Long-time TPM readers will remember the claims the credit industry made as they lobbied for the bankruptcy bill: Bankruptcy costs every American family $400. The number was pure fabrication, but it had a powerful effect. It was repeatedly quoted in newspapers, magazines and in Congress. So now there is another number. This one isn’t made up by the industry, but it doesn’t have any data to back it up either. The industry can quote it in every press release and pass out copies to every newspaper as it fights off any consumer-led effort to rein in payday lenders.

Numbers are powerful. But we need a way to get wrong numbers out of circulation.

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