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The Power of Numbers

posted by Elizabeth Warren

When the credit industry lobbied Congress for adoption of the bankruptcy amendments, they made a powerful claim:  Bankruptcy costs every American family $400.  The number was pure fabrication, but the number was repeatedly quoted in newspapers, magazines and in Congress.  It offered elected representatives a lot of cover to explain to the folks back home how they could vote to sqeeze more money from working families and put it in the hands of a dozen or so credit card issuers. Adam Levitin shows us that another number has been drawn out of thin air:  the Mortgage Bankers Association claims that any amendment to the bankruptcy laws to deal with subprime mortgages will increase mortgage rates for all homeowners by two percentage points--recently dropped to 1.5 points.  Adam is doing a great job fighting back, but, as it was with the $400, academics don't have the same PR machine.

Now there's a third data claim:  Payday lending is good for families. Once again, the claim is wrong, but the industry is pushing it hard in the media.  Maybe only a small part of the academic world realizes the importance of data in legal policymaking, but private industry seems to understand very well the power of numbers. 

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 dataset mixes together returned check data from states that permitted payday lending and from states that prohibited it.  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?) 

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. Instead of trying to read the tea leaves of regional rates of bounced checks, the CRL took the same approach as Credit Slips' own Angie Littwin took in her research: they went directly to the people who were the targets of payday lending and surveyed them. The result?  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 takes on additional credibility because it 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 paper 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 or quibbles at the margins.  These mistakes go right to the heart of the only support for the claim that payday lending is beneficial. 

Last year the Pentagon went to Congress to say that payday lending was interfering with troop readiness, and Congress outlawed payday loans to military families. Some state legislatures are now looking hard at exending the same protection to all their citizens.  They should be abke to do so without being fed bad numbers. And if bounced check charges are out of control, then they should take a look at those as well--not turn loose payday lenders so they can compete with banks to squeeze families harder.

Numbers are powerful.  But wrong numbers can do a lot of damage. 


Thank you for this post. The work by these two authors is not just shoddy. It's dangerous and wrong. Indeed, so dangerous and damaging that there really should be some tort for 'wrongful numbers'. The two people have just commited that tort and hundreds of thousands of people, including children, will suffer real damage as a consequence.

Everything costs money.

Sure, bankruptcies raise the price for others to borrow (but I don't know how much).

But so do advertising costs.
So does lobbying.
So does paying executives million dollar salaries.
So does using paper for the notes.
So does allowing the creditor to transfer the note...

Everything adds to the costs of mortgages. That is just life in a capitalist society...

Doug, I believe that is a difference in what numbers you use to calculate the cost of doing business and what numbers people are using to make public policy decisions. It is not that things cost money, that is a given.....

Your right - the wrong information can do some damage - like when you leave out that fact that the Pentagon's report to Congress including its recommendation to cap interest on auto title, RAL's and payday, was discredited by the Government Accountability Office in 2007. The GAO found the Pentagon's the recommendations “were not directly linked to [its] findings," and that it had failed to establish a direct relationship between the use of a credit product and the financial problems of the service member. The GAO urged "caution" when relying on the Pentagon's report; a warning that has apparently gone unheeded by you.

Moreover, there is a growing body of research on payday lending from independent sources that are not affiliated with the industry or politically motivated groups like CRL. While some of that research is against payday lending, a good deal of it is not. There have been several reports released in recent years that on the whole find payday beneficial. Thus, the claim that the Morgan paper is the "only support for the claim that payday is beneficial" is simply not true.

In the spirit of full disclosure, you should also make it clear when touting CRL's "research" that it is an affiliate of a credit union (Self Help CU out of NC) that has directly benefited from the elimination of other lending competition like payday and that you and CRL's executive director are both members on an FDIC advisory committee and were appointed by the FDIC's current current chair and former CRL board member, Shiela Bair.

For a well cited paper which also concludes that payday lending is welfare enhancing for consumers with access to it, see:

Wilson, Bart J., Findlay, David W., Meehan, James W. , Wellford, Charissa P. and Schurter, Karl, "An Experimental Analysis of the Demand for Payday Loans" (January 14, 2008). Available at SSRN: http://ssrn.com/abstract=1083796.

This paper cites to three other independent studies concluding the same thing.

Obviously this so-called industry (payday lending) can get someone somewhere to come to whatever conclusion they want. No one believes that 400% loans that trap people into paying back multiples of what they borrowed benefits the borrowers and to try and pretend that you could prove this fantasy by a report is beyond absurd. Mr. Morgan recently came to the Virginia legislature to testify before a legislative committee and it was pretty clear when he finished that his report and its conclusions are a work of fiction (and deathly dull fiction too).

Payday Lenders who charge twice what LOAN SHARKS charge (in Arkansas the rates are 168% to 2028% APR even though the Constitution says the maximum is 17% per annum for consumer loans)are not good for consumers or the ecomomy no matter what these studies say. "Liers figure and figures lie" is an old saying that is appropriate here.

No consumer in the United States should be forced to pay (or offered a loan) that charges triple digit interest rates - it is just unfair and UnAmerican.

how many people take these loans out for a whole year? if not many, then why is APR a relevant figure?

Thanks for discussing our paper: "Payday Holiday: How Households Fare after Payday Credit Bans." We reply to the CRL critique at the end of our revised working paper. Suffice to say here that the CRL did not expose any "mistakes" in our paper. Interested readers should see for themselves. http://www.newyorkfed.org/research/staff_reports/sr309.html

Could someone please calculate the APR for the $2.00 transaction fee my ATM charges?

My blog, How To Get Good Credit Gab, provides the opportunity to share thoughts, ideas and experiences about obtaining good credit and emphasizes the importance of building and maintaining good credit and the perils of personal financial mismanagement.

Please consider adding this video you your site:

Government Big Daddy will save you - NOT

If the government prevents these people from giving their money away like this, they will find another way,,

Pawn Shops charge more, that would be a good choice for them.

Bank Overdraft charges are LOTS more, that would finish them off even faster.

GO Darwin GO


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