The CFPB’s payday loan rulemaking was the subject of a NY Times article this past Sunday which has received considerable attention. According to the article, the CFPB will “soon release” its proposal which is expected to include an ability-to-repay requirement and limits on rollovers.

Two recent studies cast serious doubt on the rationale typically offered by consumer advocates for an ability-to-repay requirement and rollover limits—namely, that sustained use of payday loans adversely affects borrowers and borrowers are harmed when they fail to repay a payday loan.

One such study is entitled “Do Defaults on Payday Loans Matter?” by Ronald Mann, a Columbia Law School professor. Professor Mann compared the credit score change over time of borrowers who default on payday loans to the credit score change over the same period of those who do not default. His study found:

• Credit score changes for borrowers who default on payday loans differ immaterially from credit score changes for borrowers who do not default
• The fall in credit score in the year of the borrower’s default overstates the net effect of the default because the credit scores of those who default experience disproportionately large increases for at least two years after the year of the default
• The payday loan default cannot be regarded as the cause of the borrower’s financial distress since borrowers who default on payday loans have experienced large drops in their credit scores for at least two years before their default

Professor Mann states that his findings “suggest that default on a payday loan plays at most a small part in the overall timeline of the borrower’s financial distress.” He further states that the small size of the effect of default “is difficult to reconcile with the idea that any substantial improvement to borrower welfare would come from the imposition of an “ability-to-repay” requirement in payday loan underwriting.”

The other study is entitled “Payday Loan Rollovers and Consumer Welfare” by Jennifer Lewis Priestley, a professor of statistics and data science at Kennesaw State University. Professor Priestley looked at the effects of sustained use of payday loans. She found that borrowers with a higher number of rollovers experienced more positive changes in their credit scores than borrowers with fewer rollovers. She observes that such results “provide evidence for the proposition that borrowers who face fewer restrictions on sustained use have better financial outcomes, defined as increases in credit scores.”

According to Professor Priestley, “not only did sustained usage not contribute to a negative outcome, it contributed to a positive outcome for borrowers.” (emphasis supplied). She also notes that her findings are consistent with findings of other studies that because consumers’ inability to access payday credit, whether generally or at the time of refinancing, does not end their need for credit, denying access to original or refinance payday credit may have welfare-reducing consequences.

Professor Priestley also found that a majority of payday borrowers experienced an increase in credit scores over the time period studied. However, of the borrowers who experienced a decline in their credit scores, such borrowers were most likely to live in states with greater restrictions on payday rollovers. She concludes her study with the comment that “despite several years of finger-pointing by interest groups, it is fairly clear that, whatever the “culprit” is in producing adverse outcomes for payday borrowers, it is almost certainly something other than rollovers—and apparently some as yet unstudied alternative factor.”

We hope that the CFPB will consider the studies of Professors Mann and Priestley in connection with its expected rulemaking. We understand that, to date, the CFPB has not conducted any research of its own on the consumer-welfare outcomes of payday borrowing in general, nor on lending to borrowers who are unable to repay in particular. Given that these studies cast serious doubt on the presumption of most consumer advocates that payday loan borrowers will benefit from ability-to- repay requirements and rollover limits, it is critically important for the CFPB to conduct such research if it hopes to fulfill its promise of being a data-driven regulator.