Washington’s changes seem plausibly related to its adoption of an 8-loan yearly maximum, another form of regulation unusual among states
Without demographic data it is difficult to assess changes in composition. Table 6 attempts to get a handle on the question by asking how often customers who were repeat borrowers prior to the law change appear in the data after the law change. Customers are divided according to whether their pre-period loans led to indebtedness a greater or smaller proportion of the time than was the median for all pre-period borrowers. Naturally, repeat borrowers are more likely to appear in the post-period no matter what the regulatory environment, so similar figures are computed for customers in other states in order to get a baseline. The rightmost column presents odds ratios, with numbers 1 indicating the degree to which pre-period repeat borrowers are over-represented in the post-period.
As expected, the data show that repeat borrowers are much more likely to show up than occasional borrowers in the post-period in all states. The odds ratio for Virginia is much lower than for other states, suggesting that in Virginia the law change significantly altered customer composition. In South Carolina and Washington, however, the odds ratios look more normal. Both states were marginally more likely than other states to retain non-repeat borrowers, but the differences are small, suggesting that these states did not experience notable customer selection when lending volume dropped.
Finally, as in the pooled regressions, the law-change results show no evidence that extended repayment options matter. This may be due to the omission of Colorado, the only state where extended repayment is mandatory, not just an option. It may also be due to the fact that the lender providing the data makes extended repayment options available even in states that don’t require it. As such, these regressions may not capture the impact of extended repayment options on lenders without such a policy.
Overall, pooled cross-state regressions and within-state online installment loans Virginia regressions examining law changes show a reount of agreement. Both suggest the following conclusions about payday lending regulation: price caps tend to be strictly binding, size caps tend to be less binding, and prohibitions on simultaneous borrowing appear to have little effect on the total amount borrowed. Delinquency seems positively related to higher price caps. Rollover prohibitions and cooling-off periods, as well as to higher price caps, appear to reduce the frequency of repeat borrowing.
Minimum term limits affect loan length, but maximum term limits do not
Focusing on states with law changes, South Carolina, Virginia, and Washington were all able to significantly cut their rates of repeat borrowing. These changes were accompanied by significant upheavals, however, particularly in Virginia and Washington where loan volume dropped sharply and, in the case of Virginia, delinquency spiked and customer composition shifted. It seems likely that Virginia’s changes were connected to its adoption of a 2-pay-period minimum term, which is longer than the minimum term of most states. It will be interesting to follow what happens in Mississippi, which like Virginia recently adopted a long minimum term limit. In South Carolina the decline in repeat borrowing is less readily pinned on a single provision.
This paper has attempted to get inside the monolith of payday lending and examine how different regulatory environments affect loan terms and usage. Without a doubt there remains greater detail to explore—for instance, both cooling-off provisions and extended repayment options vary greatly across states. It is possible that particular instances of these regulations, like for instance those adopted by South Carolina, might have effects on delinquency or repeat borrowing that are not captured by the average effect of all laws in that regulatory category. In the face of state-specific idiosyncracies, however, the more fine-grained the question the more challenging it is to move beyond informed speculation.