FDIC Study May Change Views on Payday Lenders; Repeat Users Not Key to Profits

WASHINGTON – The new report from the FDIC Center For Financial Research on payday lending could open a new front in the ongoing policy debate over the controversial practice. The report, Payday Lending: Do the costs justify the price, represents one of the only occasions where data from actual payday lender records was analyzed to determine the profitability of the store front lenders and their pricing practices. This is significant because few other studies in the past have examined actual payday data. In this case, two “monoline payday advance firms” provided their records, though the report did not name them. The FDIC has been severely criticized in recent years by consumer and low-income advocates because the government corporation has not acted to restrict the ability of state-chartered banks to participate in payday lending arrangements. The Office of the Comptroller of the Currency, the regulator for national banks, has forbidden national banks from working with payday lenders. But David Barr, spokesman for the FDIC, pointed out that the study is still preliminary and does not address policy questions. The report has drawn attention because of its use of payday lender data and because it reported that the number of payday advance stores in zip codes where populations are predominantly African-American is roughly equal to overall population percentages. The Center for Responsible Lending, a subsidiary of the Durham-based Community for Self Help, released a report in March that alleged African-American neighborhoods in North Carolina are three times more likely than non-African-American neighborhoods to have payday lending stores. The Community for Self Help is the parent organization for the $195 million Self Help Credit Union. The Community Financial Services Association of America (CFSA), the payday advance industry trade group, has challenged CRL to reveal the back-up data from its report. “Numerous questions cloud the findings of this report, so we’re calling on the Center for Responsible Lending to show its back-up data to an expert,” said Lynn DeVault, president of CFSA. But University of Florida’s Dr. Mark Flannery, the study’s principle author has sent a letter to the CFSA taking issue with its conclusion that it had cleared payday lenders of the CRL accusation because, as Flannery pointed out, the study had not been conducted to look at that topic. “Our study did not include an in-depth analysis of payday lending store locations because we have not had time to do this analysis carefully,” Flannery wrote in an April 11 letter. Whether or not the study shows anything about the location of payday lending outlets, the study definitely opens the door into how payday lenders price their loans, a practice for which they have been criticized sharply in the past. Nor did the study find that the industry’s profitability relies on repeated business from the same borrowers for profitability, also a long-standing criticism. “We find that fixed operating costs and loan losses justify a large part of the high APR charged on payday advance loans,” the study said. “The business relies heavily on maximizing the number of loans made from each store, which operates with a relatively fixed cost.we find no evidence that repeat borrowers affect store profits beyond their proportional contribution to total loan volume. In other words, the industry’s profitability does not depend on the presence of repeat borrowers per se.” Contrary to widespread impressions that payday lenders must find their business very profitable, based on their loan fees, the study found that payday loan stores only really begin to make money when they have been in the same location for awhile. With store level data from the two stores which cover 2002, 2003 and 2004, the study found that so-called “young” stores that have not been in place for a long time made only an average of 4,904 loans in a calendar year whereas stores which had been in one place for some time, the so-called “mature” stores, would make an average of 8,133 loans in a calendar year. This is significant, the study found, because loan volume was key to a lender’s success. A payday lending location that does not make loans must close, the study observed. The report also found that the fees payday lenders charged were higher in the mature stores than they were in the younger or new stores, but that the fees were not as subject to increased competition as many might have believed and that, in the end, the profits payday lenders make were not as high as many have thought. “That said, mature stores appear to earn quite healthy operating profits -$18.60 per loan made or approximately $1.96 per average dollar of loans outstanding (profits per dollar of total loans originated during a year is smaller),” the study found. “These levels sound high, but are they? As we have emphasized, part of the answer to this question depends on a firm’s allocation of expenses across its stores, since this large number has an important effect on measures of store profitability. Allocating these expenses equally across stores brings down net pretax profits per loan to $11.67 or $1.27 per average loan dollar outstanding.” The study urged further study of the payday lending industry in order to better evaluate policy questions the industry raises. -