PAYDAY LENDING: DO OUTRAGEOUS PRICES NECESSARILY MEAN OUTRAGEOUS PROFITS?

Fordham Journal of Corporate & Financial Law, 2007 by Huckstep, Aaron

Together, these two articles suggest that the industry's justifications for their fees should be viewed with great skepticism. Both, however, indicate that borrowers' behavior is inadequately understood.85 For states or the federal government to create an effective solution to the perceived problems with payday lenders, more information must be known about both the borrowers and the lending firms in this market. The remainder of this article attempts to provide additional information on both subjects.

IV. THE TYPICAL PAYDAY BORROWER

The typical payday loan borrower is not easy to describe. While much anecdotal evidence exists regarding the demographic of payday borrowers, there is relatively little unbiased and consistent large-scale data available.86 Many think that payday lenders largely serve low-income individuals who have little or no access to traditional methods of credit such as credit cards. In addition, the typical payday borrower is thought to have few liquid assets or savings.87 Payday loan borrowers are also thought to have a relatively higher debt-to-income ratio, and are often thought to be in "financial distress."88 These borrowers have been described in some articles simply as "poor people."89 While these are reasonable intuitive guesses, they can be refuted. One study indicates that most payday loan borrowers are middle-class, have access to other forms of credit, have steady jobs, and use payday loans exactly as intended-for short-term emergency cash flow problems.90 These contradictions exist because much of the available data relating to borrowers are "bound up with advocacy positions for or against the industry" and thus is of questionable reliability.91

A sampling of the data provides a picture of the inconsistency. A 2001 study by Georgetown University's Credit Research Center at the McDonough School of Business indicated that 66% of borrowers use payday loans as they are intended-as an emergency cash flow fix.92 The same report indicates that 60.1% of borrowers renewed their loans less than five times in the past year.93 Further, 41.7% of the borrowers own homes94 and 100% have steady incomes and checking accounts.95 Alternatively, a recent study from Indiana indicates that 66% of borrowers roll over their loans more than 10 times per year.96 The Center for Responsible Lending further identified these inconsistencies in a December 2004 Research Report.97 The inconsistencies are not limited to the number of loans or the number of rollovers per year. The industry argues that the average borrower has a $35,000 annual income.98 The 2001 Georgetown study indicates that over half of borrowers have incomes between $25,000 and $49,999,99 while studies from Wisconsin, Illinois, and California point to an average annual income of around $25,000 per year.100

The Georgetown study was funded by the Community Financial Services Association ("CFSA"), a major trade association of the payday lending industry.101 Although perhaps tainted by the CFSA's involvement, the study's results paint an interesting and relatively benign picture of the typical payday borrower. For instance, the study found that more than half of the respondents had at least a high school diploma or some college education.102 Only 6.2% of the respondents had no high school diploma.103 In terms of income, the respondents were "less likely than the general population to have either low or higher incomes."104 Furthermore, according to the Georgetown study, the majority of borrowers used payday lenders in the manner intended: as a short-term cash flow fix.105 65.7% reported using the loans for an emergency cash crisis.106 Interestingly, 34.8% reported using payday loans no more than four times per year and 22.5% reported using the loans 14 times or more per year.107 36.4% of borrowers were under 35 years of age,108 and more than half were married109 Just under 25% reported being unmarried with children.110