THE ECONOMIC IMPACTS OF PAYDAY LOANS IN AL, FL, LA & MS

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1 THE ECONOMIC IMPACTS OF PAYDAY LOANS IN AL, FL, LA & MS Presented by Haydar Kurban, Ph.D. Southern Regional Asset Building Coalition Conference New Orleans, LA September 25, 2014

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6 RECENT STUDIES DOCUMENT THAT Payday loans do not mitigate financial stress Payday loans cause financial difficulty (Melzer, 2011) and higher rates of bankruptcy (Skiba and Tobacman, 2011) Among low- to moderate-income families, access to payday loans increases the incidence of difficulty paying bills by 25% (Melzer, 2011) and bankruptcy by 2.5% (Skiba and Tobacman, 2011) Compared to 28.9% of payday loan borrowers, 24.9% of non-payday loan borrowers experience financial difficulty (Melzer, 2012)

7 ESTIMATING ECONOMIC IMPACTS OF PAYDAY LOANS Negative impacts on the local economy: Interests and fees paid by payday loan borrowers reduce consumer spending Borrowers find themselves financially distressed and, therefore, further reduce spending Decrease in consumer spending reduces demand for goods and services and depresses the level of economic activity through the multiplier process Positive impacts on the local economy: Interests and fees paid by the borrowers are considered sales for the payday loan industry Payday loan industry, directly and indirectly, generates new income and jobs through the multiplier process

8 USING IMPLAN TO MEASURE THE NET ECONOMIC EFFECTS About 15.1% of interest and fees are not collected because of higher default rates (Flannery & Samolyk, 2005) X dollars of interest and fees increase the sales or revenues of the industry by ( X) X dollars of interest and fees reduce consumer spending by ( X) Further decrease in consumer spending caused by financial difficulty

9 DECREASE IN CONSUMER SPENDING CAUSED BY FINANCIAL DIFFICULTY Used Payday Loan Last Year Ever Used Payday Loan U.S. 1.7% 4.7% AL 3.6% 7.9% FL 2.4% 5.2% LA MS (FDIC, 2011, Table B-21)

10 LINKING INCOME GROUPS TO SPENDING GROUPS IMPLAN provides total household demand by 9 income groups. From the recent CFPB report we know the share of each income group (CFPB, 2013) 12 % of borrowers make less than $10,000 13% of borrowers make $10,000-$15, % of borrowers make $15,000-$25, % of borrowers make $25,000-$35,000 25% of borrowers make $35,000-$50,000 (Consumer Financial Protection Bureau (CFPB), 2013)

11 LINKING INCOME GROUPS TO SPENDING GROUPS (cont d) Find the total number of households that received payday loans Find the number of households that experienced financial difficulty because of payday loan debt Find the decrease in consumer spending caused by interest and fee payments and increase in financial difficulty in each state Find the net economic impact using IMPLAN

12 IMPLAN SET UP The total amount of reduction in consumer spending will be what borrowers pay in terms of fees and interest to payday lenders plus the decrease in spending caused by the increase in financial difficulty. We then entered the total amount of the direct decrease in consumer spending into the IMPLAN model and estimated the economic impacts. Payday lenders also generate economic impacts by directly hiring employees and buying from other industries. We entered the total amount of interest and fees as an increase in sales or output of the payday lending industry.

13 IMPLAN SET UP (cont d) Florida Alabama Louisiana Mississippi Total Fees and Interest* $312,651,131 $232,068,288 $181,316,905 $138,117,866 Net Fees and Interest Collected** $265,440,810 $197,025,977 $153,938,052 $117,262,068 Spending Decline due to Financial Difficulty*** $416,792,049 $ ,261 $145,281,304 $92,296,359 Total Decline in Consumer Spending $682,232,859 - $357,916,238 -$299,219,356 -$209,558,427 *Total fees and interest are based on Appendix 3 on page 26 of the Center for Responsible Lending s 2013 report titled Payday Lending Abuses and Predatory Lending. The data for Florida is based on the information obtained from regulators and the data for AL, LA and MS are estimated by the CRL ( 2013) report. We re-estimated the fees and interest for Mississippi by using Florida s fees and interest to total loan ratio. ** Net fees are calculated by multiplying the total fees and interest by ( ). ***The decline in spending is calculated by estimating the total loss in consumer spending across $0-$50,000 income groups.

14 FLORIDA IMPLAN RESULTS Spending -$682,232,859 (total reduction in consumer spending) Impact Employment Labor Income Total Value Added Output Direct Effect 0 $0 $0 $0 Indirect Effect 0 $0 $0 $0 Induced Effect $319,416,040 -$585,161,629 -$918,744,214 Total Effect $319,416,040 -$585,161,629 -$918,744,214 Revenues $265,440,810 (fees and interest collected by the payday lenders) Impact Employment Labor Income Total Value Added Output Direct Effect 3188 $112,436,689 $108,379,967 $265,440,810 Indirect Effect 908 $49,072,373 $77,426,181 $126,912,578 Induced Effect 1173 $50,813,873 $91,673,529 $144,895,291 Total Effect 5270 $212,322,935 $277,479,677 $537,248,679 NET EFFECT -2,150 -$107,093,104 -$307,681,952 -$381,495,535

15 THE NET ECONOMIC EFFECTS IN FLORIDA Revenues and sales of the payday loan industry are derived from fees and interest collected from lower income population Payday loan borrowers reduce their spending on goods and services Payday loans caused about a net output loss of $381 million in Florida in 2012 In net, payday loans destroyed more economic activity as measured by labor income, value added and employment in Florida

16 ALABAMA IMPLAN RESULTS Spending -$357,916,238 Impact Employment Labor Income Total VA Output Direct Effect 0.0 $0 $0 $0 Indirect Effect 0.0 $0 $0 $0 Induced Effect -2,923 -$107,238,745 -$204,272,616 -$328,112,507 Total Effect -2,923 -$107,238,745 -$204,272,616 -$328,112,507 Revenue $197,025,977 Impact Employment Labor Income Total VA Output Direct Effect 2,675 $54,872,769 $47,038,962 $197,025,977 Indirect Effect 616 $30,731,947 $52,649,513 $84,817,164 Induced Effect 496 $18,140,778 $34,511,862 $55,739,341 Total Effect 3,787 $103,745,493 $134,200,337 $337,582,482 NET EFFECT 864 -$3,493,252 -$70,072,279 $9,469,975

17 THE NET ECONOMIC EFFECTS IN ALABAMA The net economic effects in Alabama are negative in terms of value added and labor income Although it appears that the payday loan industry created more jobs and output in Alabama, it destroyed more higher wage jobs in other industries and therefore the net effect in labor income is negative This presentation does not take into consideration the wealthstripping and income draining impacts of payday loans on local communities

18 LOUISIANA IMPLAN RESULTS Spending -$299,219,356 Impact Employment Labor Income Total VA Output Direct Effect 0.0 $0 $0 $0 Indirect Effect 0.0 $0 $0 $0 Induced Effect $103,791,436 -$191,754,296 -$309,819,474 Total Effect $103,791,436 -$191,754,296 -$309,819,474 Revenue $153,938,052 Impact Employment Labor Income Total VA Output Direct Effect 2328 $53,283,464 $49,533,942 $153,938,052 Indirect Effect 546 $27,135,309 $43,273,141 $71,958,228 Induced Effect 485 $18,774,951 $34,600,749 $56,020,566 Total Effect 3360 $99,193,724 $127,407,831 $281,916,846 NET EFFECT 669 -$4,597,712 -$64,346,464 -$27,902,629

19 THE NET ECONOMIC EFFECTS IN LOUISIANA We observe similar patterns in Louisiana and Alabama. We think that the IMPLAN results for Florida are more reliable because the interest and fee and the loan data in Florida are obtained from the regulators by the Center for Responsible Lending (CRL, 2013). The loan, fees, and interest figures for AL, LA and MS are estimated by the CRL.

20 MISSISSIPPI IMPLAN RESULTS Spending -$209,558,427 Impact Employment Labor Income Total VA Output Direct Effect 0.0 $0 $0 $0 Indirect Effect 0.0 $0 $0 $0 Induced Effect -1,691 -$59,411,735 -$115,504,784 -$188,386,077 Total Effect -1,691 -$59,411,735 -$115,504,784 -$188,386,077 Revenue $117,262,068 Impact Employment Labor Income Total VA Output Direct Effect 2,590 $57,411,755 $53,233,674 $117,262,068 Indirect Effect 458 $18,740,370 $33,419,817 $56,693,275 Induced Effect 434 $15,234,553 $29,639,768 $48,525,740 Total Effect 3,482 $91,386,678 $116,293,259 $222,481,084 NET EFFECTS 1,791 $31,974,942 $788,475 $34,095,007

21 THE NET ECONOMIC EFFECTS IN MISSISSIPPI In Mississippi we re-estimated the amount of fees and interest collected by the payday loan industry In Florida the fees and interest is about 10 percent of the loan volume We multiplied the Mississippi loan volume by 0.1 and reestimated the fees and interest as $117,262,068. The net economic effects appear positive. However, the net indirect and induced economic impacts are negative. Following Samolyk and Flannery (2005 and 2007) we assume that on average a payday loan storefront hires 2.5 workers.

22 CONTACT INFORMATION Haydar Kurban, Ph.D. Adji Diagne, M.A. Center on Race and Wealth Howard University