Providing Subprime Consumers with Access to Credit: Helpful or Harmful? James R. Barth Auburn University

Providing Subprime Consumers with Access to Credit: Helpful or Harmful? James R. Barth Auburn University

FICO Scores: Identifying Subprime Consumers Category FICO Score Range Super-prime 740 and Higher Prime 680 739 Near-Prime 620 679 Subprime 550 619 Deep Subprime Below 550 Source: CreditBridge.

Population Percentage Subprime Consumers: A Large Part of Market 25% 20% Subprime Consumers (25%) 16.0% 19.6% 18.1% 15% 12.2% 10% 6.7% 8.4% 9.2% 9.8% 5% 0% 300-499 500-549 550-599 600-649 650-699 700-749 750-799 800-850 FICO Score Source: CreditBridge.

Subprime Consumers: High Delinquency Rates Subprime Consumers (25%) 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 100% 87% 81% 80% 19.6% 18.1% 16.0% 60% 51% 12.2% 8.4% 9.2% 9.8% 40% 31% 6.7% 20% 15% 5% 2% 1% 0% 300-499 500-549 550-599 600-649 650-699 700-749 750-799 800-850 Percentage Delinquency Rate Source: CreditBridge.

Subprime Consumers: Achieving the American Dream Subprime Mortgage debt $10.3 trillion 6.7% Securitized 62% Prime 93.3% Non-Securitized 38% Equity in housing stock $7.9 trillion

Subprime Consumers: High Delinquency Rates Home mortgage loans delinquent or in foreclosure (percent of number) 45 40 Q3 2009 Subprime ARM: 45.7% 35 Subprime FRM: 22.4% 30 FHA and VA: 9.1% 25 Prime: 5.9% 20 15 10 5 0 Q2 1998 Q1 1999 Q4 1999 Q3 2000 Q2 2001 Q1 2002 Q4 2002 Q3 2003 Q2 2004 Q1 2005 Q4 2005 Q3 2006 Q2 2007 Q1 2008 Q4 2008 Q3 2009

What Interest Rate Is Appropriate for Subprime Consumers? PND (1 + r sl ) = (1 + r f ) 0.20 (1 + r sl ) = (1 + 0.03) 1+ r sl = 1.03/0.20 = 5.15 r sl = 5.15 1.00 = 415% Plus fixed and variable costs PND is probability of no default r sl is subprime loan rate r f is risk-free rate

Payday Lenders Provide Access to Credit for Subprime Consumers

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming How Many Payday Lender Stores Are There: Official vs. Proxy Data? 5000 4000 3000 2000 1000 0 Regulatory agencies (total 16,814) NAICS North codes American (total Industry 29,044) Classification System (total 29,044)

Proxy Data Overstate Number by 12,230! State Legal status Number of payday lenders collected from regulators Payday lenders based on NAICS codes Difference between official and proxy data South Dakota Legal 408 110 298 Delaware Legal 347 126 221 Michigan Legal 617 555 62 Kansas Legal 335 305 30 Wyoming Legal 82 52 30 Illinois Legal 503 1,248-745 Louisiana Legal 403 1,342-939 South Carolina Legal 311 1,348-1,037 Georgia Prohibit 0 1,208-1,208 Florida Legal 149 1,520-1,371

Eleven States Prohibit Payday Lending!

Wide Variation in Number of Payday Lender Stores

Connecticut Montana New Hampshire Oregon Indiana Maine Florida Minnesota Idaho Utah Nevada Washington Alaska Virginia Illinois Colorado Rhode Island California Nebraska Wisconsin North Dakota Michigan Ohio Wyoming Iowa Louisiana South Carolina New Mexico Oklahoma Kansas Kentucky Delaware Missouri Texas Tennessee Alabama South Dakota Mississippi Number of Payday Lenders Per 10,000 People (Only includes states where payday lending is legal) 3.5 3 2.5 2 1.5 1 0.5 0

Distribution of Maximum Allowable Interest Rates Based on Fees

Some Facts about the Payday Lending Industry In the 2,531 counties where payday lenders legally operate, there was a national average of 6.32 lenders per county. In states where it s legal, 1,065 counties have no payday lenders. Harris County, Texas, has the highest number of payday lenders at 734. The state of Texas has the most payday lenders at 3,889. Maine has the fewest at 11. Mississippi, South Dakota, Alabama, Tennessee, Texas, Missouri, Delaware, Kentucky and Kansas had more than one payday lender per 10,000 people.

Some Facts about the Payday Lending Industry Connecticut, Montana, New Hampshire and Oregon s finance rates are far below the typical payday lender rates and are clearly intended to deter the operation of payday lenders within their borders. For states that allow payday lending, six did not have limits to the interest rate that could be charged Delaware, Idaho, Nevada, South Dakota, Utah and Wisconsin. Maine, Texas, Utah and Wyoming have no limits on the loan amount payday lenders can offer customers. Colorado has the longest minimum loan term at 180 days.

FICO Score Payday Lenders Locate Close to Subprime Consumers 710 700 690 680 670 660 650 640 630 0 0.5 1 1.5 2 2.5 3 3.5 4 Number of Payday Lender Per 10,000 Population

Burglaries Per 10,000 Population Where Payday Lenders Locate, Burglaries Are Fewer 300 250 200 150 100 50 0 0 1 2 3 4 5 6 7 8 Number of Payday Lender Per 10,000 Population

Problems Studying the Payday Lending Industry Data availability. No centralized database on number and location of payday stores. Some use NAICS codes 522291 (consumer lending) and 522390 (other activities related to credit intermediation) as proxies. No or limited availability of financial data. Some data for the few publicly traded payday lenders. Some limited data on borrowers for just a few states. The regulatory regimes for payday lending differ widely across states: some quite restrictive and some relatively lax.