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Designing a Targeted Regulatory Intervention for Payday Lending Mitigating Extended Use of Single-Payment Loans Without Eliminating Access
Rick Hackett Special Policy Consultant, Clarity Services
Topics
• Regulatory Context
• Fixing Flaws in Existing Statistical Analysis of Single-Pay Loans
• Building a Representative Longitudinal Sample
• Results from Longitudinal Sample
• Robustness of Sampling Method
• Designing a Targeted Intervention That Preserves Access
Theory of “harm” is triggered by cost of loan: “Fees eclipse loan amount.”
• “Cost” computation is rational – a “loan sequence” is renting the same dollars when no intervening income between loan.
• Limit is arbitrary (why not .5x or 2.0x loan amount?)
• Sounds like a loan cost limitation, but CFPB prohibited from setting usury caps
Essence of the CFPB’s Data Analysis
Essence of the CFPB’s Data Analysis
This presentation analyzes the “proof,” assuming that the theory is correct. CFPB “proof” has two basic flaws:
1. Prove “harm” with too short a sample
2. Prove “harm” without looking at evolution over time
(longitudinal) – using single-month cohorts
Fundamental Flaws in Published Analyses
• Truncation Effect on Studies Limited to 11 or 12 Months
• Sampling Bias in Selection of Cohorts for Study
Duration of “Life Cycle” of Payday Loan Use Number of Loans per Sequence; Summary Statistics
Behaviors Missed Due to Truncation
Behaviors Missed Due to Truncation
Behaviors Missed Due to Truncation
Behaviors Missed Due to Truncation
Sampling Bias: Oversampling Heavy Users
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Equal to or Lessthan 3 Loans
Equal to or Lessthan 4 Loans
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Equal to or Lessthan 7 Loans
greater than 7loans
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CFPB Sampling Method
Maximum Number of Loans in One Sequence per Borrower ("WorstCase")
Why is Sampling Method So Critical?
• Median sequence duration from all 6 sampling methods we tested was 2 loans (except 3 for CPFB method).
• But mean sequence duration ranged from 4.5 to 7.5 loans.
• There are outliers dragging the mean way above the median, and sampling methods determine the weighting of the outliers.
Visualizing the Tail on the Curve: Distribution of Percentage of Sequences Both Samples
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Number of Loans
Percent-Longitudinal
Percent-CFPB Sample
Visualizing the Tail on the Curve: Distribution of Percentage of Sequences CFPB Sample Method 4 years
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The Bottom 95%
(less than 25 loans)
The Top 5%
(greater than or = to 25 loans
Visualizing the Tail on the Curve: Distribution of Sequence Counts-A Longitudinal Study
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Chart Title
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Frequency of Sequences by Number of Loans Longitudinal Sample
Visualizing the Tail on the Curve: Distribution of Percentage of Sequences Both Samples
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Number of Loans per Sequence
Percent-Longitudinal
Percent-CFPB Sample
Visualizing the Tail on the Curve: Distribution of Percentage of Sequences Both Samples
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Percent-Longitudinal
Percent-CFPB Sample
Building a Representative Longitudinal Sample
Data source: 100MM loans over 4.5 years (20% of market)
Sampling method: • 1,000 random-sampled borrowers January 2010
• Sample for 3.5 years; observe for 4.5 years
• When a borrower ends product use through sample period, replace with new random-sampled borrower not a user in prior month
Building a Representative Longitudinal Sample Result: • 1,211 new borrowers join the sample over the 3.5 year period
• All 2,211 followed through end of 4.5 years (limited truncation effect)
Building a Representative Longitudinal Sample
Olin when you do this slide add; Replacement N=1211 Replaced N=698 Persistent N=302 (legend below)
How Our Random Sample Evolves Ju
ly 9
Dec 1
2
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mb
er in
Sam
ple
Building a Representative Longitudinal Sample How Our Random Sample Evolves
Nu
mb
er in
Sam
ple
Building a Representative Longitudinal Sample
Out of 2,211 borrowers who make up a constant 1,000 per month:
• 302 are “persistent” throughout – CFPB sees
• 698 taper off – CFPB sees
• 1,211 are new replacements not seen by the CFPB – they are very different
Visualizing Truncation and Sampling Bias Mostly Persistent Borrowers and No Replacements
Nu
mb
er in
Sam
ple
Results from Longitudinal Sample (CFPB sees mean sequence = 7.25 loans)
5.05
7.66
8.41
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Mean Number of Loans per Sequence
Replacement Replaced Persistent
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ans
Predominance of Sequences 6 Loans or Less
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Loans
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Replacement
Replaced
Persistent
Takeaway
When the CFPB looks at a single cohort packed with heavy users, over a short time, it finds a large percentage of long sequences.
When you look at the behavior of a longitudinal sample (new borrowers joining all the time) over a longer period, the percentage of long sequences drops radically.
Takeaway
Better Worst Case Scenarios Distribution of Borrowers’ Maximum Loan Sequence 49.8% of Borrowers Never Experience “CFPB Harm”
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Equal to orLess Than8 Loans
Equal to orLess Than9 Loans
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Replacement
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Takeaway
• 49.8% of borrowers never have a sequence longer than six loans.
• This analysis includes sequences using multiple lenders.
• Only the “persistent” borrowers have high percentage of long “worst case.” These are CFPB’s white paper borrowers.
If There Is a Single “Debt Trap,” Are There Many? NO
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1 Loan 2 Loans 3 Loans 4 Loans 5 Loans 6 Loans 7 Loans 8 Loans 9 Loans 10 Loan
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Other Loan Sequences
Replacement
Replaced
Persistent
Percentage of Other Sequences for Borrowers With Maximum Loan Sequence of 10 Loans
No Harm by CFPB Definition
84.29
72.83
62.51
81.55
Replacement Replaced Persistent Total
Are Borrowers With a Maximum Loan Sequence of 10 Loans Having Other Sequences Showing Harm? NO
Robustness: Are New Borrowers Really Different?
SEQUENCE DURATION STATISTICS FROM MULTIPLE SAMPLES
Is ANY Change Justified? Hackett Thinks So
90th Percentile (Top 0%)
Objectives for a Targeted Intervention
• Eliminate long sequences
• Limit additional cost of origination
• Speed and convenience
• Preserve access
Demand Side Considerations
Financial profiles and use cases vary: • Chronic cash flow shortage (cash flow insolvent)
• Income/expenditure asynchrony
• Temporary cash flow shortage (expense or income shock)
• Opportunity cost of denial will vary (loss of housing versus loss of cable tv)
• Only the first case is easy to legislate
Suggested Content of Intervention
• Automated and inexpensive screen for cash flow insolvency
• Screen for existing/recent small-dollar obligations to accurately detect sequences
• Rollover (sequence length) limit consistent with CFPB economic theory
Automated And Inexpensive Screen For Cash Flow Insolvency
• Consumer stated income (not more than 125% of zip+4/age median)
• Consumer stated housing expense (not less than 75% of zip+4/age median)
• Credit report-based other debt payments
Automated And Inexpensive Screen For Cash Flow Insolvency
• BLS-based (zip+4/age/income) proxy for living expenses
• Screen: Residual income ≥ loan fee + 1/6 loan amount
• Can be done in seconds for less than $1.00
Rollover Limit Consistent With CFPB Economic Theory
• Linked recent loans (within one pay period sequence) plus new loan cannot produce fees ≥ principal (or some % selected by CFPB).
• Will vary by state (Florida = 10 loans; Utah = 5 loans)
Rollover Limit Consistent With CFPB Economic Theory
• Once hit limit, lender must offer 4 pay period off ramp. If PIF, then 30-day cooling off period.
• Data to manage all of this is available from existing credit reporting systems.
Loan Volume Retained Under Alternative Restrictions
Loan Volume Retained Under Alternative Restrictions