Financial Fragility and the Price of Credit: Payday Lending, Safety Nets, and Mortgage Costs

Session Submission Type: Panel

Abstract

The panel offers a multifaceted view of financial vulnerability. Though each examines a different credit-market segment— payday lending reform in Ohio, payday lending dynamics in Wisconsin, and national mortgage lending—they collectively underscore the core policy challenge: protecting vulnerable consumers from high-cost lending while maintaining access to financial pathways.

The first paper examines Ohio’s 2018 Fairness in Lending Act, which capped payday-loan APRs and fees. Using a border-county difference-in-differences design, it finds that affected low-income households saw a sharp post-reform drop in consumption: essential spending, including food, fell about 25 percent, while alcohol and tobacco –often assumed to track payday borrowing - remained flat. The results indicate that the reform reduced borrowing costs but also triggered lender exit, cutting off access to short-term credit rather than improving financial health. The authors emphasize that restricting payday lending without providing substitutes can leave vulnerable households unable to smooth consumption, highlighting the need for complementary tools such as emergency assistance, affordable small-dollar bank loans, or employer-based wage access programs.

The second paper examines the consequences of payday lender exits in Wisconsin, a state with permissive payday lending laws but relatively inclusive safety-net programs. Despite the absence of interest rate caps, the number of licensed lenders has collapsed over the past decade. Using county-by-year variation in lender “vacancies,” the author shows that when payday lenders disappear, households increasingly turn to public energy assistance programs. Preliminary evidence indicates that lender vacancies increase benefit receipt for both heating and non-heating (electric) assistance, with effects emerging gradually as households first attempt to cope without formal support. The findings underscore the buffering role of Wisconsin's inclusive eligibility rules and warn that if policymakers restrict both alternative financial services and safety-net supports, households may struggle to manage short-term shocks.

The third paper shifts to long-term borrowing, analyzing more than 20 million mortgage originations between 2019 and 2024 to assess how multiple dimensions of mortgage pricing shape the cost of homeownership for low-income borrowers. Even after controlling for borrower risk, loan characteristics, and local market conditions, low-income borrowers face systematically higher costs. They pay modestly higher mortgage rate spreads and substantially higher upfront costs relative to loan size, with the burden particularly acute for small-dollar mortgages. The findings suggest that expanding access to mortgage credit is insufficient if the available products impose disproportionate cost burdens; reducing fixed transaction costs and improving the affordability of small-dollar mortgages may be essential for ensuring homeownership as a viable pathway to wealth.

The papers show that regulating high-cost consumer credit can reduce essential consumption, as seen in Ohio, or increase reliance on public assistance, as seen in Wisconsin – outcomes shaped by the strength of the safety net and the availability of alternative credit. They also demonstrate that even in tightly regulated mortgage markets, loan-product structures can impose persistent cost burdens on low-income borrowers. Effective consumer protection, therefore, requires not only restricting harmful credit practices but also expanding access to safer alternatives and sustaining robust social insurance programs.

Policy Area

• Poverty and Income Policy

Chair

• Yunhee Chang, University of Mississippi

Discussants

• Tansel Yilmazer, The Ohio State University

• Swarn Chatteriee, The University of Georgia

Organizer

• Yunhee Chang, University of Mississippi

Individual Presentations

• The Impact of Payday Lending Access on Household Consumption Patterns - Presenting Author: Yiling Zhang, University of Alabama

• Licensed Payday Lender Vacancies and Energy Assistance Participation: Evidence from Wisconsin - Presenting Author: Melody Harvey, University of Wisconsin-Madison

• The high cost of low-income mortgages: Evidence from national-level data - Presenting Author: Patrick Meehan, University of Michigan