State Interventions in Fringe Lending to the Poor: Assessing the Effects of the Military Lending Act

• In Event: 424 - Section on Economic Sociology Paper Session. Economic Inequality in Wealth, Assets, and Credit

Abstract

Poor access to credit by households is theorized to facilitate or reinforce economic inequality. But theories differ on whether access to costly credit like payday loans by low-income households helps or harms, and therefore whether the state should intervene in such markets. Using data on fringe lending establishments and credit histories of military personnel, we study the effects of federal- and state-level interventions in fringe consumer credit market and empirically assess how the likely users of fringe loans fare after their access to such loans is restricted. We first assess whether a federal intervention—the Military Lending Act (MLA)—was binding, and find evidence of a reduction in the volume of tax refund anticipation loans, but no evidence of a dramatic reduction in payday loans. Analysis of credit data provides no evidence of long-term effects of the MLA on the military personnel’s credit standing or access. To assess whether the MLA did not have an effect because the law was not binding enough, or because restrictions on fringe lending are inconsequential for borrowers’ standing in the mainstream consumer credit markets, as some recent research suggests, we estimate the effects of smaller-scale, but stronger-binding regulation—state-level bans on payday lending. We find no long-term effects on credit standing and small positive effects on credit access among the military personnel. However, the marginal improvement in access to the mainstream, less costly credit after state bans follows a higher number of requests for credit, suggesting a higher level of economic distress experienced by borrowers.

Authors

• Roman V. Galperin, Johns Hopkins University

• Kaili Mauricio, Federal Reserve Bank of Boston