Auburn University researchers provide overview of national payday lending practices

According to published reports, President Obama is expected to reference payday lending Thursday, March 26, when he delivers a speech on economic development at Lawson State Community College in Birmingham. But payday lending has been under the microscope of three Auburn University Harbert College of Business finance professors for some time.

In a new study, "Do State Regulations Affect Payday Lender Concentration," faculty members Jim Barth, John Jahera and Jitka Hilliard, and doctoral student Yanfei Sun, present a state-by-state overview of payday lending stores and restrictions on their operations. Jahera will present the paper before the Joint Conference of the Federal Reserve Bank of Philadelphia and Journal of Economics and Business on April 30.

"It is clear that this is not the best way to borrow money, especially if the customer renews the loans repeatedly," Hilliard said. "On the other hand, payday lenders would not exist if there were not a demand for their services. They provide immediate access to cash that customers could not otherwise obtain. We have a highly regulated banking industry and a loosely regulated payday lending industry."

The researchers found that a "significantly positive relationship exists between the number of payday lending stores and the percentage of the population that is African-American." Alabama has the third-most payday lending stores per 10,000 people in the nation with an interest rate of more than 456 percent (ninth-highest nationally) for a 14-day, $100 loan. Thirteen states and the District of Columbia prohibit payday lenders.

"Some people say payday lenders provide a service. Yet, this raises the issue as to why some states outlaw them," said Barth, who is also Milken Institute Senior Fellow. "It's an issue – an important public policy issue – whether the rates they charge are appropriate or not and whether the other restrictions placed on them are too lenient or not."