241. Are Payday Loans Really as Evil as People Say?

Critics -- including President Obama -- say short-term, high-interest loans are predatory, trapping borrowers in a cycle of debt. But some economists see them as a useful financial instrument for people who need them. As the Consumer Financial Protection Bureau promotes new regulation, we ask: who's right?

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Stephen J. Dubner?

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• 0:43Stephen J. Dubner?

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• 1:25Stephen J. Dubner?

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• 2:05Stephen J. Dubner?

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• 2:32Stephen J. Dubner?

  Sebastian McCamey lives in Chicago. He's in his early 20s. Not long ago, he got a ticket for smoking outside a transit station.

• 2:41Speaker 01

  It's open. It's outside. So I was just standing outside waiting on the bus stop. And I lit me a cigarette and the officers pulled up on me and was like, hey, you know, you can't smoke here. I was like, no, I didn't know. I don't see no signs. So they wrote me a ticket.

• 2:54Stephen J. Dubner?

  The ticket wasn't cheap.

• 2:55Speaker 01

  $150.

• 2:57Stephen J. Dubner?

  At the time, McCamey was making $8.45 an hour, working at a supermarket. A $150 ticket was a big problem. He also had an outstanding $45 phone bill. So he ignored the smoking ticket, hoping it'd go away. That didn't work out so well. He got some letters from the city demanding he pay the fine. So he went to a payday loan store and he borrowed some money.

• 3:19Speaker 01

  I got like $200 and it was just like, I needed some real quick cash. There wasn't no hesitations, no nothing. They asked me for certain pieces of information. I provided the information and I got my loan.

• 3:30Stephen J. Dubner?

  McCamey paid off the ticket and the phone bill.

• 3:33Speaker 01

  So out of the payday loan, I had like $4.50 left.

• 3:43Stephen J. Dubner?

  They're called payday loans because payday is typically when borrowers can pay them back. They're usually small, short-term loans that can tie you over in an emergency. The interest rates on an annualized basis can be in the neighborhood of 400%. Much, much higher than even the most expensive credit cards. But again, they're meant to be short-term loans, so you're not supposed to get anywhere near that annualized rate, unless of course you do.

• 4:09Stephen J. Dubner?

  Because if you can't pay off your payday loan, you might take out another one, a rollover, it's called. And this can get really expensive, really, really, really expensive. So much so that some people think payday loans are just evil. This guy, for instance.

• 4:27Speaker 02

  At first, it seems like easy money, but the average borrower ends up spending about 200 days out of the year in debt.

• 4:33Stephen J. Dubner?

  President Obama spoke about the problem last year at Lawson State Community College in Birmingham, Alabama. He argued that payday loans trap borrowers in a cycle of debt.

• 4:44Speaker 02

  You take out a $500 loan at the rates that they're charging of these payday loans, some cases 450% interest, you wind up paying more than $1,000 in interest and fees on the $500 that you borrowed. You don't need to be a math genius to know that it's a pretty bad deal if you're borrowing $500 and you have to pay back $1,000 in interest.

• 5:08Stephen J. Dubner?

  The president was promoting some proposed new rules from the Consumer Financial Protection Bureau that would change how payday lenders operate, or perhaps put them out of business, which, if payday lenders are as nasty as the president makes them sound, is a good thing, isn't it? Isn't it?

• 5:38Speaker 03

  From WNYC Studios, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.

• 5:53Stephen J. Dubner?

  Payday loans are short-term, relatively small-dollar loans that are advertised as a quick solution to a sudden emergency, like a medical expense or a trip to the auto mechanic.

• 6:04Speaker 04

  My car wouldn't start again. When the unexpected happens and you need cash, visit your neighborhood Ace Cash Express. In just minutes, you can get a payday loan for up to $1,000 with no credit hassles. It's easy. Easy. Really easy.

• 6:22Stephen J. Dubner?

  Here's how easy it is. The payday lender asks for evidence that you have a job, some pay stubs, for instance. Also, you have to have a bank account.

• 6:32Speaker 05

  And that's pretty much the extent of it.

• 6:34Stephen J. Dubner?

  That's Bob DeYoung. He's a finance professor at the University of Kansas.

• 6:38Speaker 05

  The payday lender doesn't collect any other information. The payday borrower then writes a check, and this is the key part of the technology. The payday borrower then writes a check for the amount of the loan and postdates it by two weeks. This becomes the collateral for the loan. So should the payday borrower not pay the loan off in two weeks, the payday lender then deposits the check.

• 6:58Stephen J. Dubner?

  So the payday business model is not like a pawn shop where you surrender your valuable possessions to raise cash. To get a payday loan, you need to have a job and a bank account. According to Pew survey data, some 12 million Americans, roughly 1 in 20 adults, take out a payday loan in a given year. They tend to be relatively young and earn less than $40,000. They tend to not have a four-year college degree. And while the most common borrower is a white female, the rate of borrowing is highest among minorities.

• 7:33Speaker 06

  From the data that we've seen, payday loans disproportionately are concentrated in African-American and Latino communities. And that African-American and Latino borrowers are disproportionately represented among the borrowing population.

• 7:46Stephen J. Dubner?

  That's Diane Standard. She is the Director of State Policy at the Center for Responsible Lending, which has offices in North Carolina, California, and Washington, DC. The CRL calls itself a "nonprofit, nonpartisan organization with a focus on, quote, 'fighting predatory lending practices.'" Probably already figured out that the CRL is anti-payday loan. Standard argues that payday loans are often not used, how the industry markets them, as a "quick solution to a short-term emergency."

• 8:18Speaker 06

  The vast majority of payday loan borrowers are using payday loans to handle Everyday, basic expenses that don't go away in two weeks. Like their rent, their utilities, their groceries.

• 8:31Stephen J. Dubner?

  Worse yet, she says, borrowers have almost no choice but to roll over their loans again and again, which jacks up the fees. In fact, rollovers, Standard says, are an essential part of the industry's business model.

• 8:44Speaker 06

  Payday loans are structured as a debt trap by design.

• 8:49Stephen J. Dubner?

  According to the Consumer Financial Protection Bureau, or CFPB, the federal agency that President Obama wants to tighten payday loan rules, 75% of the industry's fees come from borrowers who take out more than 10 loans a year.

• 9:04Speaker 06

  These payday loans cost borrowers hundreds of dollars for what is marketed as a small loan. And the Center for Responsible Lending has estimated that payday loan fees drain over $3.4 billion a year from low-income consumers stuck in the payday loan debt trap.

• 9:21Stephen J. Dubner?

  Instead of paying 400% a year to borrow short-term money, Standard's group advocates for something much lower.

• 9:29Speaker 06

  36% is closer to what we think of as fair and reasonable and allows credit to be offered in a way that can be reasonably expected to be paid back.

• 9:42Stephen J. Dubner?

  That does sound reasonable, doesn't it? A typical credit card rate is around 15%, maybe 20 or higher if you have bad credit. But to the payday loan industry, a proposed cap of 36% is not reasonable at all.

• 9:57Speaker 07

  When the consumer advocacy folks go and advocate for a 36% annualized percentage rate, they very clearly understand that that's industry elimination.

• 10:06Stephen J. Dubner?

  Jamie Fulmer is a spokesperson for Advance America. That's one of the biggest payday lenders in the United States.

• 10:13Speaker 07

  If you associate the cost of paying our rent to our local landlords, paying our light bill and electrical fees, paying our other fees to local merchants who provide services to us, you know, we operate on a relatively thin margin.

• 10:27Stephen J. Dubner?

  Fulmer says that payday loan interest rates aren't nearly as predatory as they seem. Two reasons. First, when you hear 400% on an annualized basis, you might think that people are borrowing the money for a year, but these loans are designed to be held for just a few weeks, unless, of course, they get rolled over a bunch of times. And reason number two, because payday loans are so small, the average loan is about $375, the fees need to be relatively high to make it worthwhile for the lender. For every $100 borrowed, Fulmer says, the lender gets about $15 in fees. So capping the rate at an annualized 36% just wouldn't work.

• 11:10Speaker 07

  It would take the $15 and it would make that fee $1.38 per $100 borrowed. That's less than 7.5 cents per day. The New York Times can't sell a newspaper for 7.5 cents a day. And somehow, we're expected to be offering unsecured relatively $100 loans for a two-week period for 7.5 cents a day. It just doesn't make economical sense.

• 11:35Stephen J. Dubner?

  Fulmer's firm, Advance America, runs about 2,400 payday loan shops across 29 states. All in, there are roughly 20,000 payday shops in the US with total loan volume estimated at around $40 billion a year. If you were to go back to the early 1990s, there were fewer than 500 payday loan stores. But the industry grew as many states relaxed their usury laws. Many states, but not all. Payday lending is forbidden in 14 states, including much of the Northeast and in Washington DC. Another nine states allow payday loans, but only with more borrower-friendly terms. And that leaves 27 states where payday lenders can charge in the neighborhood of 400% interest.

• 12:20Stephen J. Dubner?

  States ranging from California to Texas to Wisconsin to Alabama, which is what drew President Obama there.

• 12:28Speaker 02

  Here in Alabama, there are four times as many payday lending stores as there are McDonald's.

• 12:36Speaker 02

  Think about that.

• 12:39Speaker 02

  Because there are a lot of McDonald's.

• 12:41Stephen J. Dubner?

  The new CFPB rules that the president was promoting would substantially change how payday lenders run their business.

• 12:48Speaker 02

  If you're making that profit by trapping hardworking Americans into a vicious cycle of debt, you've got to find a new business model. You've got to find a new way of doing business.

• 12:57Stephen J. Dubner?

  The CFPB doesn't have the authority to limit interest rates. Congress does. So what the CFPB is asking for is that payday lenders either more thoroughly evaluate a borrower's financial profile, or limit the number of rollovers on a loan and offer easier repayment terms. Payday lenders say that even these regulations might just about put them out of business. And they might be right. The CFPB itself estimates that the new regs could reduce the total volume of short-term loans, including payday loans, but other types as well, by roughly 60%.

• 13:32Speaker 07

  We have to wait for the final proposed rules to come out.

• 13:34Stephen J. Dubner?

  Jamie Fulmer again, from Advance America.

• 13:37Speaker 07

  But where they appear to be going is down a path that would simply eliminate the product instead of reforming the industry or better regulating the industry.

• 13:46Stephen J. Dubner?

  The payday industry and some political allies argue that the CFPB is trying to deny credit to people who really need it. Here's an ad from the American Action Network. That's a political advocacy group that opposes the CFPB.

• 14:01Speaker 08

  Washington DC, controlling your decisions, limiting your opportunity. Tell Congress to stop the CFPB now before they deny you.

• 14:12Stephen J. Dubner?

  Okay, so it probably does not surprise you that the payday industry does not want this kind of government regulation, nor should it surprise you that a government agency called the Consumer Financial Protection Bureau is trying to regulate an industry like the payday industry. It may not even surprise you to learn that the Center for Responsible Lending, the nonprofit that's fighting predatory lending, that it was founded by, wait for it, a credit union, the self-help credit union, which would likely stand to benefit from the elimination of payday loans, and that among the center's many funders are banks and other mainstream financial institutions.

• 14:57Stephen J. Dubner?

  As you find when you dig into just about any modern economic scenario, most people have at least one horse in every race, which makes it hard to separate advocacy and reality. So let's go where Freakonomics Radio often goes when we want to find someone who does not have a horse in the race: to academia. Let's ask some academic researchers if the payday loan industry is really as nasty as it seems.

• 15:23Speaker 05

  Most folks hear the word payday lending and they immediately think of evil lenders who are making poor people even poorer. I wouldn't agree with that accusation.

• 15:34Stephen J. Dubner?

  That's Bob DeYoung from the University of Kansas.

• 15:37Speaker 05

  My field of expertise is commercial banking and lending. So my interest and expertise in payday lending is a natural extension of a consumer credit provided by financial institutions.

• 15:47Stephen J. Dubner?

  And are you an academic through and through, or do you have other interests and endeavors?

• 15:51Speaker 05

  Well, I'm an academic through and through at this point. I spent, the 15 years before I came to Kansas, I spent as a bank regulator at the Federal Reserve, the FDIC, and the Treasury Department.

• 16:02Stephen J. Dubner?

  DeYoung, along with three co-authors, recently published an article about payday loans on Liberty Street Economics. That's a blog run by the Federal Reserve Bank of New York. Another co-author, Donald Morgan, is an assistant vice president at the New York Fed. The article is titled "Reframing the Debate About Payday Lending." Begins like this. Except for the 10 to 12 million people who use them every year, just about everybody hates payday loans. Their detractors include many law professors, consumer advocates, members of the clergy, journalists, policymakers, and even the president. But is all the enmity justified?

• 16:40Speaker 05

  I do have to say that the material in that piece is not necessarily the opinion of the New York Fed or the Federal Reserve system.

• 16:49Stephen J. Dubner?

  Is that a standard disclaimer? And if not, what's the issue there?

• 16:52Speaker 05

  That's a very standard disclaimer. The Federal Reserve system is rather unique among regulators across the world. They see the value in having their researchers exercise scientific and academic freedom because they know that inquiry is a good thing.

• 17:07Stephen J. Dubner?

  But in DeYoung's view, in the government's rush to regulate, maybe shut down, the payday loan industry, there isn't nearly enough inquiry going on.

• 17:16Speaker 05

  We need to do more research and try to figure out the best ways to regulate, rather than regulations that are being pursued now that would essentially shut down the industry. I don't want to come off as being an advocate of payday lenders. That's not my position. My position is I want to make sure the users of payday loans are using them responsibly and for who are made better off by them, don't lose access to this product.

• 17:38Stephen J. Dubner?

  Now, Bob, the blog post is sort of a pop version of a meta-study, which rolls up other research on different pieces of the issue. Persuade me that the studies that you cite in the post aren't merely the biased rantings of some ultra-right-wing, pro-market-at-all-costs lunatics. And I realize at least one of the primary studies was authored by yourself, so I guess I'm asking you to prove that you are not an ultra-right-wing, pro-market-at-all-costs lunatic.

• 18:06Speaker 05

  Yes, I like to think of myself as an objective observer of social activity as an economist. But there's one section in the blog where we highlight mixed evidence that in some cases, having access to payday loans looks like, on balance, it helps reduce financial distress at the household level. And we also point to, I believe, an equal number of studies in that section that find the exact opposite. And then, of course, there's another section in the blog where we point directly to rollovers. And rollovers is where the rubber hits the road on this. If we can somehow predict which folks would not be able to handle this product and would roll it over incessantly, then we could impress upon payday lenders not to make the loans to those people.

• 18:52Speaker 05

  This product, in fact, is particularly bad-suited to predict this because the payday lender only gets a small number of pieces of information when she makes the loan, as opposed to the information that a regulated financial institution would collect. The expense of collecting that information, of underwriting the loan in the traditional way that a bank would, would be too high for the payday lender to offer the product. If we load up additional costs on the production function of these loans, the loans won't be profitable any longer. On the critics' side right now are the Center for Responsible Lending, who advocates a 36% cap on payday lending, which we know puts the industry out of business.

• 19:33Speaker 05

  The CFPB's proposed policy is to require payday lenders to collect more information at the point of contact. And that's one of the expenses that, if avoided, allows payday lenders to actually be profitable and deliver the product. Now, that's not the only plank in the CFPB's platform. They advocate limiting rollovers and cooling off periods. And the research does point out that in states where rollovers are limited, payday lenders have gotten around them by paying the loan off by refinancing, just starting a separate loan with a separate loan number, evading the regulation. Of course, that's a regulation that was poorly written if the payday lenders can evade it that easily.

• 20:14Stephen J. Dubner?

  DeYoung argues that if you focus on the seemingly exorbitant annual interest rates of payday loans, you're missing the point.

• 20:21Speaker 05

  Borrowing money is like renting money. You get to use it for two weeks and then you pay it back. You could rent a car for two weeks, right? You get to use that car. Well, if you calculate the annual percentage rate on that car rental, meaning that if you divide the amount you pay on that car by the value of that automobile, you get similarly high rates. So this isn't about interest. This is about short-term use of a product that's been lent to you. This is just arithmetic.

• 20:47Stephen J. Dubner?

  And what about the targeting of minority customers as charged by the Center for Responsible Lending?

• 20:53Speaker 05

  Studies that have looked at this have found that once you control for the demographics and income levels in these areas, in these communities, the racial characteristics no longer drive the location decisions. As you might expect, business people don't care what color their customers are as long as their money's green.

• 21:12Stephen J. Dubner?

  Furthermore, according to DeYoung's own research, because the payday loan industry is extremely competitive, the market tends to drive fees down. And while payday lenders get trashed by government regulators and activists, payday customers, he says, seem to tell a different story.

• 21:29Speaker 05

  If we take an objective look at the folks who use payday lending, what we find is that most users of the product are very satisfied with the product. Survey results show that almost 90% of users of the product say that they're either somewhat satisfied or very satisfied with the product afterwards.

• 21:49Stephen J. Dubner?

  Remember Sebastian McCamey from Chicago, the guy who got $150 ticket for public smoking and had to take out a payday loan? He sounded OK with the experience.

• 21:59Speaker 01

  Wouldn't want to burn a bridge with the payday loan place because you might need them again.

• 22:03Stephen J. Dubner?

  McCamey no longer works at the supermarket.

• 22:06Speaker 01

  I sell phones. I work at Busomover around the corner from the payday loan place.

• 22:12Stephen J. Dubner?

  He says he ultimately paid about $50 in fees for the $200 that he borrowed. It wasn't cheap, but, well, he needed the money and he was able to pay the loan back quickly. To him, the system works.

• 22:26Speaker 01

  Everybody that comes in here always come out with a smile on their face. I don't never see nobody come out hollering. They take care of everybody that comes in to the T, to the, you'll be satisfied. I'll be satisfied and I see other people be satisfied. I never seen a person walk out with a bad attitude or anything.

• 22:43Stephen J. Dubner?

  We asked some other payday loan customers in Chicago about their experience. It was a mixed bag.

• 22:48Speaker 09

  I don't think nothing wrong with them. I had some back bills I had to pay off. So it didn't take me too long to pay it back. About three months, something like that. They're beautiful people.

• 22:59Speaker 10

  I advise everyone do not even mess with those people because they are ripoffs. I wouldn't dare go back again. I don't even like walking across the street passing. That's just how pissed I was and so hurt.

• 23:11Speaker 11

  My only thing is if you're going to take out a loan, you should just make sure you can pay it back and you have means to pay it back.

• 23:27Stephen J. Dubner?

  Bob DeYoung makes one particularly counterintuitive argument about the use of payday loans. Rather than trapping borrowers in a cycle of debt, as President Obama and other critics put it, DeYoung argues that payday loans may help people avoid a cycle of debt, like the late fees your phone company charges for an unpaid bill. Like the overdraft fees or bounced check fees your bank might charge you.

• 23:52Speaker 05

  They choose not to overdraft the checking account and take out the payday loan because they've done the calculus that overdrafting on four or five checks at their bank is going to cost them more money than taking out the payday loan.

• 24:05Stephen J. Dubner?

  DeYoung also argues that most payday borrowers know exactly what they're getting into when they sign up, that they're not unwitting and desperate people who are being preyed upon. He points to a key piece of research by Ronald Mann. That's another co-author on the New York Fed blog post.

• 24:21Speaker 12

  I'm a professor at the Columbia Law School.

• 24:23Stephen J. Dubner?

  Professor Mann wondered, what kind of a grasp do payday loan customers have on whether they'll be able to pay back the loan on time?

• 24:30Speaker 12

  I have a general idea that people that are really tight for money know a lot more where their next dollar is coming from and going than the people that are not particularly tight for money. So I generally think that the kinds of people that borrow from payday lenders have a much better idea of how their finances are going to go the next two or three months because it's a really crucial item for them that they worry about every day. So that's what I set out to test.

• 24:53Stephen J. Dubner?

  First, Mann wanted to gauge borrowers' expectations, how long they thought it would take them to pay back a payday loan. So he designed a survey that was given out to borrowers in a few dozen payday loan shops across five states.

• 25:05Speaker 12

  And so if you walked up to the counter and asked for a loan, they would hand you this sheet of paper and say, if you'll fill out this survey for us, we'll give you $15 or $25. I forget which one it was. And then I get the survey sent to me and I can look at them.

• 25:23Stephen J. Dubner?

  Later on, the payday lenders gave Mann the data that showed how long it actually took those exact customers to pay off their loans. About 60% of them paid off the loan within 14 days of the date they'd predicted.

• 25:37Speaker 12

  And that surprised me. I didn't really expect that the data would be so favorable to the perspective of the borrowers.

• 25:48Stephen J. Dubner?

  To Mann, this suggests that most borrowers have a pretty good sense of the product they're buying.

• 25:53Speaker 12

  If your prior is that none of the people using this product would do it if they actually understood what was going on, well, that just doesn't seem to be right because the data at least suggests that most people do have a fairly good understanding of what's going to happen to them.

• 26:08Stephen J. Dubner?

  On the other hand, this leaves about 40% of borrowers who weren't good at predicting when they'd pay the loan off, and Mann found a correlation between bad predictions and past payday loan use.

• 26:21Speaker 12

  The data actually suggests that there's a relatively small group of borrowers in the range of 10 to 15% who have been extremely heavy users, whose predictions are really bad. And I think that group of people seems to fundamentally not understand their financial situation.

• 26:38Stephen J. Dubner?

  Which suggests there is a small but substantial group of people who are so financially desperate and/or financially illiterate that they can probably get into big trouble with a financial instrument like a payday loan. So, given this fact, how should one think about the industry? Is it treacherous enough that it should be eliminated? Or is it a useful, if relatively expensive, financial product that the majority of customers benefit from?

• 27:12Speaker 13

  The data is sending us very mixed signals at this point.

• 27:16Stephen J. Dubner?

  Coming up on Freakonomics Radio, how mixed are the signals? And are we sure that the academic researchers writing these papers aren't getting editorial guidance from the payday industry itself?

• 27:29Speaker 13

  Miller was not only reading drafts of the paper, but he was making all kinds of suggestions about the paper's structure, its tone, its content. And eventually, what you see is Miller writing whole paragraphs that go pretty much verbatim straight into the finished paper.

• 27:59Stephen J. Dubner?

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• 28:42Stephen J. Dubner?

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• 29:04Stephen J. Dubner?

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• 29:36Stephen J. Dubner?

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• 30:32Stephen J. Dubner?

  I'm Stephen Dubner. This is Freakonomics Radio. We've been talking about the payday loan industry and what the academic research has to say about it.

• 30:40Speaker 14

  The data is sending us very mixed signals at this point.

• 30:45Stephen J. Dubner?

  That's Jonathan Zinnman.

• 30:46Speaker 14

  I'm a professor of economics at Dartmouth College.

• 30:49Stephen J. Dubner?

  Zinnman says a number of studies have tried to answer the benchmark question of whether payday lending is essentially a benefit to society. Some studies say yes.

• 30:59Speaker 14

  But we have other studies that find that having more access to payday loans leads to a greater incidence of detrimental outcomes.

• 31:10Stephen J. Dubner?

  Consider a study that Zinnman published a few years back. It looked at what happened in Oregon after that state capped interest rates on short-term loans from the usual 400% to 150%, which meant a payday lender could no longer charge the industry average of roughly $15 per $100 borrowed. Now, they could only charge about $6. As an economist might predict, if the financial incentive to sell a product is severely curtailed, people will stop selling the product.

• 31:43Speaker 14

  We saw a pretty massive exit from payday lending in Oregon, as measured by the number of outlets that were licensed to make payday loans under the prior regime and then under the new law.

• 31:59Stephen J. Dubner?

  But Zinnman's research went beyond that basic fact. The state of Washington, Oregon's neighbor to the north, had considered passing a similar law that would cap interest rates, but it didn't.

• 32:09Speaker 14

  And so we have a setup for a nice, natural experiment there. You have two neighboring states, similar in a lot of ways. One passed a law, another considered passing a law, but didn't quite pass it.

• 32:19Stephen J. Dubner?

  So in the state that didn't pass it, payday lending went on as before. And this let Zinnman compare data from the two states to see what happens, if anything, when payday loan shops go away. He looked at data on bank overdrafts and late bill payments and employment. He looked at survey data on whether people considered themselves better or worse off without access to payday loans.

• 32:42Speaker 14

  And in that study, in that data, I find evidence that payday borrowers in Oregon actually seem to be harmed. They seem to be worse off by having that access to payday loans taken away. And so that's a study that supports the pro-payday-loan camp.

• 32:59Stephen J. Dubner?

  That's pretty compelling evidence in favor of payday loans. But in a different study, Zinnman found evidence in the opposite direction.

• 33:11Stephen J. Dubner?

  In that paper, which he co-authored with Scott Carroll, Zinnman looked at the use of payday loans by US military personnel. This had been the topic of an ongoing debate in Washington DC.

• 33:22Speaker 14

  The Pentagon in recent years has made it a big policy issue. They have posited that having very-ready access to payday loans outside of bases has caused financial distress and distractions that have contributed to declines in military readiness and job performance.

• 33:41Speaker 15

  Predatory lenders are blatantly targeting our military personnel.

• 33:45Stephen J. Dubner?

  That's then Senator Elizabeth Dole in a 2006 Senate Banking Committee hearing on payday loans. Dole showed a map with hundreds of payday loan shops clustered around military bases.

• 33:57Speaker 15

  This practice not only creates financial problems for individual soldiers and their families, but it also weakens our military's operational readiness.

• 34:06Speaker 14

  And so Scott and I got the idea of actually testing that hypothesis using data from military personnel files.

• 34:15Stephen J. Dubner?

  Zinnman and Carroll got hold of personnel data from US Air Force bases across many states that looked at job performance and military readiness. Like the Oregon/Washington study, this one also took advantage of changes in different states' payday laws, which allowed the researchers to isolate that variable and then compare outcomes.

• 34:37Speaker 14

  And what we found, matching that data on job performance and job readiness, supports the Pentagon's hypothesis. We found that as payday loan access increases, servicemen's job performance evaluations decline. And we see that sanctions for severely poor readiness increase as payday loan access increases, as the spigot gets turned on. So that's a study that very much supports the anti-payday lending camp.

• 35:08Stephen J. Dubner?

  Congress had been so concerned about the effects of payday loans that in 2006, it passed the Military Lending Act, which, among other things, capped the interest rate that payday lenders can charge active personnel and their dependents at 36% nationwide. So what happened next? You guessed it, a lot of the payday loan shops near military bases closed down.

• 35:40Stephen J. Dubner?

  We've been asking a pretty simple question today. Are payday loans as evil as their critics say? Or, overall, are they pretty useful? But even such a simple question can be hard to answer, especially when so many of the parties involved have incentive to twist the argument and even the data in their favor. At least the academic research we've been hearing about is totally unbiased, right? I specifically asked Bob DeYoung about that when I was talking to him about his New York Fed blog post that, for the most part, defended payday lending. Okay, Bob, for the record, did you or any of your three co-authors on this, did any of the related research on the industry, was any of it funded by anyone close to the industry?

• 36:24Speaker 05

  No.

• 36:25Stephen J. Dubner?

  But as we kept researching this episode, our producer, Christopher Worth, learned something interesting about one study cited in that blog post. The study by Columbia Law professor Ronald Mann, another co-author on the post. The study where a survey of payday borrowers found that most of them were pretty good at predicting how long it would take to pay off the loan. Here's Ronald Mann again.

• 36:48Speaker 12

  I didn't really expect that the data would be so favorable to the perspective of the borrowers.

• 36:55Stephen J. Dubner?

  What our producer learned was that while Ronald Mann did create the survey, it was actually administered by a survey firm. And that firm had been hired by the chairman of a group called the Consumer Credit Research Foundation, or CCRF, which is funded by payday lenders. Now, to be clear, Ronald Mann says that CCRF did not pay him to do the study and did not attempt to influence his findings, but nor does his paper disclose that the data collection was handled by an industry-funded group. So we went back to Bob DeYoung and asked whether maybe it should have.

• 37:32Speaker 05

  Had I written that paper and had I known 100% of the facts about where the data came from and who paid for it, yes, I would have disclosed that. I don't think it matters one way or the other in terms of what the research found and what the paper says.

• 37:50Stephen J. Dubner?

  Some other academic research we've mentioned today does acknowledge the role of CCRF in providing industry data, like Jonathan Zinnman's paper, which showed that people suffered from the disappearance of payday loan shops in Oregon. Here's what Zinnman writes in an author's note. "Thanks to Consumer Credit Research Foundation, CCRF, for providing household survey data. CCRF is a nonprofit organization funded by payday lenders with the mission of funding objective research. CCRF did not exercise any editorial control over this paper." Now, we should say that when you're an academic studying a particular industry, often the only way to get the data is from the industry itself. It's a common practice.

• 38:34Stephen J. Dubner?

  But as Zinman noted in his paper, as the researcher, you draw the line at letting the industry or industry advocates influence the findings. But as our producer, Christopher Worth, learned, that doesn't always seem to have been the case with payday lending research and the Consumer Credit Research Foundation, or CCRF. Here, let's bring in Christopher to go over this.

• 38:57Speaker 13

  Hey, Stephen.

• 38:58Stephen J. Dubner?

  Hey, Christopher. So as I understand it, much of what you've learned about CCRF's involvement in the payday research comes from a watchdog group called the Campaign for Accountability, or CFA. So first off, tell us a little bit more about them and what their incentives might be.

• 39:15Speaker 13

  Right. Well, it's a nonprofit watchdog, relatively new organization. Its mission is to expose corporate and political misconduct, primarily by using open records requests, like the Freedom of Information Act, or FOIA, requests to produce evidence.

• 39:31Stephen J. Dubner?

  From what I've seen on the CFA website, most of their political targets, at least, are Republicans. What do we know about their funding?

• 39:38Speaker 13

  Yeah. I mean, they told me they don't disclose their donors and that CFA is a project of something called the Hopewell Fund, about which we have very, very little information.

• 39:48Stephen J. Dubner?

  Okay. So this is interesting, that a watchdog group that will not reveal its funding is going after an industry for trying to influence academics that its funding. So should we assume that CFA, the watchdog, has some kind of horse in the payday race? Or do we just not know?

• 40:07Speaker 13

  It's hard to say. I mean, actually, we just don't know. But whatever their incentive might be, their FOIA requests have produced what looked like some pretty damning emails between CCRF, which, again, receives funding from payday lenders, and academic researchers who have written about payday lending.

• 40:24Stephen J. Dubner?

  Okay, so Christopher, let's hear the most damning evidence.

• 40:28Speaker 13

  The best example concerns an economist named Mark Fusaro at Arkansas Tech University. So in 2011, he released a paper called "Do Payday Loans Trap Consumers in a Cycle of Debt?" And his answer was basically, no, they don't.

• 40:43Stephen J. Dubner?

  Okay, so that would seem to be good news for the payday industry, yes. Tell us a bit about Fusaro's methodology and his findings.

• 40:50Speaker 13

  Okay, so what Fusaro did is he set up a randomized control trial where he gave one group of borrowers a traditional, high-interest-rate payday loan, and then he gave another group of borrowers no interest rate on their loans. And then he compared the two, and he found out that both groups were just as likely to roll over their loans again. And we should say, again, the research was funded by CCRF.

• 41:12Stephen J. Dubner?

  Okay, but as we discussed earlier, the funding of research doesn't necessarily translate into editorial interference, correct?

• 41:19Speaker 13

  That's right. In fact, in the author's note, Fusaro writes that "CCRF, quote, 'exercise no control over the research or the editorial content of this paper.'"

• 41:31Stephen J. Dubner?

  Okay, so far, so good.

• 41:32Speaker 13

  So far, so good. But I think we should mention two things here. One, Fusaro had a co-author on the paper. Her name is Patricia Sorillo. She's the president of a company called Cypress Research, which, by the way, is the same survey firm that produced the data for that paper you mentioned earlier about how payday borrowers are pretty good at predicting when they'll be able to pay back their loans.

• 41:52Stephen J. Dubner?

  Right.

• 41:53Speaker 13

  And the other point, too, there was a long chain of emails between Mark Fusaro, the academic researcher here, and CCRF. And what they show is they certainly look like editorial interference.

• 42:06Stephen J. Dubner?

  Wow, okay. And who from CCRF was Mark Fusaro, the academic, communicating with?

• 42:12Speaker 13

  He was communicating with CCRF's chairman, a lawyer named Hillary Miller. He's the president of the Payday Loan Bar Association, and he's testified before Congress on behalf of payday lenders. And as you can see in the emails between him and Fusaro, again, the professor here, Miller was not only reading drafts of the paper, but he was making all kinds of suggestions about the paper's structure, its tone, its content. And eventually, what you see is Miller writing whole paragraphs that go, pretty much verbatim, straight into the finished paper.

• 42:47Stephen J. Dubner?

  Wowzer, that does sound pretty damning that the head of a research group funded by payday lenders is essentially ghostwriting parts of an academic paper that happens to reach pro-payday lending conclusions. Were you able to speak with Mark Fusaro, the author of the paper?

• 43:07Speaker 13

  I was. And what he told me was that even though Hillary Miller was making substantial changes to the paper, CCRF did not exercise editorial control. That is, he says he still had complete academic freedom to accept or reject Miller's changes. Here's Fusaro.

• 43:24Speaker 16

  The Consumer Credit Research Foundation and I had an interest in the paper being as clear as possible. And if someone, including Hillary Miller, would take a paragraph that I had written and rewrite it in a way that made what I was trying to say more clear, I'm happy for that kind of advice. I have taken papers to the University Writing Center before, and they've helped me make my writing more clear. And there's nothing scandalous about that at all. I mean, the results of the paper have not, have never been called into question. Nobody suggests that I changed any of the results or anything like that based on any comments from anybody. Frankly, I think this is much ado about nothing.

• 44:08Stephen J. Dubner?

  Well, Christopher, that, that defense sounds, at least to me, like, pretty weak sauce. I mean, the University Writing Center doesn't have as much vested interest in the outcome of my writing as an industry group does for an academic paper about that industry, right?

• 44:24Speaker 13

  I think that's a fair point to make. Fusaro does maintain, though, that CFA, this watchdog group, has really taken his emails out of context and just made false accusations about him.

• 44:35Speaker 16

  This is a group with an agenda that doesn't like the results of academic research, and they are opposed to payday loans.

• 44:41Stephen J. Dubner?

  All right, Christopher, thank you very much for looking into this. We should also tell listeners that if they want to go way deeper into this rabbit hole, that Christopher Wirth has written up an article that we've posted on Freakonomics.com, right?

• 44:53Speaker 13

  That's right. Please go take a look.

• 44:55Stephen J. Dubner?

  Okay. Thanks so much.

• 44:56Speaker 13

  Thanks, Tim.

• 45:06Stephen J. Dubner?

  So we are left with at least two questions, I guess. Number one, how legitimate is any of the payday loan research we've been telling you about today, pro or con? And number two, how skeptical should we be of any academic research? There is a long and often twisted history of industries co-opting scientists and other academic researchers to produce findings that make their industries look safer, or more reliable, or otherwise better than they really are. Whenever we talk about academic research on this show, which is pretty much every week, we do try to show the provenance of that research and establish how legitimate it is.

• 45:46Stephen J. Dubner?

  The best first step in figuring that out is to ask what kind of incentives are at play. But even that is only one step. Does a researcher who's out to make a splash with some sexy finding necessarily operate with more bias than a researcher who's operating out of pure intellectual curiosity? I don't think that's necessarily so. Like life itself, academic research is a case-by-case scenario. You do your best to ask as many questions as you can of the research and of the researchers themselves. You ask where the data comes from, whether it really means what they say it means, and

• 46:28Stephen J. Dubner?

  you ask them to explain why they might be wrong or compromised. You make the best judgment you can, and then you move forward and try to figure out how the research really matters. Because the whole idea of the research, presumably, is to help solve some larger problem. The problem we've been looking at today is pretty straightforward. There are a lot of low-income people in the US who've come to rely on a financial instrument, the payday loan, that is, according to its detractors, exploitative, and, according to its supporters, useful. President Obama is pushing for regulatory reform.

• 47:11Stephen J. Dubner?

  Payday advocates say the reform may kill off the industry, leaving borrowers in the lurch.

• 47:23Stephen J. Dubner?

  I went back to Bob DeYoung, the finance professor and former bank regulator, who has argued that payday loans are not as evil as we think. Let's say that you have a one-on-one audience with President Obama. We know that the president understands economics pretty well, or I would argue that at least. What's your pitch to the president for how this industry should be treated and not eliminated?

• 47:45Speaker 05

  Okay, in a short sentence that's highly scientific, I would begin by saying, let's not throw the baby out with the bathwater. The question comes down to, how do we identify the bathwater and how do we identify the baby here? One way is to collect a lot of information, as the CFPB suggests, about the creditworthiness of the borrower. But that raises the production costs of payday loans and will probably put the industry out of business. But I think we can all agree that once someone pays fees in an aggregate amount that are equal to the amount that was originally borrowed, that's pretty clear that there's a problem there.

• 48:18Stephen J. Dubner?

  So in DeYoung's view, the real danger of the payday structure is the possibility of rolling over the loan again and again and again. That's the bathwater. So what's the solution?

• 48:28Speaker 05

  Right now, there's very, very little information on rollovers, the reasons for rollovers, and the effects of rollovers. And without academic research, the regulation is going to be based on who shouts the loudest. And that's a really bad way to write law or write regulation. That's what I really worry about. If I could advocate a solution to this, it would be identify the number of rollovers at which it's been revealed that the borrower is in trouble and is being irresponsible and this is the wrong product for them. At that point, the payday lender doesn't flip the borrower into another loan, doesn't encourage the borrower to find another payday lender. At that point, the lender's principal is then switched over into a different product,

• 49:13Speaker 05

  a longer-term loan, where he or she pays it off a little bit each month.

• 49:17Stephen J. Dubner?

  You think the president would buy?

• 49:18Speaker 05

  Well, I don't know what the president would buy. You know, we have a problem in society right now. It's getting worse and worse that is that we go to loggerheads and we don't, we're very bad at finding solutions that satisfy both sides. And I think this is a solution to Does satisfy both sides or could at least satisfy both sides. It keeps the industry operating for folks who who value the product. On the other hand, it identifies folks using it incorrectly and allows them to get out without, you know, being further trapped.

• 49:44Stephen J. Dubner?

  Well, here's what seems to me at least the puzzle, which is that repeat rollovers, which represents a relatively small number of the borrowers and are a problem for those borrowers. But it sounds as though those repeat rollovers are the source of a lot of the lenders' profits. So if you were to eliminate what seems to be the biggest problem from the consumer side, wouldn't that remove the profit motive from the lender's side, maybe kill the industry?

• 50:12Speaker 05

  This is why price caps are a bad idea. Because if if the solution was implemented as I suggest, and in fact, payday lenders lost some of their most profitable customers because now we're not getting that fee the sixth and seventh time from them, then price would have to go up. And we'd let the market determine whether or not at that high price, we still have folks wanting to use the product.

• 50:37Stephen J. Dubner?

  Obviously, the the history of lending is long and usually, at least in my reading, tied to religion. There is prohibition against it in Deuteronomy and elsewhere in the Old Testament. It's in the New Testament shakes, you know, the merchant of Venice was not the hero. So do you think that the general view of this kind of lending is colored by an emotional or moral argument too much at the expense of an economic and practical argument?

• 51:07Speaker 05

  Oh, I do think that that our history of usury laws is a direct result of our Judeo-Christian background. But even even Islamic banking, which follows in the same tradition. But clearly, interest on money lent or borrowed is has been looked at non-objectively. Let's put it that way. So the shocking APR numbers, if we apply them to renting a hotel room or renting a automobile or lending your father's gold watch or your mother's silverware to the pawnbroker for a month. APRs come out similar. So the shock from these numbers is, we recognize the shock here because we're used to calculating interest rates on loans, but not interest rates on anything else.

• 51:51Speaker 05

  And it's human nature to want to hear bad news. And it's, you know, the media understands this, and so they report bad news more often than good news. We don't, we don't hear this. It's like the houses that don't burn down and the stores that don't get robbed.

• 52:13Stephen J. Dubner?

  There's one more thing I want to add to today's discussion. The payday loan industry is, in a lot of ways, an easy target. But the more I think about it, the more it seems like a symptom of a much larger problem, which is this. Remember, in order to get a payday loan, you need to have a job and a bank account. So what does it say about an economy in which millions of working people make so little money that they can't pay their phone bills, that they can't absorb one hit like a ticket for smoking in public? Whatever you want to call it, wage deflation, structural unemployment, the absence of good-paying jobs, isn't that a much bigger problem?

• 52:57Stephen J. Dubner?

  And if so, what's to be done about that? Next time on Freakonomics Radio, we will continue this conversation by looking at one strange and controversial proposal for making sure that everyone's got enough money to get by.

• 53:14Speaker 17

  I think a guaranteed annual income could do a very nice job of addressing some of these issues.

• 53:22Stephen J. Dubner?

  Pros and cons, the history and the future of a guaranteed annual income. That's next time on Freakonomics Radio.

• 53:43Stephen J. Dubner?

  Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Christopher Wirth. Our staff also includes Irvan Gunja, Jake Howitt, Merritt Jacob, Greg Rosalsky, Kashima Hilevich, Alison Hockenberry, and Caroline English. Thanks also to Bill Healy for his help with this episode from Chicago. You can also find all our previous episodes at Freakonomics.com, or you can also read Christopher Wirth's article about payday industry connections to academic research. And as always, I'd like to encourage you to subscribe to Freakonomics Radio on iTunes or wherever you get your podcasts.

• 54:36Stephen J. Dubner?

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• 55:08Stephen J. Dubner?

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• 55:39Stephen J. Dubner?

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• 56:17Speaker 08

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