designing a targeted regulatory intervention for payday ... · designing a targeted regulatory...
TRANSCRIPT
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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
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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
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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
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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
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Fundamental Flaws in Published Analyses
• Truncation Effect on Studies Limited to 11 or 12 Months
• Sampling Bias in Selection of Cohorts for Study
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Duration of “Life Cycle” of Payday Loan Use Number of Loans per Sequence; Summary Statistics
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Behaviors Missed Due to Truncation
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Behaviors Missed Due to Truncation
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Behaviors Missed Due to Truncation
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Behaviors Missed Due to Truncation
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Sampling Bias: Oversampling Heavy Users
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Maximum Number of Loans in One Sequence per Borrower ("WorstCase")
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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.
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Visualizing the Tail on the Curve: Distribution of Percentage of Sequences Both Samples
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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
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Visualizing the Tail on the Curve: Distribution of Sequence Counts-A Longitudinal Study
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Frequency of Sequences by Number of Loans Longitudinal Sample
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Visualizing the Tail on the Curve: Distribution of Percentage of Sequences Both Samples
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Visualizing the Tail on the Curve: Distribution of Percentage of Sequences Both Samples
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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
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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)
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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
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Building a Representative Longitudinal Sample How Our Random Sample Evolves
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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
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Visualizing Truncation and Sampling Bias Mostly Persistent Borrowers and No Replacements
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Results from Longitudinal Sample (CFPB sees mean sequence = 7.25 loans)
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Predominance of Sequences 6 Loans or Less
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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.
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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
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Better Worst Case Scenarios Distribution of Borrowers’ Maximum Loan Sequence 49.8% of Borrowers Never Experience “CFPB Harm”
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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.
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If There Is a Single “Debt Trap,” Are There Many? NO
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No Harm by CFPB Definition
84.29
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Replacement Replaced Persistent Total
Are Borrowers With a Maximum Loan Sequence of 10 Loans Having Other Sequences Showing Harm? NO
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Robustness: Are New Borrowers Really Different?
SEQUENCE DURATION STATISTICS FROM MULTIPLE SAMPLES
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Is ANY Change Justified? Hackett Thinks So
90th Percentile (Top 0%)
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Objectives for a Targeted Intervention
• Eliminate long sequences
• Limit additional cost of origination
• Speed and convenience
• Preserve access
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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
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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
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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
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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
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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)
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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.
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Loan Volume Retained Under Alternative Restrictions
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Loan Volume Retained Under Alternative Restrictions