The effect of interest rate caps on bankruptcy: Synthetic control evidence from recent payday lending bans

Abstract

Citing consumer protection concerns, New Hampshire-along with three other states-recently banned payday lending by implementing an APR cap on small loans. New Hampshire presents a compelling quasi-experiment: its neighbors already had a payday loan ban in place. Hence, New Hampshire consumers were completely shut out of the storefront payday loan market. We perform a synthetic control analysis for all four of the recently-banning states. Our results show that, on the aggregate, bankruptcies are largely unaffected by the bans. Our New Hampshire results are characterized by an initial rise in bankruptcies after the ban, followed by a fall. This is consistent with the notion that payday bans hurt credit-constrained consumers in the short-run, but could help them in the long-run. We also analyze survey data of payday borrowers and find that while bankruptcies are unaffected, consumers substitute toward paying their credit card bills late and using pawnshops.

Banks' Credit Losses and Lending Dynamics

“…Our approach may appear similar to the "synthetic control" introduced by Abadie, Diamond, and Hainmueller (2010) in the context of cigarette consumption and applied in a banking context by Dasgupta and Mason (2020), in that hypothetical observations are constructed as weighted averages from other observations. The synthetic control approach is different in purpose and construction, however.…”

Do payday lending bans protect or constrain regional economies? Evidence from the Military Lending Act's final rule

“…Evidence on the effects of banning payday loans is mixed (Ramirez, 2020). Some research indicates beneficial effects of banning payday lenders, like reducing personal bankruptcy rates (Skiba & Tobacman, 2019) and improved well‐being (Dobridge, 2016), negative effects like increased credit delinquencies (Barth et al., 2020; Desai & Elliehausen, 2017; Morgan et al., 2012; Zinman, 2010), or null effects on financial well‐being (Bhutta et al., 2015; Dasgupta & Mason, 2020).…”

Interest Rate Repression: A New Database

“…There have been various attempts in recent years to classify IRCs internationally. However, existing studies either take a narrow geographical perspective, focusing on EMDEs (Helms and Reille, 2004) or advanced economies (see Reifner et al, 2010, for the EU;and Dasgupta and Mason, 2019, for the US), or, when taking a global perspective, they focus on lending interest rate caps only (Maimbo and Gallegos, 2014;Ferrari et al, 2018). In a paper similar to ours, Jafarov et al (2019) attempt to compile a database on all types of IRCs and construct a basic index (i.e.…”