Tough Times Borrowing: Effects of Fringe Lending Regulation on Credit Standing, Search, and Access

59 Pages Posted: 21 Nov 2015 Last revised: 20 Apr 2017

See all articles by Roman V. Galperin

Roman V. Galperin

Johns Hopkins University - Carey Business School

Kaili Mauricio

Federal Reserve Banks - Federal Reserve Bank of Boston

Date Written: April 18, 2016

Abstract

Poor access to credit has long been theorized to contribute to poverty and economic inequality. However, costly fringe credit products like payday loans may be even more harmful. Critics call for strict regulation of such products, while the empirical evidence on the effects of fringe borrowing is mixed. We use data from a credit bureau on a national sample of individuals in the U.S. military households to assess how a federal regulation of fringe lending (the Military Lending Act, or MLA) affected credit standing, search, and access for likely fringe borrowers. Using variation across states in access to fringe loans prior to the MLA, we estimate difference-in-differences models and find no significant long-term effect of the law on military borrowers’ credit standing. However, credit access, measured as cumulative limit on credit cards, increased by 17 to 25% while search for new credit intensified during spells of severe credit constraint after the MLA. Our results indicate substitution of fringe products with mainstream credit and reconcile some of the contradictory prior findings, by suggesting a strategic but myopic borrower, whose set of salient credit sources can be altered by regulation.

Keywords: consumer credit, fringe lending, payday loans, debt

JEL Classification: D12, D18

Suggested Citation

Galperin, Roman V. and Mauricio, Kaili, Tough Times Borrowing: Effects of Fringe Lending Regulation on Credit Standing, Search, and Access (April 18, 2016). Johns Hopkins Carey Business School Research Paper No. 17-02. Available at SSRN: https://ssrn.com/abstract=2693318 or http://dx.doi.org/10.2139/ssrn.2693318

Roman V. Galperin (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Kaili Mauricio

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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