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"A Closer Look at Prohibitions, Price Caps, and Disclosures"
The Urban Institute

March, 2011

A new report from the Urban Institute, "Prohibitions, Price Caps, and Disclosures: A Look at State Policies and Alternative Financial Product Use", investigates how state regulations affect consumer use of payday loans, auto title loans, pawnshop loans, RALs, and rent-to-own transactions. The study was funded by the Treasury Department and conducted by the Institute's Signe-Mary McKernan, Caroline Ratcliffe, and Daniel Kuehn. They used data from the FINRA Investor Educational Foundation's 2009 National Financial Capability State-by-State Survey.

The research team found that between 6 and 13 percent of respondents used each of the five AFS products from 2004 to 2009. AFS customers, in contrast to nonusers, tended to be lower income, without a bank account, younger, less educated, minority, financially responsible for more children, and southern.

Price caps and prohibitions on AFS products can reduce supply, the researchers observe. "Restricting supply can increase well-being when it restricts or exposes high-priced suppliers who might be offering products at well-above-market prices," they note. "At the same time, restricting supply without introducing alternative products can reduce consumer well-being, as consumers turn to inferior products or options to deal with credit needs."

Prohibiting payday loans is associated with a 35 percent decline in such borrowing. People who live near another state can cross state lines to obtain a loan. Also, Internet payday loans are generally available to people in states that prohibit payday lending businesses.

Moving from having no annual percentage rate (APR) cap on auto title borrowing to setting a 36 percent APR cap (the federal cap on payday loans to the military) is linked to a 30 percent reduction in use. And moving from no interest rate cap to roughly a 40 percent APR is associated with a 25 percent reduction in pawnshop borrowing.

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