IDEAS home Printed from https://ideas.repec.org/a/bla/jconsa/v58y2024i2p558-586.html
   My bibliography  Save this article

The impact of payday alternative loans on credit union performance and loan quality

Author

Listed:
  • Cullen F. Goenner

Abstract

Federal regulators in 2010 amended lending rules to allow federal credit unions (FCU) to originate short‐term, small‐dollar amount loans, with an annual percentage rate of up to 1000 basis points above the otherwise imposed interest rate ceiling of 18 percent. The purpose of the change in policy was to allow FCUs the ability to provide their members with an alternative to payday loans. We find the decision to originate these higher‐interest loans is primarily influenced by the characteristics of a credit union's environment. Credit unions located in minority neighborhoods and in markets with fewer traditional financial services are more likely to participate in the payday alternative loan program. Participation in the program is shown to improve earnings performance without adversely affecting participants' loan quality. These results suggest credit unions can provide lower‐priced alternatives to payday loans that are beneficial to members and their credit unions.

Suggested Citation

  • Cullen F. Goenner, 2024. "The impact of payday alternative loans on credit union performance and loan quality," Journal of Consumer Affairs, Wiley Blackwell, vol. 58(2), pages 558-586, June.
  • Handle: RePEc:bla:jconsa:v:58:y:2024:i:2:p:558-586
    DOI: 10.1111/joca.12585
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/joca.12585
    Download Restriction: no

    File URL: https://libkey.io/10.1111/joca.12585?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. David C. Wheelock & Paul W. Wilson, 2011. "Are Credit Unions Too Small?," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1343-1359, November.
    2. Brian T. Melzer, 2011. "The Real Costs of Credit Access: Evidence from the Payday Lending Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 517-555.
    3. Sumit Agarwal & Paige Marta Skiba & Jeremy Tobacman, 2009. "Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?," American Economic Review, American Economic Association, vol. 99(2), pages 412-417, May.
    4. Cullen F. Goenner, 2018. "The market for private student loans: an analysis of credit union exposure, risk, and returns," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 1227-1251, May.
    5. David Ely, 2014. "Credit unions and risk," Journal of Regulatory Economics, Springer, vol. 46(1), pages 80-111, August.
    6. Campbell, Dennis & Asís Martínez-Jerez, F. & Tufano, Peter, 2012. "Bouncing out of the banking system: An empirical analysis of involuntary bank account closures," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1224-1235.
    7. repec:rre:publsh:v:34:y:2004:i:2:p:191-205 is not listed on IDEAS
    8. John Y. Campbell & Howell E. Jackson & Brigitte C. Madrian & Peter Tufano, 2011. "Consumer Financial Protection," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 91-114, Winter.
    9. Larry Kirsch & Robert N. Mayer & Norman I. Silber, 2014. "The CFPB and Payday Lending: New Agency/Old Problem," Journal of Consumer Affairs, Wiley Blackwell, vol. 48(1), pages 1-16, March.
    10. Neil Bhutta & Jacob Goldin & Tatiana Homonoff, 2016. "Consumer Borrowing after Payday Loan Bans," Journal of Law and Economics, University of Chicago Press, vol. 59(1), pages 225-259.
    11. Donald P. Morgan & Michael R. Strain & Ihab Seblani, 2012. "How Payday Credit Access Affects Overdrafts and Other Outcomes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 519-531, March.
    12. W Scott Frame & Gordon V Karels & Christine A McClatchey, 2003. "Do credit unions use their tax advantage to benefit members? Evidence from a cost function," Review of Financial Economics, John Wiley & Sons, vol. 12(1), pages 35-47.
    13. Goddard, John & McKillop, Donal & Wilson, John O.S., 2008. "The diversification and financial performance of US credit unions," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1836-1849, September.
    14. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    15. Tripp, James D & Smith, Stanley D, 1993. "U.S. Credit Union Motivation for Involvement in the First-Mortgage Market," The Journal of Real Estate Finance and Economics, Springer, vol. 7(3), pages 229-236, November.
    16. Fried, Harold O. & Knox Lovell, C. A. & Eeckaut, Philippe Vanden, 1993. "Evaluating the performance of US credit unions," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 251-265, April.
    17. Burkey, Mark L. & Simkins, Scott P., 2004. "Factors affecting the location of payday lending and traditional banking services in North Carolina," MPRA Paper 36043, University Library of Munich, Germany.
    18. Edward C. Lawrence & Gregory Elliehausen, 2008. "A Comparative Analysis Of Payday Loan Customers," Contemporary Economic Policy, Western Economic Association International, vol. 26(2), pages 299-316, April.
    19. Mark J. Flannery & Katherine A. Samolyk, 2005. "Payday lending: do the costs justify the price?," Proceedings 949, Federal Reserve Bank of Chicago.
    20. Morse, Adair, 2011. "Payday lenders: Heroes or villains?," Journal of Financial Economics, Elsevier, vol. 102(1), pages 28-44, October.
    21. Ahmed S. Abou-Zaid & Tesa Leonce, 2014. "Religious Pluralism, yet a Homogenous Stance on Interest Rate: The Case of Judaism, Christianity, and Islam," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 8(2), June.
    22. Neil Esho & Paul Kofman & Ian Sharpe, 2005. "Diversification, Fee Income, and Credit Union Risk," Journal of Financial Services Research, Springer;Western Finance Association, vol. 27(3), pages 259-281, September.
    23. Kathleen Buse & Ruth Bernstein & Diana Bilimoria, 2016. "The Influence of Board Diversity, Board Diversity Policies and Practices, and Board Inclusion Behaviors on Nonprofit Governance Practices," Journal of Business Ethics, Springer, vol. 133(1), pages 179-191, January.
    24. DeYoung, Robert & Roland, Karin P., 2001. "Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 54-84, January.
    25. James R. Barth & Jitka Hilliard & John S. Jahera & Kang B. Lee & Yanfei Sun, 2020. "Payday lending, crime, and bankruptcy: Is there a connection?," Journal of Consumer Affairs, Wiley Blackwell, vol. 54(4), pages 1159-1177, December.
    26. Paige Marta Skiba & Jeremy Tobacman, 2019. "Do Payday Loans Cause Bankruptcy?," Journal of Law and Economics, University of Chicago Press, vol. 62(3), pages 485-519.
    27. Goenner, Cullen F, 2016. "The policy impact of new rules for loan participation on credit union returns," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 198-210.
    28. Barth, James R. & Hilliard, Jitka & Jahera, John S. & Sun, Yanfei, 2016. "Do state regulations affect payday lender concentration?," Journal of Economics and Business, Elsevier, vol. 84(C), pages 14-29.
    29. Marianne Bertrand & Adair Morse, 2011. "Information Disclosure, Cognitive Biases, and Payday Borrowing," Journal of Finance, American Finance Association, vol. 66(6), pages 1865-1893, December.
    30. Scott Carrell & Jonathan Zinman, 2014. "In Harm's Way? Payday Loan Access and Military Personnel Performance," The Review of Financial Studies, Society for Financial Studies, vol. 27(9), pages 2805-2840.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dasgupta, Kabir & Mason, Brenden J., 2020. "The effect of interest rate caps on bankruptcy: Synthetic control evidence from recent payday lending bans," Journal of Banking & Finance, Elsevier, vol. 119(C).
    2. Desai, Chintal A. & Elliehausen, Gregory, 2017. "The effect of state bans of payday lending on consumer credit delinquencies," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 94-107.
    3. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    4. Taylor Canann & Richard Evans, 2015. "Determinants of Short-term Lender Location and Interest Rates," Journal of Financial Services Research, Springer;Western Finance Association, vol. 48(3), pages 235-262, December.
    5. J. Brandon Bolen & Gregory Elliehausen & Thomas W. Miller, 2020. "Do Consumers Need More Protection From Small‐Dollar Lenders? Historical Evidence And A Roadmap For Future Research," Economic Inquiry, Western Economic Association International, vol. 58(4), pages 1577-1613, October.
    6. Mohammed El Hazzouri & Rowan El‐Bialy & Ela Veresiu & Kelley J. Main, 2023. "Vulnerable consumer experiences of (dis)empowerment with consumer protection regulations," Journal of Consumer Affairs, Wiley Blackwell, vol. 57(3), pages 1066-1088, July.
    7. James R. Barth & Jitka Hilliard & John S. Jahera & Kang B. Lee & Yanfei Sun, 2020. "Payday lending, crime, and bankruptcy: Is there a connection?," Journal of Consumer Affairs, Wiley Blackwell, vol. 54(4), pages 1159-1177, December.
    8. Neil Bhutta & Jacob Goldin & Tatiana Homonoff, 2016. "Consumer Borrowing after Payday Loan Bans," Journal of Law and Economics, University of Chicago Press, vol. 59(1), pages 225-259.
    9. Cullen F. Goenner, 2018. "The market for private student loans: an analysis of credit union exposure, risk, and returns," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 1227-1251, May.
    10. Fitzpatrick, Katie, 2024. "Non-bank credit and food hardship: The association between payday loans, pawn loans, rent-to-own contracts and food hardship in households with children," Children and Youth Services Review, Elsevier, vol. 157(C).
    11. Patricia D. Posey, 2023. "Information Inequality: How Race and Financial Access Reflect the Information Needs of Lower-Income Individuals," The ANNALS of the American Academy of Political and Social Science, , vol. 707(1), pages 125-141, May.
    12. Wang, Jialan & Burke, Kathleen, 2022. "The effects of disclosure and enforcement on payday lending in Texas," Journal of Financial Economics, Elsevier, vol. 145(2), pages 489-507.
    13. Sarah Miller & Cindy K. Soo, 2020. "Does Increasing Access to Formal Credit Reduce Payday Borrowing?," NBER Working Papers 27783, National Bureau of Economic Research, Inc.
    14. Megan Doherty Bea & K. Bley, 2022. "(Un)conditional consumer protections in high‐cost lending regulation: Impacts on local lending geographies," Journal of Consumer Affairs, Wiley Blackwell, vol. 56(4), pages 1561-1596, December.
    15. Lodermeier, Alison, 2024. "Credit access and housing insecurity: Evidence from winter utility shutoff protections," Journal of Public Economics, Elsevier, vol. 230(C).
    16. Fekrazad, Amir, 2020. "Impacts of interest rate caps on the payday loan market: Evidence from Rhode Island," Journal of Banking & Finance, Elsevier, vol. 113(C).
    17. Ryszard Kowalski & Grzegorz Wałęga, 2022. "Regulation of Usury: Justification, Consequences, and Some Lessons from Polish Experience," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 2, pages 57-73.
    18. van Rijn, Jordan, 2018. "The Effect of Membership Expansion on Credit Union Risk and Returns," Staff Paper Series 588, University of Wisconsin, Agricultural and Applied Economics.
    19. Daniel Bjorkegren & Joshua Blumenstock & Omowunmi Folajimi-Senjobi & Jacqueline Mauro & Suraj R. Nair, 2022. "Instant Loans Can Lift Subjective Well-Being: A Randomized Evaluation of Digital Credit in Nigeria," Papers 2202.13540, arXiv.org.
    20. Bernardus Van Doornik & Armando Gomes & David Schoenherr & Janis Skrastins, 2024. "Financial Access and Labor Market Outcomes: Evidence from Credit Lotteries," American Economic Review, American Economic Association, vol. 114(6), pages 1854-1881, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jconsa:v:58:y:2024:i:2:p:558-586. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0022-0078 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.