| Sixteen states and the District of Columbia currently ban payday lending, short-term small-dollar loans typically associated with annualized interest rates above 200%. Five states and the District of Columbia have initiated payday lending bans within the past four years. A multivariate regression analysis using court district-level bankruptcy data (n=90) from 2006 to 2009, along with indicator variables for payday lending bans and demographic and economic control variables, tests for the effect of payday lending authorization on Chapter 7 (liquidation) and Chapter 13 (debt repayment) bankruptcy rates. While cross-sectional and year-effects models demonstrate a statistically significant increase in Chapter 7 bankruptcies where payday lending is permitted, there is no link with regard to Chapter 13. Once individual district effects are accounted for in a fixed-effects model, there is no measurable impact of recent payday lending bans, and a Hausman test rejects statistically significant random effects models. Despite limitations inherent in fixed-effects estimation, it is possible that there is a long-term relationship between permitting payday lending and higher bankruptcy rates, as suggested by other model specifications. Recommendations for further analysis include greater use of individual-level and industry data, exploration of the factors leading to states' legislative action on payday lending, and a more thorough examination of the confounding relationship that both African-Americans and Native Americans have with the bankruptcy process. |
