North Carolina After Payday Lending: Attitudes, Experiences, Credit Options January 2008

1.  North Carolina After Payday Lending: Attitudes, Experiences, Credit OptionsJanuary 2008

2. Back in 1999, concerns were raised that NC regulation enacted in response to mortgage lending abuses would curtail credit to low income and minority borrowers Since then share of subprime mortgages to total originations increased from 9% in 1996, to 20% in 2006. Subprime loans are not made based on a borrowers long term ability to repay. They include prepayment penalties and offer incentives�ARM interest only and teaser rates--that encourage borrowers to assume mortgages believing they will be able to refinance at more favorable terms later. Refinancing was possible while U.S. housing prices continued to increase. This is not the case anymore. Predatory Lending Parallel North Carolina was the first start to legalize and then de-authorize payday lending Estimates vary but somewhere between 3 and 7% of state residents took a payday loan in the year 2000. State Consumer Finance Law limits interest rates on loans under $600 to a max. APR of 36% Average APR of payday loans in NC was 419% Give a brief description of how payday lending worksNorth Carolina was the first start to legalize and then de-authorize payday lending Estimates vary but somewhere between 3 and 7% of state residents took a payday loan in the year 2000. State Consumer Finance Law limits interest rates on loans under $600 to a max. APR of 36% Average APR of payday loans in NC was 419% Give a brief description of how payday lending works

3. The value of U.S. subprime mortgages was estimated at $1.3 trillion as of March 2007, with over 7.5 million first-lien subprime mortgages outstanding. About 2 million ARMs will experience a reset in the rate Approximately 16% of subprime loans with adjustable rate mortgages (ARM) were 90-days delinquent or in foreclosure proceedings as of October 2007, roughly triple the rate of 2005. By January of 2008, the delinquency rate had risen to 21%. Subprime ARMs only represent 6.8% of the loans outstanding in the US, yet they represent 43.0% of the foreclosures started during the third quarter of 2007. Predatory Lending Parallel North Carolina was the first start to legalize and then de-authorize payday lending Estimates vary but somewhere between 3 and 7% of state residents took a payday loan in the year 2000. State Consumer Finance Law limits interest rates on loans under $600 to a max. APR of 36% Average APR of payday loans in NC was 419% Give a brief description of how payday lending worksNorth Carolina was the first start to legalize and then de-authorize payday lending Estimates vary but somewhere between 3 and 7% of state residents took a payday loan in the year 2000. State Consumer Finance Law limits interest rates on loans under $600 to a max. APR of 36% Average APR of payday loans in NC was 419% Give a brief description of how payday lending works

4. Center for Community Capital did one study about the impacts of the 1999-2000 NC Anti-Predatory Lending NC was the first state to enact anti-predatory lending law Our study demonstrated that a carefully crafted state law can selectively filter out predatory loans without having to resort to punitive enforcement provisions that affect securitization or constrain the flow of credit. The study played a key role in facilitating the passage of similar anti-predatory lending laws in other states. To a large extent, we reached similar conclusions and are playing a similar role with our payday lending study. Predatory Lending Parallel North Carolina was the first start to legalize and then de-authorize payday lending Estimates vary but somewhere between 3 and 7% of state residents took a payday loan in the year 2000. State Consumer Finance Law limits interest rates on loans under $600 to a max. APR of 36% Average APR of payday loans in NC was 419% Give a brief description of how payday lending worksNorth Carolina was the first start to legalize and then de-authorize payday lending Estimates vary but somewhere between 3 and 7% of state residents took a payday loan in the year 2000. State Consumer Finance Law limits interest rates on loans under $600 to a max. APR of 36% Average APR of payday loans in NC was 419% Give a brief description of how payday lending works

5. 1997: Legislature exempts payday lenders from state usury laws; payday lending begins in NC 2000: Payday lending in NC peaks with 3.5 million payday loans per year 2001: Payday exemption sunsets, some lenders continue to operate in partnership with out-of-state banks 2006: In March, the last payday lenders in NC close 2007 (spring): Research undertaken to determine the effects of payday lending de-authorization on North Carolina consumers Timeline of Payday Lending in North Carolina North Carolina was the first start to legalize and then de-authorize payday lending Estimates vary but somewhere between 3 and 7% of state residents took a payday loan in the year 2000. State Consumer Finance Law limits interest rates on loans under $600 to a max. APR of 36% Average APR of payday loans in NC was 419% Give a brief description of how payday lending worksNorth Carolina was the first start to legalize and then de-authorize payday lending Estimates vary but somewhere between 3 and 7% of state residents took a payday loan in the year 2000. State Consumer Finance Law limits interest rates on loans under $600 to a max. APR of 36% Average APR of payday loans in NC was 419% Give a brief description of how payday lending works

6. What factors contribute to financial shortfalls and short-term credit needs? How are moderate-income state residents meeting their credit needs in the absence of payday lending? Do consumers have adequate options to deal with financial hardships? Are consumers better off or worse off since the de-authorization of payday lending? Key Research Questions These questions were motivated by an on-going policy debate about payday lending Some groups argue that in the absence of payday lending customers will not be able to meet their short-term credit needs or will turn to more unfavorable sources for short-term credit. They also claim that consumers are always better off with more choices. Other groups argue that consumers will be better off without payday lending because it is a poor option for handling financial shortfalls, and that consumers already have sufficient alternatives. Our research takes NO POSITION in this debate � our objective is to gather data that can inform this discussion.These questions were motivated by an on-going policy debate about payday lending Some groups argue that in the absence of payday lending customers will not be able to meet their short-term credit needs or will turn to more unfavorable sources for short-term credit. They also claim that consumers are always better off with more choices. Other groups argue that consumers will be better off without payday lending because it is a poor option for handling financial shortfalls, and that consumers already have sufficient alternatives. Our research takes NO POSITION in this debate � our objective is to gather data that can inform this discussion.

7. Survey of 400 urban North Carolina residents earning less than $45,000 per year � people who may have considered taking a payday loan prior to de-authorization Survey asked people how they have handled unexpected expenses over the previous three years Focus groups with previous payday loan customers; separate groups with occasional and frequent customers Allowed actual customers to bring their voices to the conversation about payday lending Research Methodology Clustered random sample from 3 largest urban areas that had the highest concentration of payday lending shops Designed to be similar to the demographic profile of the average NC payday loan customer Generalizable to moderate-income urban North Carolinians Focus group participants recruited from survey respondents and targeting cold callingClustered random sample from 3 largest urban areas that had the highest concentration of payday lending shops Designed to be similar to the demographic profile of the average NC payday loan customer Generalizable to moderate-income urban North Carolinians Focus group participants recruited from survey respondents and targeting cold calling

8. Out of 400 respondents, 159 had experienced a financial shortfall in the previous 3 years People who experienced shortfalls were more likely to: Rent their home Not have a credit card, or to have gone over their limit if they did have a credit card Not have a bank account Have less than two months income in savings Have been denied credit in the past Characteristics of Short-Term Borrowers People who experienced financial shortfalls were more likely to already have less-than-ideal financial situations and were more likely to have credit problems. They tend to be under-banked as well. They have fewer options for handling financial problems that may arise because they are starting from a shakier financial position. People who experienced financial shortfalls were more likely to already have less-than-ideal financial situations and were more likely to have credit problems. They tend to be under-banked as well. They have fewer options for handling financial problems that may arise because they are starting from a shakier financial position.

9. Households Hit Hardest When Multiple Unexpected Expenses Accumulate Of the 159 people who had experienced a financial shortfall in the previous 3 years, 142 could identify the factor or factors that contributed. For 60% of people, the shortfall resulted from a combination of things rather than a single disruptive event. Medical is the most common, followed by unanticipated repair bills for a home or car. Both of the top 2 causes, medical and car repair, also potentially reduce income as people can�t work. 3% reported that elective spending on luxury items caused their financial problems.Of the 159 people who had experienced a financial shortfall in the previous 3 years, 142 could identify the factor or factors that contributed. For 60% of people, the shortfall resulted from a combination of things rather than a single disruptive event. Medical is the most common, followed by unanticipated repair bills for a home or car. Both of the top 2 causes, medical and car repair, also potentially reduce income as people can�t work. 3% reported that elective spending on luxury items caused their financial problems.

10. People Use Many Options to Handle Shortfalls On the left is a partial list of some of the things people did to manage their financial shortfalls. � of people used two or more options the most recent time they had a shortfall, suggesting that most people are aware of and have access to multiple options. People preferred the low- and no-cost options: pay late, use one�s savings, or borrow from family. More than half of the people who used multiple options used their own savings as one of the options. The least-used options were the costliest ones� auto title loans, bankruptcy, payday loans, and tax advance loans. Few people borrowed an advance on their salary from their employer, but several focus group participants brought this up as an alternative they would like to have available to them.On the left is a partial list of some of the things people did to manage their financial shortfalls. � of people used two or more options the most recent time they had a shortfall, suggesting that most people are aware of and have access to multiple options. People preferred the low- and no-cost options: pay late, use one�s savings, or borrow from family. More than half of the people who used multiple options used their own savings as one of the options. The least-used options were the costliest ones� auto title loans, bankruptcy, payday loans, and tax advance loans. Few people borrowed an advance on their salary from their employer, but several focus group participants brought this up as an alternative they would like to have available to them.

11. Payday Lending Is Not Missed We asked people 3 questions about payday lending. First, were they aware that payday lending is not allowed in NC? Almost 60% were not aware that it was gone Is payday lending a good thing or a bad thing? Over 70% said it was a bad thing. This was true both among the full sample and among the sub-sample of people who had experienced a financial shortfall. Has prohibiting payday lending had a positive or negative effect on your household, or has it not had an effect? Over 70% said it had no effect at all. Of those who said it had an effect, twice as many said it had a positive effect as those who said it had a negative effect.We asked people 3 questions about payday lending. First, were they aware that payday lending is not allowed in NC? Almost 60% were not aware that it was gone Is payday lending a good thing or a bad thing? Over 70% said it was a bad thing. This was true both among the full sample and among the sub-sample of people who had experienced a financial shortfall. Has prohibiting payday lending had a positive or negative effect on your household, or has it not had an effect? Over 70% said it had no effect at all. Of those who said it had an effect, twice as many said it had a positive effect as those who said it had a negative effect.

12. Receive Money Fast �I didn't have to go through much to get it. I mean, I was in and out of there in about thirty, thirty-five minutes.� Simple Application Process �The paperwork was simple. They didn't ask a lot of questions.� Friendly Staff �The guy I did my business with at that one place, he did not look like your typical lounge lizard.� Focus Groups: Payday Loans Are Easy to Get In� We did focus groups: occasional customers (1-3 loans past 3 years) and frequent (6+ loans)? Point was to learn about the payday loan experience from actual customers in their own words. Used a semi-structured approach with an experienced focus group moderator What is it about payday lending that appeals to consumers � what do they look for when selecting a short-term credit product?We did focus groups: occasional customers (1-3 loans past 3 years) and frequent (6+ loans)? Point was to learn about the payday loan experience from actual customers in their own words. Used a semi-structured approach with an experienced focus group moderator What is it about payday lending that appeals to consumers � what do they look for when selecting a short-term credit product?

13. Easy to Renew, Hard to Pay Off �It is really easy. You just go down and give them another $30 and you have another two weeks to pay it back.� �If you�re already struggling, you�ll never come out of it.� High Costs �The interest rate is already outrageous.� Did Not Resolve the Shortfall �...more of a burden than a convenience.� �It became a habit.� �But Hard to Get Out In spite of these advantages to payday loans as a way to meet credit needs, most people said their overall experience with payday lending was negative. They felt that the costs and consequences of taking a payday loan far outweighed the benefits. They said that while the short term was appealing, it turned out to be bad because two weeks was not enough time to repay the loan. Therefore many customers ended up renewing their loans many times because they could not afford to pay it off. The high interest rate was cited by every single focus group participant as being excessive Most notably, all but two participants said that taking a payday loan did not resolve their financial problem but rather made it worse because they then had another debt to pay. Of the two who said it did solve their problems, one said the loan terms were so unfair that the experience motivated him to manage his money better so he would not have to take another payday loan.In spite of these advantages to payday loans as a way to meet credit needs, most people said their overall experience with payday lending was negative. They felt that the costs and consequences of taking a payday loan far outweighed the benefits. They said that while the short term was appealing, it turned out to be bad because two weeks was not enough time to repay the loan. Therefore many customers ended up renewing their loans many times because they could not afford to pay it off. The high interest rate was cited by every single focus group participant as being excessive Most notably, all but two participants said that taking a payday loan did not resolve their financial problem but rather made it worse because they then had another debt to pay. Of the two who said it did solve their problems, one said the loan terms were so unfair that the experience motivated him to manage his money better so he would not have to take another payday loan.

14. The absence of payday lending has not had a significant impact on the availability of short-term credit options in North Carolina Most state residents said payday lending de-authorization had no impact or had positive impact on their lives Nearly 9 out of 10 people surveyed believe payday lending is a bad thing Payday lending customers gave first-hand accounts of how payday loans are easy to get into but a struggle to repay Summary of Findings 1. The majority of people have access to multiple options for handling their short-term credit needs even without payday lending 2. The vast majority of state residents said payday lending de-authorization had no effect on them, but those who did say it had an effect said it was a positive effect by a 2 to 1 margin. 3. Among the former customers in our focus groups, almost all were glad payday lending was no longer operating in the state. When we asked �what are your thoughts about payday lending no longer being available in North Carolina� one participant burst out, �Thank you Jesus, now I can�t do that anymore!� 4. Finally, we concluded that while North Carolina residents do feel a need for a short-term credit product to meet their needs during financial shortfalls, they felt that the bad things about payday lending outweighed the good. They expressed a desire for short-term small loan options that offer the simplicity and fast turn-around of a payday loan but with lower interest rates and more flexible repayment options.1. The majority of people have access to multiple options for handling their short-term credit needs even without payday lending 2. The vast majority of state residents said payday lending de-authorization had no effect on them, but those who did say it had an effect said it was a positive effect by a 2 to 1 margin. 3. Among the former customers in our focus groups, almost all were glad payday lending was no longer operating in the state. When we asked �what are your thoughts about payday lending no longer being available in North Carolina� one participant burst out, �Thank you Jesus, now I can�t do that anymore!� 4. Finally, we concluded that while North Carolina residents do feel a need for a short-term credit product to meet their needs during financial shortfalls, they felt that the bad things about payday lending outweighed the good. They expressed a desire for short-term small loan options that offer the simplicity and fast turn-around of a payday loan but with lower interest rates and more flexible repayment options.