Bankruptcy

The Power of Numbers

By Elizabeth Warren

When the credit industry lobbied Congress for adoption of the bankruptcy amendments, they made a powerful claim:  Bankruptcy costs every American family $400.  The number was pure fabrication, but the number was repeatedly quoted in newspapers, magazines and in Congress.  It offered elected representatives a lot of cover to explain to the folks back home how they could vote to sqeeze more money from working families and put it in the hands of a dozen or so credit card issuers. Adam Levitin shows us that another number has been drawn out of thin air:  the Mortgage Bankers Association claims that any amendment to the bankruptcy laws to deal with subprime mortgages will increase mortgage rates for all homeowners by two percentage points--recently dropped to 1.5 points.  Adam is doing a great job fighting back, but, as it was with the $400, academics don't have the same PR machine.

Now there's a third data claim:  Payday lending is good for families. Once again, the claim is wrong, but the industry is pushing it hard in the media.  Maybe only a small part of the academic world realizes the importance of data in legal policymaking, but private industry seems to understand very well the power of numbers. 

A report from the Center for Responsible Lending points out that the study's claim is based on the rate of bounced checks, but the dataset mixes together returned check data from states that permitted payday lending and from states that prohibited it.  The study also looks at the number of FTC complaints filed, but the higher reporting rate in North Carolina was true both before and after payday lending was banned. (I'm not sure what a higher rate of filing FTC complaints means anyway--maybe just more activists in the state who urge prople to write the FTC?) 

The University of North Carolina put together a detailed analysis of payday lending by studying low-income households after the ban on payday lending went into effect. Instead of trying to read the tea leaves of regional rates of bounced checks, the CRL took the same approach as Credit Slips' own Angie Littwin took in her research: they went directly to the people who were the targets of payday lending and surveyed them. The result?  Payday lending had no discernible effect on the availability of credit. In addition, twice as many borrowers reported they were better off without payday lending than they had been with it. 

The payday loan study takes on additional credibility because it is written by a researcher at the Federal Reserve and a grad student.  (That makes it sound like a study from the Federal Reserve, but the paper says it is not.)  There is no reason to believe the mistakes in the study are intentional, but they are severe.  This isn't one of those academic interpretation questions or quibbles at the margins.  These mistakes go right to the heart of the only support for the claim that payday lending is beneficial. 

Last year the Pentagon went to Congress to say that payday lending was interfering with troop readiness, and Congress outlawed payday loans to military families. Some state legislatures are now looking hard at exending the same protection to all their citizens.  They should be abke to do so without being fed bad numbers. And if bounced check charges are out of control, then they should take a look at those as well--not turn loose payday lenders so they can compete with banks to squeeze families harder.

Numbers are powerful.  But wrong numbers can do a lot of damage. 

Full post as published by Credit Slips on February 01, 2008 (boomark / email).