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133 133 Many low- and moderate-income (LMI) households use short-term credit products provided by firms that operate outside the mainstream banking sector (Barr 2004, 2005). These products include payday loans, pawnshop services, refund anticipation loans (RALs), and rent-to-own. Low- and moderateincome households also access short-term credit through credit cards, as well as through nontraditional types of credit-card products, such as secured credit cards or cash-advance options, and by using overdraft services provided by banks. The finance charges and fees associated with short-term credit products can be high (Drysdale and Keest 2000).1 Furthermore, some short-term loans, such as payday loans, can be rolled over or extended to provide additional time to pay back the loan, often at a substantial fee, essentially equivalent to the cost of another loan (Drysdale and Keest 2000). Use of payday lending products may result in a broad range of credit problems for borrowers (Melzer, forthcoming). In spite of these high fees and attendant problems, these products have proliferated in the marketplace. For example, the number of payday lending outlets grew from 10,000 to 22,000 between 2000 and 2004, and the estimated payday loan volume in 2003 was $40 billion (Flannery and Samolyk 2005). Refund Borrowing to Make Ends Meet michael s. barr, jane k. dokko, and benjamin j. keys 6 1. For example, the fees associated with a typical payday loan of two-week duration typically amount to $15–20 for each $100 loaned, or an APR of 390–520 percent (Drysdale and Keest 2000). The fees on refund anticipation loans are similarly high: evidence suggests that the average price of an RAL for a family with children that files a return and is eligible for an earned-income credit is $130 (Berube and Kornblatt 2005). 134 michael s. barr, jane k. dokko, and benjamin j. keys anticipation loans consumed $740 million of Americans’ tax-refund dollars in 2003 (Berube and Kornblatt 2005). With their increased prevalence, these alternative products have faced greater regulatory scrutiny. Nondepository and depository institutions providing alternative short-term credit products have historically needed to comply with a patchwork of federal and state regulations (Barr 2004). At the federal level, the Truth in Lending Act (TILA) generally governs disclosure of loan pricing according to a uniform standard defining, for example, the annual percentage rate (APR) of interest on the loan. However, evidence arguably suggests that consumers may not understand the costs of short-term borrowing in such terms (Mann and Hawkins 2007),2 and there is little evidence regarding AFS-provider compliance with TILA.3 Though many states have enacted substantive and procedural laws governing short-term consumer credit, these laws often treat particular forms of credit extension differently from one another,4 and some forms of credit are not subject to such regulation at all. Some state regulation may reduce the costs of credit and improve credit access and outcomes, while others may unintentionally reduce the availability of credit, increase costs, or shift activity among different products. Some studies have found that restrictions on one form of AFS reduce supply of that product and do not increase the demand for other AFS products (see McKernan, Ratcliffe, and Kuehn 2010), while others have found that restriction of one AFS products leads to costly increases in use of other AFS products (see Zinman 2010). To further complicate matters, depending on the issuer of the loan, federal or state regulations may apply, with different governmental agencies regulating different types of lenders. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the creation of the Consumer Financial Protection Bureau, policymakers have the opportunity to develop a coherent approach to regulation of short-term credit products offered by AFS and bank providers. Improved disclosures that permit individuals to assess costs and benefits across differ2 . Ronald Mann and Jim Hawkins (2007) note that the relatively high probability that payday loans will be rolled over, for example, makes it difficult for consumers, even those who understand the finance charge and APR disclosures, to make an accurate estimate of the amount they will ultimately pay. 3. A survey of payday lender practices in the Columbus, Ohio, area finds that many lenders violated TILA’s requirements in refusing to disclose finance charges or the APR before contract formation (Johnson 2002). A study of 100 payday lending sites advertising on the Internet reveals that 43 percent of sites did not make finance charges...

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