Don’t Trust Pew’s Biased Payday Loan Study

From The Washington Business Journal, 5/24/13:

Bryant Switzy’s refreshing article on private sector alternatives to payday lending is a welcome respite from the media’s notorious demonization of an important, if not ideal, credit product.  However, he cites data from “killer research by the Pew Charitable Trusts”.  Regrettably, the media has devoured Pew’s study without recognizing its bias and fatal methodological flaws, rendering its conclusions inaccurate.

The bias is evident from the outset.  Pew asserts payday loans (PDLs) are “predatory lending [that] has stifled access to more transparent and safer forms of borrowing.”  This assertion is made despite logical and factual counterarguments presented by multiple sources, and also presupposes the existence of an “unsafe loan” while never defining one.  Indeed, the NY Fed’s unbiased study, “Defining and Detecting Predatory Lending” provides robust evidence that PDLs are not predatory.  In addition, Pew oddly asserts there are more transparent forms of borrowing when its own survey reports that six in seven borrowers say terms and conditions are clear.

There is non-response bias.  PDLs carry societal stigma, thus respondents are more likely to deny PDL usage.  This may result in many positive experiences with PDL going unreported.  The study also refers to online borrowers as being “relatively scarce”, when 20% of all loans are done online, suggesting a huge swath of online borrowers was ignored.

There is response bias.  Pew held focus groups in New York City – an odd choice considering PDLs are banned both in NY and every surrounding state.  Did Pew pay for people to come to the Big Apple? If so, it would create focus group response bias ias guests would be more likely to want to please their hosts.

There is query bias.  The survey asks if PDLs should be more or less regulated. People equate the word “regulation” with “safety”, and as people always want to feel safer, the result is unsurprisingly large in favor of more regulation – without even specifying what that regulation would entail, including restriction of credit access.

There is data source bias.  Pew relies entirely on data from Washington State when it alleges that, while borrowers have the option to convert to an installment plan if they cannot repay in full on the due date, they choose not to.  However, the Community Financial Services Association of America, the industry’s trade association group, requires its members to offer installment plans.  Pew did not survey CFSA to enquire how many times this option is chosen, which would be a nationally representative sample.


For that matter, why did Pew completely ignore the numerous third-party vendors when collecting data?  These vendors have the most complete data sets in the nation, and have no political agenda.  The most unbiased raw data was right under Pew’s noses, yet they ignored it.  Why?

There are other anomalies.  Pew only publishes quotes that criticize PDLs or offer weak praise.  Where are focus group transcripts?  Even a casual reader of the study cannot miss that the authors seem to delight in repeatedly mentioning that the average borrower “stays indebted for five months on a two week loan”. Yet Pew’s data runs contrary to data collected by several states. In Texas, for example, the OCCC reported that the mode (most frequent data point) for renewals was 1, not the 7-10 renewals Pew wants readers to infer.

Pew’s math doesn’t add up.  Advance America’s loan loss rates are 3%, yet Pew suggests the reason for this is that borrowers pay off an Advance America loan by borrowing from another lender.  Yet eventually that loan either is paid off or defaults.  With default, some lender somewhere would have to write off the loan, resulting in a loss rate greater than 3% nationally.  With repayment, it is unlikely that a person would willingly put themselves back into debt for five months every time they faced another financial shortfall.  Pew’s own results say most people use a method they previously rejected in order to pay off the loan in full, yet Pew expects us to believe that the next time a financial difficulty arose, people would go back to PDLs instead of using the method that eventually solved their problem the first time?   This strains credulity.

Most egregiously, Pew only selected 451 storefront borrowers for its full-length survey, an exceedingly small sample from a group of 12 million nationwide borrowers.  Readers are not provided with the reasons why these individuals were chosen for the longer survey. Pew itself does not provide the entire list of questions either, telling readers they are “being held for future release”.  Why not release everything now?  It is essential for proper interpretation of the results.

The media is too quick to rely on studies when released, without first performing due diligence.  Pew’s study is disturbingly flawed.  The language alone should tip reporters and readers to view its conclusions with suspicion.

Lawrence Meyers is a nationally renowned expert in consumer credit and CEO of PDL Capital, Inc.

About Lawrence Meyers

I've written many words. Some of them have even made sense. Some of them have been spoken by actors in TV shows. Others have just been viewed and, likely, scoffed at. All the better. New Yorker at heart. Devotee of Jung. Skeptic. Lover of cinema. Authority defier.

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