Taylor Canann and Dr. Richard Evans, Department of Economics

Short-term consumer credit lenders, in particular payday, pawn, and car title lenders, are seen as lenders that prey on the weak of society. This study uses a two-stage negative binomial regression to examine the “chum in the water,” determinants of the locations, of these “loan sharks,” payday and car title lenders. Using zip code level data for the state of Utah I find that the number of payday and car title lenders increase with young, single, middle income, English speaking, Hispanic populations. But I also found that these “loan sharks” locate near pawn shops. My findings indicate that these lenders are not predatory but instead locate near individuals who can pay back their loan. Their locating decisions are also based on population density and traffic flow. Therefore, I find that the lenders do not want to be predatory, but state regulations on lenders abilities to locate actually force these lenders to locate “predatorily.”

In this heated political and academic discussion, many papers and books have been published attacking these lenders for different reasons. Robin Prager is a Senior Adviser for the Board of Governors of the Federal Reserve. He has his B.A. in economics from Harvard and Ph.D. in economics from MIT. In his 2009 paper “Determinants of the Locations of Payday Lenders, Pawnshops and Check-Cashing Outlets,” Prager runs a regression analysis on how these lenders locate and finds that they locate based on “demographic characteristics,” “credit worthiness, and state laws and regulations” (Prager 2009). While Prager’s analysis is well done, he fails to incorporate factors such as military personnel, traffic flow and endogeneity problems of pawn shops. In my analysis I analyze location by looking at these lenders distance to nearest military base, how heavy traffic flow is through the zip code and I instrument out pawn shops.

Banks are competing lenders, but fail to have the ability to offer small, short-term loans to individuals with bad credit. Thus, when an individual is unable to pay a debt and is unable to attain a loan from the bank, they turn to these short-term consumer credit lenders. For these reasons, other research papers have investigated the correlation between the locating aspects of banks and payday lenders. To maximize profits, fastfood chains often locate in high-traffic flow areas; by analyzing the correlation between the locating decision of fast-food chains and payday and car title lenders we are able to see if these lenders are locating based upon the traffic flow of the area. Lastly, hospitals are high immediate cost institutions, and for some people these bills are hard to payoff. In order to provide a market for individuals who are in need of quick money to pay off their debts, these lenders provide an opportunity for those in lower income brackets to get medical treatment.

Many states have very strict regulations on how these “loan sharks” can locate. Mark L. Burkey and Scott P. Simkins’ analysis is done on Zip Code Tabulation Area (ZCTA) level data from the state of North Carolina, which is problematic because of the amount of government regulation on the lenders in North Carolina. Steven M. Graves published in The Professional Geographer “Landscapes of Predation, Landscapes of Neglect: A Location Analysis of Payday Lenders and Banks.” In this analysis Graves focuses on metropolitan Louisiana and Cook County, Illinois. California is studied in two papers. The first byWei Li, Leslie Parrish, Keith Ernst, and Delvin Davis: “Predatory Profiling: The Role of Race and Ethnicity in the Location of Payday Lenders in California.” The second is by Adair Morse: “Payday Lenders: Heroes or Villains?” California, Illinois, and Louisiana have similar problems to North Carolina, they are highly regulated states. When government regulates industries, the industries are forced to change their locating decisions. A similar problem is seen in H. Evren Damar’s paper “Why Do Payday Lenders Enter Local Markets? Evidence from Oregon.” Oregon has very strict regulations on how payday lenders locate. That is why I used the state of Utah. Utah has no restrictions on how these lenders locate or how they are able to set interest rates.

By my findings in Figure 1, and contradictory to popular belief, these lenders are not being predatory in their locating decisions, but are filling a need. People sometimes need these small, short-term loans, and, by not regulating this industry, Utah is allowing these industries to be in the most profit maximizing locations. By profit maximizing, these lenders are locating near those that need a loan, not prey on those that cannot pay back the loan. There is future research that is still needed. The only analysis that is left is to determine whether or not these lenders are predatory in the way that they collect overdue or defaulted loans. I have looked at location analysis for payday and car title lenders with the data given, but I have been unable to find good instruments for payday and car title lenders to run such an analysis on pawn lenders.