Texas Leads the Way in Consumer Protection

Well, not really.  But there is one small way in which Texas’ payday loan and auto title loan law has incorporated recent research on behavioral economics before other states, so I thought I’d use that title because it may be one of the few chances in my life to do so. 

Some behavioral economists have argued that disclosure regulation should inform consumers of how they are likely to interact with lending products by disclosing other consumers' patterns of use.  Lauren Willis has an interesting series of posts on Credit Slips about disclosure regulations.  In one in particular, she highlights the work of Marianne Bertrand and Adair Morse.  Bertrand and Morse partnered with a payday lender and disclosed different information to different borrowers, including information about how long borrowers usually take to pay off their loans.  They found that some of the disclosures affected borrowing behavior.

As proof that some academic work affects the real world at least, Texas has adopted this sort of approach in its disclosures about payday lending and title lending.  It appears Texas adopted Bertrand and Morse’s approach almost completely.  Even the graphics look the same – compare page 40 of Bertrand and Morse’s paper with Texas’ disclosure. 

The goal of these disclosures is to combat, among other biases, the optimism bias.  One of the most powerful critiques of payday and title lending is that borrowers think they will pay off the loan quickly but end up rolling over the loans repeatedly.  To assess the magnitude of the optimism bias in title lending markets, Kathryn Fritzdixon, Paige Skiba, and I asked borrowers taking out new title loans how long they thought it would take them to pay off the debt completely after all rollovers.  Then, we compared their responses to the Texas disclosure to see if our borrowers were realistic about how long it would take them to pay off their loans.   

	Our   sample	Texas   Disclosure
	Percentage	Percentage
1 month	20.90%	27.00%
2–3 months	40.30%	24.00%
4–5 months	13.43%	13.00%
6+ months	25.37%	36.00%
Total	100%	100%

As you can see from the table, some people are overly optimistic about how long it will take them to repay their loans,  but only a small percentage of the people who responded to our survey think the loan will be repaid immediately, contrary to data from some other reports.  Thus, our research suggests that pattern of use disclosures like those in Texas should help people make better borrowing decisions by combatting over optimism.

Comments

[Scott Pryor]

I interviewed Lauren on Thursday about her work. Podcast should be available next week. Very insightful.

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