Tough Times Borrowing: Effects of Fringe Lending Regulation on Credit Standing, Search, and Access

Poor access to credit has long been theorized to contribute to poverty and economic inequality. However, costly fringe credit products like payday loans may be even more harmful. Critics call for strict regulation of such products, while the empirical evidence on the effects of fringe borrowing is mixed. We use data from a credit bureau on a national sample of individuals in the U.S. military households to assess how a federal regulation of fringe lending (the Military Lending Act, or MLA) affected credit standing, search, and access for likely fringe borrowers. Using variation across states in access to fringe loans prior to the MLA, we estimate difference-in-differences models and find no significant long-term effect of the law on military borrowers’ credit standing. However, credit access, measured as cumulative limit on credit cards, increased by 17 to 25% while search for new credit intensified during spells of severe credit constraint after the MLA. Our results indicate substitution of fringe products with mainstream credit and reconcile some of the contradictory prior findings, by suggesting a strategic but myopic borrower, whose set of salient credit sources can be altered by regulation.