How the payday lending industry shapes academic research

The hotly contested question of how to regulate payday lending is partly about ideology. How far should the government go to save repeat borrowers from their own worst habits? Your answer will depend on your political beliefs.

But this debate, like a lot of fights involving financial regulation, is also about facts. Do payday customers indeed suffer economic harm when they get into a cycle of repeat borrowing? That is an empirical question that unbiased researchers should be able to answer.

Jennifer Lewis Priestley, a professor of statistics and data science at Kennesaw State University in Georgia, tackled the topic of payday loan rollovers in a 2014 study. Her research professed to cast doubt on the commonly held belief that repeated rollovers, which industry critics call a “cycle of debt,” are actually harmful to consumers.

Now Priestley’s study has become the latest flashpoint in another debate — one that involves the influence of financial industry dollars on academic research findings.

After her study was published, a watchdog group called the Campaign for Accountability became suspicious that the findings were tainted by $30,000 in grant funding from a payday-industry-backed organization, the Consumer Credit Research Foundation.

“Not only are they paying for these studies, but then they’re using these studies to ward off government regulation,” said Daniel Stevens, executive director of the Campaign for Accountability.

Gary Tramontina/Bloomberg

The Campaign for Accountability filed a state open-records request seeking access to Priestley’s email correspondence, which sparked a multiyear legal showdown that was heard by the Georgia Supreme Court on Monday.

The case sheds light on the lengths that an often assailed industry has gone to shape policy outcomes. It also raises the question of whether, in evaluating industry-funded research, it is enough to assess the published study itself, or if it is necessary to dig deeper.

Arkansas documents revealed extensive involvement

The Campaign for Accountability, which was founded three years ago, uses research and litigation in an effort to expose ethics violations in public life.

The organization has a liberal bent. Its targets have included Republican members of Congress and members of the Trump administration, in addition to companies such as Google and Berkshire Hathaway.

In 2015, the Campaign for Accountability filed open-records requests with four public universities, including Kennesaw State and Arkansas Tech University, where industry-financed research on payday lending had been conducted.

In response, Arkansas Tech released a large trove of emails between an economics professor who co-authored the study, Marc Fusaro, and the Consumer Credit Research Foundation. The Campaign for Accountability subsequently published a report titled “Academic Deception” based on what it found in the emails.

That report stated that the Consumer Credit Research Foundation paid Fusaro more than $39,000 to prepare the study; that the industry group’s chairman was significantly involved in writing the study, even sending full paragraphs to be included; and that the chairman devised and financed a public-relations strategy for the research.

“While the payday loan industry purports to rely on outside experts to support its position that payday loans are not responsible for plunging millions of Americans into a never-ending cycle of debt, that expertise really has been bought and shaped by the industry itself to advance its anti-regulatory agenda,” the Campaign for Accountability report stated.

Hilary Miller, a Connecticut-based lawyer who is chairman of the Consumer Credit Research Foundation, defended his extensive involvement in the Arkansas Tech research.

“While we do not insist on doing so, most investigators — as is the general custom between researchers and private-sector grant-makers — offer us an opportunity to comment on early drafts of their work,” he said in an email.

“We never alter the experiment itself or the data that flow from it. In this case, we provided third-party peer-review input to the authors and our own editorial comments on their paper.”

Miller added that his comments placed the researchers’ findings in the context of the policy debate over payday lending. He said that this is what the Campaign for Accountability seemed to object to, not the findings themselves.

Fusaro, the Arkansas Tech professor, offered a similar rationale in a 2016 interview.

“The Consumer Credit Research Foundation and I had an interest in the paper being as clear as possible,” he told Freakonomics Radio. “And if someone, including Hilary Miller, would take a paragraph that I had written and rewrite it in a way that made what I was trying to say more clear, I’m happy for that kind of advice.”

“I mean, the results of the paper have never been called into question,” he added.

Fusaro’s 2011 paper was titled “Do Payday Loans Trap Consumers in a Cycle of Debt?” It was based on a field experiment in which payday borrowers were randomly split into two groups – members of the first group were charged normal interest rates, while members of the second group got an interest-free loan. The study found no difference in repayment rates between the two groups, which Fusaro and his co-author took as evidence that high interest rates on payday loans are not the cause of the debt cycle.

In its 2017 payday lending rule, the Consumer Financial Protection Bureau weighed in on the Arkansas Tech study. The agency, then led by Obama appointee Richard Cordray, did not take issue with the researchers’ empirical findings. But it did seem inclined to interpret those findings differently than the study’s authors did.

The CFPB wrote that the Arkansas Tech study seemed to show that the single-payment loan structure of payday loans is a sufficient driver of the debt cycle, without regard to the fees borrowers pay. Consequently, the bureau suggested that the study supports its case for a crackdown on short-term, lump-sum loans.

Georgia documents remain in legal limbo

The Kennesaw State study, published in 2014, was titled “Payday Loan Rollovers and Consumer Welfare.” It examined the transactions of payday customers who live in states that have restrictions on loan rollovers, as well as of those customers who live in states that have looser rules.

The study found that customers in the states with fewer regulatory restrictions had better outcomes, as measured by changes in credit scores, than borrowers in the more heavily regulated states.

“This study contributes to a growing body of literature which shows that payday loans may not only fail to harm borrowers, but may actually contribute to an improvement in borrower welfare,” Priestley said in a December 2014 press release.

Through a university spokeswoman, Priestley declined to comment for this article.

Like the Arkansas Tech research, the Kennesaw State study drew a critique from the Cordray-era CFPB, which said that it ignored differences in who chooses to use payday loans in different states, and also overlooked differences in the changes in economic conditions in different states.

But unlike at Arkansas Tech, emails related to the Kennesaw State study have never been made public. So it remains unclear how much impact the Consumer Credit Research Foundation had on the final paper.

Initially, after Kennesaw State received the watchdog group’s open-records request, school officials prepared to release Priestley’s correspondence with industry officials.

But in June 2015, the Consumer Credit Research Foundation filed a complaint in Fulton County Superior Court, which sought an injunction to prevent the release of the documents. The plaintiffs lost at the trial court level, but that decision was reversed on appeal, and the case is now pending before the state’s Supreme Court.

The industry-backed foundation argues that the emails cannot be released under Georgia’s open-records law, which includes two research-related exemptions. State officials and the Campaign for Accountability disagree.

At Monday’s court hearing, lawyers on both sides of the case agreed that university officials are not legally required to release the documents. The question is whether school officials nevertheless have the discretion to turn them over in response to an open-records request.

“Disclosure is not required, but it is likewise not forbidden,” argued Russ Willard, a senior assistant attorney general in Georgia.

Mark Silver, a lawyer representing the Consumer Credit Research Foundation, noted that Kennesaw State entered into a confidentiality agreement with the payday loan industry group and had the expectation that the information it provided to Priestley would not be made public.

“And what the attorney general is arguing here is that they can release it no matter what,” Silver said.

Miller, the chairman of the Consumer Credit Research Foundation, said that his organization is trying to keep the documents confidential because disclosure would harm its relationship with researchers.

“Part of the process of research is the testing and ultimate rejecting of alternative theories and hypotheses. In our case, we expose our investigators to third-party peer review and our own critique,” he said in an email. “Having these discussions remain private is deemed by us to be an important inducement to attracting new investigators and peer reviewers.”

But the Campaign for Accountability argues that the protracted legal battle shows the lengths to which the payday loan industry will go to prevent the public from learning how about how it operates.

“This case has been playing out for almost three years,” said Stevens, the group’s executive director.