Brian Melzer's Home Page

Brian T. Melzer Assistant Professor Finance Department Kellogg School of Management, Northwestern University b-melzer@kellogg.northwestern.edu Curriculum vitae

Fields of Research and Teaching Interest:

Household finance, financial institutions, real estate, corporate finance

Published Papers:

"The Real Costs of Credit Access: Evidence from the Payday Lending Market," Quarterly Journal of Economics, Vol 126 No 1, (February 2011) 517-555.

ABSTRACT: Using geographic differences in the availability of payday loans, I estimate the real effects of credit access among low-income households. Payday loans are small, high interest rate loans that constitute the marginal source of credit for many high risk borrowers. I find no evidence that payday loans alleviate economic hardship. To the contrary, loan access leads to increased difficulty paying mortgage, rent and utilities bills. The empirical design isolates variation in loan access that is uninfluenced by lenders' location decisions and state regulatory decisions, two factors that might otherwise correlate with economic hardship measures. Further analysis of differences in loan availabilityÑover time and across income groupsÑrules out a number of alternative explanations for the estimated effects. Counter to the view that improving credit access facilitates important expenditures, the results suggest that for some low-income households the debt service burden imposed by borrowing inhibits their ability to pay important bills.

Working Papers:

"Competition in a Consumer Loan Market: Payday Loans and Overdraft Credit," with Donald P. Morgan, July 2012.

ABSTRACT: Using variation in payday lending restrictions over time and across states, we study competition in the market for small, short-term consumer loans. We find that banks and credit unions reduce overdraft credit limits and fees when payday credit, a possible substitute, is prohibited. These findings suggest that depositories respond to payday loan bans by taking less risk, bouncing checks that they would have otherwise covered. The decline in overdraft fees is surprising when viewed in isolation, but sensible given that depositories incur lower credit losses as they limit overdraft coverage. We find some evidence that credit unionsÕ overdraft activities are more profitable when payday loans are unavailable, consistent with decreased competition. In addition to characterizing the impact of prohibiting payday lending, a common state policy change in recent years, our findings illuminate competition in the small-dollar loan market.

"Mortgage Debt Overhang: Reduced Investment by Homeowners with Negative Equity," August 2012.

ABSTRACT: Homeowners at risk of default face a debt overhang that reduces their incentive to invest in their property: in expectation, some value created by equity investments will go to the lender. Using rich microdata on household expenditures, I show that debt overhang plays an important role in household financial decisions, as negative equity homeowners cut back substantially on home improvements and mortgage principal payments. At the same time, these households do not reduce spending on physical assets that the homeowner may retain in default, including vehicles and home-related durables (appliances and furnishings). Even higher income and wealthier homeowners, who appear financially unconstrained, reduce improvements and principal payments when they are in a negative equity position. In fact, the effect of negative equity on investment is particularly large for wealthy homeowners in non-recourse states, where strategic default is more likely because lenders have limited claim on non-housing wealth. Debt overhang best explains this set of facts. These findings highlight an important financial friction that is suppressing household investment during the recovery from the housing crash and recession of the late 2000s.

"Spillovers from Costly Credit," May 2012.

ABSTRACT: Recent research on the effects of credit access among low- and moderate-income households finds that high-cost payday loans exacerbate, rather than alleviate, financial distress for a subset of borrowers (Melzer (2011) and Skiba and Tobacman (2011)). In this study I find that others, outside the borrowing household, bear a portion of these costs too: households with payday loan access are 20% more likely to use food assistance benefits and 10% less likely to make child support payments required of non-resident parents. These findings suggest that as borrowers accommodate interest and principal payments on payday loan debt, they prioritize loan payments over other liabilities like child support payments and they turn to transfer programs like food stamps to supplement the householdÕs resources. To establish this finding, the analysis uses a measure of payday loan access that is robust to the concern that lender location decisions and state policies governing payday lending are endogenous relative to household financial condition. The analysis also confirms that the effect is absent in the mid-1990s, prior to the spread of payday lending, and that the effect grows over time, in parallel with the growth of payday lending.

"Unemployment Insurance and Consumer Credit," with Joanne W. Hsu and David A. Matsa, November 2012.

ABSTRACT: This paper examines the impact of unemployment insurance (UI) on credit markets. Exploiting heterogeneity in the generosity of unemployment insurance across US states and over time, we find that UI helps the unemployed avoid defaulting on their debt. For every $1,000 increase in maximum UI benefits, mortgage delinquency drops by 2% and the eviction rate drops by 10% among unemployed homeowners. We also find that lenders respond to this decline in default risk by expanding credit access for low-income households who are at risk of being laid off. For every $1,000 increase maximum UI benefits, low-income households are offered $900 (4%) more in credit card debt as well as lower interest rates on credit cards and mortgages (0.5% reduction). These results show that the poor benefit from the insurance provided by a stronger social safety net even without experiencing a negative shock.