Tornado in Credit Desert: Role of Consumer Credit Access in Disaster Recovery

Abstract

I study the effect of credit access restrictions on post-disaster financial outcomes of subprime consumers in Arkansas, a state with the lowest usury cap of 17 percent. Due to the restrictive cap, neither payday nor consumer finance companies operate in Arkansas, while they do in all six neighboring states. Using the difference-in-difference approach, I find that borrowers in border zip codes are less likely to be delinquent on mortgage debt, and have a lower drop in credit score in the post-disaster period in comparison with borrowers in center zip codes. The result is consistent with the adverse effects of credit rationing followed by consumer protection law.