140201 Predatory Lending (revised draft)

A Section 6, Frontier Torts White Paper
November 26, 2013
Harvard Law School, 1563 Massachusetts Avenue, Cambridge, MA 02138
1
MEMBERS OF THE PREDATORY LENDING POLICY GROUP
Steering Committee
Hannah Diamond
Corey Jones
Brian Klosterboer
Tort Doctrinalists
Yohan Park
Adam Rosenfeld
Patrick Sharma
Historians
Mark Thomson
Hano Ernst
Will Burgess
External Situationists
Lauren Anstey
Jessica Ranucci
Ted Hamilton
Internal Situationists
Habin Chung
Monica Mleczko
Lisa Marrone
Colin Chapman
Economists
Albert Chen
Hudson Todd
Jacob (Coby) Loup
Policy Wonks
Alexander J. Clayborne
Patrick Swiber
Declan Conroy
Public Choice Experts
Travis West
Sean Cuddihy
Ben Levenback
Media Analysts
Petra Plasilova
Bianca Tylek
Kellen Wittkop
2
The Frontier Torts Project
In the fall of 2013, the 83 students in Harvard Law School’s 1L Section 6 participated in an
experimental group project in their first-year torts class. The project required students to
research, discuss, and write about a current policy problem for which tort law (or some form
of civil liability) could provide a partial solution.
Based on their expressed preferences, students were assigned to one of three policy groups:
1. Predatory lending
2. Gun manufacturer liability
3. Casino liability for addicted gamblers
Each of the three policy groups consisted of roughly 27 students. Each policy group was
further divided into the following nine specialty groups consisting of three students each:
1. Project Steering Committee
2. Tort Doctrinalists
3. Historians
4. External Situationists – or Contextualists
5. Internal Situationists – or Mind Scientists
6. Economists
7. Policy Wonks
8. Public Choice Experts
9. Media Analysts
The name and role of each specialty group was purposefully vague, and the role could vary
based on the nature of the policy issue itself and the interests and particular focus of students
working in the given specialty group.
Each policy group drafted a white paper and gave a presentation to the class about their
policy problem and possible solutions to that problem. Experts working on each issue visited
the class to speak about the topic and their work. At the conclusion of the class presentations,
each group led a class discussion and a class vote to select the best policy options. (Videos
are available of the class various class presentations.)
Each policy group then submitted a final draft of its white paper, informed by research, class
presentations, discussions, and votes, and by written feedback from the class and teaching
staff.
The course was taught and supervised by Professor Jon Hanson and teaching fellows Sam
Caravello, Deena Greenberg, and Oded Oren. For more information, contact Jon Hanson at
[email protected] or visit the website at http://learning.law.harvard.edu/frontiertorts/.
3
Frontier Torts Terminology
Dispositionism is an attributional approach that explains human behavior and outcomes as
primarily the result of individuals’ thoughts, preferences, and will. Dispositionism presumes
that a person’s behavior reflects decisions and choices that reflect that person’s beliefs,
attitudes, preferences, personality, thoughts, and intentions, the details of which he is
generally conscious. The dispositionist model assumes a person’s preferences are revealed
through his choices, since the actor has the will to choose his actions.
Naïve psychology is a model of human thinking and behavior that posits that people are aware
of, and able to explicate, theaforces motivating their decisions and behaviors. The dominant
naïve psychology model, particularly in western cultures, is dispositionism. That naïve
psychology model is also at the foundation of law and pervasive in many of the most
influential legal theories, including law and economics.
Situationism is an attributional approach that explains behavior, outcomes, and events by
looking at situational influences—that is, non-salient internal and external forces operating
within and around individuals. Situationism is informed by social science—particularly
social psychology, social cognition, cognitive neuroscience and related fields—and the
discoveries of market actors devoted to influencing consumer behavior, such as marketers and
public relations experts. Situationism is premised on the social scientific insight that the naïve
psychology—that is, the highly simplified, affirming, dispositionist model for understanding
human thinking and behavior—on which our laws and institutions are based is largely wrong.
In explaining human behavior, situationism looks to nonconscious psychological forces and
non-obvious contextual behavioral constraints that might shape people’s behavior. 4
TABLE OF CONTENTS
Executive Summary .........................................................................................................................6
Introduction ......................................................................................................................................7
History of Payday Loans..................................................................................................................9
The Economics of Payday Loans ...................................................................................................11
How Payday Loans Work...................................................................................................11
Are Payday Loans Efficient?..............................................................................................11
Economic Analysis of Potential Solutions .........................................................................13
Examining the External Situation ..................................................................................................13
The Demographics of Borrowers .......................................................................................13
Mapping the Payday Lenders.............................................................................................14
The Community and Credit Situation ................................................................................15
The Poverty Penalty and the Debt Spiral ...........................................................................15
The Psychology of Payday Lending...............................................................................................16
Poverty Impairs People’s Ability to Make Rational Financial Decisions ..........................16
Lack of Access to Mainstream Banks Encourages Distrust ..............................................17
Payday Lenders Target These Vulnerabilities ....................................................................17
The Shifting Media Landscape ......................................................................................................19
Case Studies in Victimization ............................................................................................19
The Role of Advertising .....................................................................................................20
Payday Lending on Trial ....................................................................................................20
The Situational Borrower Gains Dispositional Power .......................................................21
Public Choice .................................................................................................................................21
Situationist Lenders?..........................................................................................................21
The Anti-Regulation Coalition...........................................................................................22
The Coalition for Regulation .............................................................................................23
Proposed Recommendations ..........................................................................................................24
Policy Solutions .................................................................................................................24
Current Policy ........................................................................................................24
Disclosure as a Solution.........................................................................................25
Preventing Default .................................................................................................25
Regulatory Approaches ..........................................................................................26
Alternatives to Payday Loans ................................................................................27
Litigation-Based Solutions.................................................................................................27
Negligence and Lender Liability............................................................................28
Misrepresentation...................................................................................................28
Product Liability ....................................................................................................29
Abnormally Dangerous Lending: A New Tort?......................................................31
Conclusion .....................................................................................................................................31
References ......................................................................................................................................33
5
EXECUTIVE SUMMARY
High-interest usurious lending has existed for all of human civilization, and in modern
times has taken the form of payday loans. Payday lending is a subset of predatory lending that
involves uncollateralized short-term, small-dollar loans. Borrowers take out a loan by writing a
check to a lender for the amount borrowed plus fees. The borrower must repay the entire amount
on the next payday, usually between two weeks and a month after taking out the loan. If a
borrower is unable to pay the entire principal, the borrower can generally pay to have the loan
renewed or take out a new loan.1
Payday loans present a number of issues. Unlike borrowers of larger collateralized loans,
payday borrowers are not required to demonstrate virtually any ability to pay back a loan. In
many states, the only requirement is that a borrower has an income and a bank account. These
loans also have excessively high interest rates, which can be up to 780% calculated per year.2
This can lead to a devastating debt spiral in which borrowers sink deeper into debt as they
attempt to pay back their loans. 3
After the 2008 financial crisis, the media has increasingly portrayed borrowers in a more
situational light.4 This change in framing has opened the doors to possible policy and tort
solutions to predatory small-dollar loans.
From a policy perspective, states can place outright bans on small-dollar loans, but that
might push borrowers to other problematic alternatives. There are other policy options, however,
that would allow payday loans to function in a less predatory manner. The balloon payment
structure could be replaced with an amortizing schedule resembling more traditional loans.
Interest rate caps could ensure that lenders do not demand triple-digit interest rates. The system
could also be made more transparent so that borrowers would truly know the risks of borrowing.
Torts may present a solution either within existing tort doctrine, or by creating a new tort.
Potential plaintiffs may be able to sue payday lenders based on misrepresentation or negligence.
If the loans were viewed as products, borrowers could sue under the theory of products liability
as well. Creating a new tort could be the strongest way to address predatory lending. The tort of
abnormally dangerous lending would serve as an ex-post way of preventing borrowers from
entering a debt spiral. Both borrowers and lenders would present their stories to a neutral factfinder who would determine if a loan had been abnormally usurious. If the loan was found to be
abnormally usurious, the borrower would have to pay back the principal but none of the fees or
interest.
6
INTRODUCTION
Arthur Jackson is a retired
warehouse worker who lives with his
family in North Carolina.5 One day he
was leaving the grocery store when a
neighboring store caught his eye.
Advance America: Cash Advance.
Mr. Jackson did not need a cash
advance that day, but he thought that a
loan might help his daughter further her
dream of starting a small beauty shop.
The clerk at the store said it was a great
idea. All Mr. Jackson needed was a bank
account, proof of income, and a driver’s
license. He could get $200 in fifteen
minutes.
Mr. Jackson left the store with
$200 in cash but little understanding of
how the loan could be repaid. When he
received his paycheck two weeks later,
he returned to the store to devise a
payment plan. The clerk told him that
the loan could only be paid in full, but
for a small $35 fee the company would
roll the loan over to the following
month.
Every two weeks, Mr. Jackson
returned to Advance America to pay the
$35 fee. He assumed that some of his
payments were paying off the loan, but
interest was actually compiling on the
principal. Five years later, Mr. Jackson
had paid over $3,000 in fees and interest
but still had not paid off the loan. And
because the principal had grown, the
rollover fee had increased.
After
struggling to pay his bills for several
m o n t h s , M r. J a c k s o n f i l e d f o r
bankruptcy. Mr. Jackson’s tragic
experience is not atypical of broader
trends in payday lending. With 2,500
locations across the country, Advance
America is the nation’s largest payday
lender.6 Together with its in-store and
online competitors, the company has
provided more than 19 million
Americans with short-term, smalldollar loans.7 According to Advance
America’s website, these loans help
“hardworking families . . . manage
short-term financial challenges.”8
While some economists and
business executives defend payday
lending as providing an efficient and
necessary service for working-class
Americans, the weight of evidence
supports a different story. With
average annual interest rates above
400%,9 payday loans have been called
“predatory” for a number of reasons.
These loans typically target vulnerable
populations: the poor and working
class, single mothers, racial
minorities, home renters, and people
without a college degree. 10 Some
lenders also obscure information
about the loans by implicitly and
explicitly concealing the terms of
repayment, which allows the lenders
to amass large amounts of fees from a
small initial outflow. This “lucrative”
strategy results in $2.6 to $3.4 billion
in annual profit for the payday loan
industry. 11
Modern payday lending
emerged in the 1980s and grew in the
1990s as most states rescinded interest
rate caps on loans as part of broader
7
Mr.
Jackson’s
tragic
experience is
not atypical
of broader
trends in
payday
lending.
While some
economists and
business
executives
defend payday
lending as
providing an
efficient and
necessary
service for
working-class
Americans, the
weight of
evidence
supports a
different story.
deregulation efforts. Prior to the 2008
financial crisis, the media rarely
discussed payday lending.
In the
absence of media coverage, people
perceived borrowers as dispositional
actors who took out loans they could
not repay and lenders as situational
actors who set their interest rates
based on risk. However, just as the
Great Depression led to a shift in
attributional frameworks that
positioned people as situational actors,
so too did the 2008 crisis shift the
public perception of payday lending.
Instead of portraying borrowers as
dispositional agents, the media started
to see them as products of situation,
whose financial ruin was caused by
external forces beyond their control.
Conversely, the image of payday
lenders shifted from that of passive
businesses responding to situations to
that of active loan sharks preying on
vulnerable customers.
As we saw with Mr. Johnson,
payday loans can have devastating
effects on borrowers’ lives. A
borrower can lose thousands of dollars
from a single loan, and most
customers take out multiple loans.
A lth o u g h th e lo an s ar e o f ten
advertised as emergency cash
advances, the industry encourages
repeat borrowing from “loyal
customers.”12 The average borrower
takes out eight loans per year and
spends $520 on fees, while the
“heavily indebted” borrowers, who
comprise a third of the market, take
out twelve or more loans per year and
8
pay between $1,000 and $2,000 in
fees.13
This kind of targeted lending and
the resulting chronic debt has given
ammunition to a coalition of consumer
advocates seeking to bolster financial
regulation and curb the vices of the
payday lending industry.
Consumer
activism has been particularly powerful
at the state level; eighteen states and the
District of Columbia have capped
interest rates.
Similarly, the newly
established Consumer Financial
Protection Bureau (CFPB) began
reviewing procedures to regulate “shortterm, small-dollar” loans in 2012.14
However, payday lenders have adapted
to this shifting landscape by seeking new
methods to reach customers, often
through the Internet and Indian
reservations.
While a 2012 Frontier
Torts white paper explored the behavior
of alcohol companies exploiting Indian
reservations, some payday lenders, like
the infamous Western Sky, are owned
and operated by Indian tribes, which
adds further complexity to the already
fragmented state-by-state regulatory
framework. 15
This white paper considers
several responses to predatory payday
lending: requiring clear, transparent
terms of agreement to be provided to all
borrowers; regulating the interest rates,
frequency, or structure of the loans;
expanding alternative access to credit for
vulnerable populations; collateralizing
loans; and requiring lenders to perform
due diligence checks on potential
borrowers. While these solutions would
deal primarily with statutory law, tort
law might also be able to play a role in
addressing the harms of payday lending.
Currently, financial services providers
have no legal duty of care to their
clients, but shifting perceptions on
predatory lending could lead to the
creation of a cause of action for
negligence on the part of lenders.
Another tort option relies on the doctrine
of misrepresentation, which might allow
plaintiffs to be compensated if they were
intentionally or negligently told false
statements when they signed up for
loans. Another tort frontier concerns
products liability. This new approach
could establish compensation for victims
based on theories of negligence or strict
liability, even though products liability
compensation has traditionally been
limited to physical damage to a person
or property. Finally, this white paper
also proposes the creation of a new tort
doctrine for abnormally dangerous
lending, which would require lenders to
exercise a higher standard of care while
taking the borrowers’ situation into
account.
I n r e a l i t y, a m u l t i f a c e t e d
approach that involves both regulation
and tort law may be the best way to
mitigate the harms of payday lending.
Such an approach will hopefully be
strengthened by a situationist analysis of
payday lending.
HISTORY OF PAYDAY LOANS
The exorbitant interest rates
normally associated with payday lending
are no stranger to history. In many
societies, usury has been illegal and
strongly discouraged by social stigmas
attached to it.16 Modern payday loans
are a relatively recent occurrence,
rising to prominence in the late 1980s
and early 1990s.17 However, historical
accounts of similar practices of
expensive, small-loan consumer
financial products can be traced back
to nineteenth-century salary lenders’
use of wage assignments as security
for repayment.18 Unlike the simple
Shylockian lender, the payday lender
emerged as a character in the postindustrial age, in which he attached to
the wage paid “not at the end of the
harvest but every week or month.”19
Central to this loan-sharking20
business model was the idea of
securing a continuous stream of
payments from a debtor unable to pay
off the principal for an extended
period of time.21 Coupled with
targeting the needy, these practices
could very well be labeled as
predatory.
While attributional
frameworks of borrowers and lenders
were shaped by the Gilded Age and
Social Darwinism of the late 19th
century, 22
the progressive era
challenged these attributions and
brought more regulation in the form of
the Uniform Small Loans Act. 23
Although not without controversy, 24
the Act sought to control small loans
by allowing only a privileged class of
lenders to lend at rates above the
standard usury caps, thus seeking to
9
In reality, a
multifaceted
approach that
involves both
regulation and
tort law may
be the best way
to mitigate the
harms of
payday
lending.
attract “honest” businessmen.25 The
main benefit was informational; it
required transparency and disclosure,
but condoned a relaxed—although not
unrestricted—interest rate.26 This
same rationale also influenced the
Truth in Lending Act, passed in 1968,
which required standardized
disclosures of a loan's calculated costs
and charges.27
While many
state legislatures
have started
regulating
payday loans by
capping interest
rates and
regulating loan
structures, there
is still
considerable
resistance to
reinstating strict
usury laws.
Modern payday lending emerged
in the 1980s and is linked to the
expansion of the consumer financial
system, particularly to the widespread
use among all social strata of checking
accounts against which the checks to
payday lenders were written.28
Subsequently, a large majority of
states legalized payday loans.29 Two
crucial legal developments coincided
with the advent of modern payday
lenders: one judicial, the other
statutory. The former was the 1978
landmark Supreme Court decision
Marquette Nat’l Bank v. First of
Omaha Serv. Corp. et al.30 The Court
held that interest rates charged by a
national bank are bound only by the
laws of the state in which the bank is
chartered and are not restricted by the
usury caps in the customer’s home
state. Although the case concerned
credit cards, it led to a race to the
bottom among states, which removed
usury caps in order to attract
business.31 The latter development
was the 1980 passage of the
Depository Institutions Deregulation
and Monetary Control Act,32 which
introduced exemptions from state
10
usury caps for federally chartered
savings banks, installment plan sellers,
and chartered loan companies. Even
though banks are not the primary
providers of payday loans,33 these laws
have complicated, marginalized, and
watered down remaining usury laws to a
level of persistent non-enforcement.34
As a consequence of these
developments, today's consumer faces a
patchwork of very different state laws
and is still vulnerable to harmful payday
lending operations.35 While many state
legislatures have started regulating
payday loans by capping interest rates
and regulating loan structures, there is
still considerable resistance to reinstating
strict usury laws.36
At the federal level, the
government has generally shied away
from regulating payday loans entirely.
The Talent Amendment to the Military
Lending Act of 2007 is a notable
exception.37 Applicable only to military
personnel and their families, it prohibits
lenders from charging an APR above
36% for payday loans and mandates that
both written and oral explanations of the
terms of a loan must be given.38 Military
members are especially frequent
consumers of payday loans due in part to
the Uniform Code of Military Justice’s
stipulation that military members can be
forced to forfeit their security clearance
if they incur excessive amounts of
debt.39 The Talent Amendment suggests
that Congress is aware of the dangers
posed by payday loans and is willing to
protect at least one class of people from
harmful effects. Even so, payday lenders
have adapted to the new law by offering
both larger and longer loans that fall
outside of the amendment’s regulatory
scope, demonstrating the industry’s
malleability and resistance to reform.40
paid a $35 fee to roll the loan over.
Most payday loans take this
form.42
•
THE ECONOMICS OF
PAYDAY LOANS
HOW PAYDAY LOANS WORK
Following the deregulation of the
1980s and 1990s, payday loans emerged
as a category of financial products that is
highly profitable for lenders and
frequently detrimental to borrowers. In
the typical case, a customer writes a
personal check made out to the lender.
The lender agrees to hold the check for a
specified period of time, normally until
the customer’s next payday or for about
two weeks. The lender then gives the
borrower cash equal to the face value of
the check minus a loan fee. Typically
this loan is:
•
High-interest: For example, the $35
fee on Mr. Jackson’s $200 loan made
for an effective annualized interest
rate of about 450%. Lenders usually
charge $15 to $20 for each $100 that
they advance with a two-week
maturity, amounting to a typical
annualized interest rate of about
400%.41
•
L u m p - s u m : M r. J a c k s o n w a s
required to pay back the entire
principal of the loan all at one time
rather than in periodic installments.
For every two-week period that he
could not pay back the principal, he
•
Hassle-free: All Mr. Jackson
needed to get his loan was a bank
account, proof of income, and a
driver’s license. He put up no
collateral, and there was no credit
check or other form of due
diligence that other types of
lenders often perform. This is
typical in the payday loan
industry. 43
Over-simplified: Because getting a
payday loan is so quick and easy,
borrowers often enter the store
motivated to undervalue the loan’s
costs and leave the store with a
limited grasp on the loan’s terms. 44
The federal Truth in Lending Act
does require payday lenders to
disclose basic details such as fees
and annualized interest rates,45 but
the ease of the transaction appears
to make borrowers susceptible to
ignoring or misunderstanding
details. One study showed that
72% of borrowers did not know
their loan’s annualized interest
rate, and of those who thought
they did know, fewer than half
reported figures that corresponded
to the usual rates actually charged
by payday lenders.46
ARE PAYDAY LOANS EFFICIENT?
A fundamental principle of
economics is the idea that “resources
tend to gravitate toward their most
11
Following the
deregulation
of the 1980s
and 1990s,
payday loans
emerged as a
category of
financial
products that
is highly
profitable for
lenders and
frequently
detrimental to
borrowers.
If payday
loans were
not an option,
people who
are in need of
cash and
unable to get
a cash
advance
might turn to
even worse
channels for
borrowing.
valuable uses if voluntary exchange—
a market—is permitted.”47 When
social value is thus maximized, the
market for a value or service is said to
be “efficient.”48 Applied to payday
lending, economists who accept this
view would argue that both the lender
and the borrower have assessed their
alternatives and have come to a
rational, value-maximizing agreement.
One might doubt this after reading
about the injuries and indignities that
borrowers like Mr. Jackson suffer, but
classical economists have responses to
these concerns.49
One such response relies on the
concept of “substitution effects.” If
payday loans were not an option,
people who are in need of cash and
unable to get a cash advance might
turn to even worse channels for
borrowing, including black market
loan sharks, checking account
overdrafts, or simply not paying bills.
For example, one study from the
Federal Reserve Bank of New York
found that after Georgia prohibited
payday loans in 2004, households in
the state “bounced more checks after
the ban, complained more about
lenders and debt collectors, and were
more likely to file for bankruptcy
under Chapter 7.”50 Another response
of classical economics is that the high
interest rates attached to payday loans
reflect the high amount of risk the
lenders are assuming; if lenders could
not charge such rates, the argument
goes, the transaction would not be
valuable enough for them to
12
participate in the voluntary exchange
that results in the loan.51
These efficiency arguments can
be hard to refute, but they can be equally
challenging to prove. The difficulty with
such arguments is that they rely not on
empirical data but on assumptions about
how the world works. And in many
cases, one can plug contrary but equally
plausible assumptions into the equation
and come to a different conclusion about
efficiency. One particularly significant
assumption that underpins classical
economics arguments is that market
participants have perfect information.
But in the real world, there is no such
thing as perfect information and
therefore no such thing as perfectly
operating markets.52 As transactions get
more complex, consumers need more
time and knowledge to figure out just
how much value to assign to a product or
service.
In the case of payday lending,
research suggests that borrowers tend to
rely on information that is far from
perfect. Borrowers are likely to be poor
and undereducated, 53 unable to
understand and evaluate abstract
financial instruments with long time
horizons.54 A variety of environmental
factors, including the aggressive tactics
of payday lenders, further complicate the
borrower’s efforts to rationally gauge the
value of a loan.55 One result of this misvaluation by borrowers is that they do
not price shop as much as buyers with
perfect information would,56 meaning
the market for payday loans does not
benefit from the efficiency gains that
robust market competition tends to
provide.57
ECONOMIC ANALYSIS OF
POTENTIAL SOLUTIONS
In the language of economics,
inefficiency is the result of
“externalities,” which are conditions in
which “one person’s actions affect
another person’s well-being and the
relevant costs and benefits are not
reflected in market prices.”58 In a
perfectly functioning payday loan
market, most borrowers would refuse to
submit to 400% interest rates and
balloon repayment schemes, which
require borrowers to repay loans in one
lump sum. Savvy lenders would also
compete to offer more favorable loan
terms, thus driving down the market
prices of loans. But because borrowers
lack information and face other hurdles
to effective price shopping, lenders can
continue to offer the same extreme
lending terms without taking into
account the dramatic social costs of
plaguing poor communities with payday
loan debt spirals.
One way to address the payday
lending market’s inefficiencies would be
to force the market to “internalize” these
externalities, or to incorporate the social
costs of payday loan debt traps and
defaults into the prices of loans. The
next question, of course, is which party
should be forced to do this internalizing,
lenders or borrowers? This white paper
suggests that borrowers have trouble
internalizing the costs of payday
lending; because of poverty, stress, lack
of education, and related factors,
borrowers often discount the true costs
of the loans they are considering.
Consequently, these borrowers take
out extortionate loans and suffer the
consequences later. One can imagine,
however, that lenders could easily
restructure the point of sale to give
borrowers more information about the
terms and consequences of the loans.
This intuition squares with a concept
in economics known as the “least cost
avoider,” which suggests that the party
who should be asked to avoid
externalities is the one who can do it
most cheaply 59—or, in the words of a
classic formulation of the concept, the
one who is “best situated to afford
such protection.”60 Later in this paper,
we explore in more detail a number of
approaches that would force payday
lenders to internalize some of the
costs that their current practices
impose.
EXAMINING THE
EXTERNAL SITUATION
THE DEMOGRAPHICS OF
BORROWERS
Despite the costs, an incredible
number of Americans have
participated in the economic model of
payday lending.
According to a
survey done by Pew Charitable Trusts,
approximately 5.5% of American
adults report having used a payday
loan in the last five years.61 In 2010,
roughly 12 million American adults
used a storefront or online payday
13
One way to
address the
payday
lending
market’s
inefficiencies
would be to
force the
market to
“internalize”
these
externalities,
or to
incorporate
the social
costs of
payday loan
debt traps
and defaults
into the
prices of
loans.
A borrower’s story: Fenny from Missouri below show demographic groups
took out her first payday loan in the early reporting to have used a payday loan in
‘90s. She didn't have any money, she said, the last five years:
and wanted to play bingo.
A friend
suggested she take out a quick $100 loan.
She thought she’d go play some bingo and
win. She lost.
Two weeks later she renewed the loan,
adding about $15 to what she owed. Soon
she was taking out loans to pay for other
expenses and loans to pay the interest on
earlier loans.
She took out loans in
different Missouri towns until, she said,
she “just had them everywhere.”
There are
more payday
lender
storefronts in
the United
States than
McDonald’s
and Starbucks
franchises
combined.
She got in the habit of taking out loans to
address any financial problem, and things
got out of control. At one point she had at
least five payday loans out at once;
another time she turned to auto title loans
Figure 1: Demographics of Payday
Loan Borrowers 65
to help her keep up with payday debt—and
ended up losing her car.
MAPPING THE PAYDAY LENDERS
Adapted from http://kbia.org/post/payday-loanscredit-option-or-debt-trap, http://
munews.missouri.edu/expert-comment/2011/0125state-report-shows-persisting-problems-withpredatory-lending-mu-expert-says/,http://
www.piconetwork.org/news-media/coverage/
2009/0246
loan.62 On average, a borrower takes
out eight loans of $375 annually,
s p e n d i n g $ 5 2 0 o n i n t e r e s t .63
Controlling for other factors, the Pew
Report identified five groups with
higher odds of having used a payday
loan: people without a four-year
college degree, home renters, African
Americans, people earning less than
$40,000 annually, and people who are
separated or divorced. 64 The charts
14
There are more payday lender
storefronts in the United States than
McDonald’s and Starbucks franchises
combined.66 A relatively new industry,
payday lending grew rapidly in the late
1990s and 2000s — loan volume
expanded by about 600% between 1999
and 2004.67 Payday lending locations
tend to be small, with average annual
revenue of $350,000,68 and rely on
customer convenience and familiarity.69
One study estimates that borrowers do
not produce profit for a lender until they
have taken out four or five loans.70 This
encourages lenders to focus on
neighborhoods and customer bases that
lack alternative credit options and have a
high likelihood of repeated borrowing.
Payday lenders are 2.4 times more
concentrated in African American and
Latino communities.71 They have also
been accused of targeting military
communities in the United States 72 and
children in the U.K. though television
ads.73
THE COMMUNITY AND CREDIT
SITUATION
Three larger sociological trends
in America could help to explain the
current high rates of payday borrowing
by creating a real or perceived lack of
alternatives to payday loans. Over the
past century, Americans have become
increasingly mobile. Extended family
members are less likely to live
together,74 which could decrease the
amount of intra-familial lending. Nearly
half of payday loan borrowers reported
that without the loan, they would not
rely on family or friends to get a loan.
This suggests that informal family
borrowing is not perceived as a realistic
alternative for many payday loan
recipients.75
Similarly, the decline of civic
engagement and social capital in
America76 might contribute to an
increased reliance on payday loans
because of an actual or perceived lack of
alternative borrowing opportunities from
local sources. This decline in social
capital can have an impact on economic
outcomes because social networks
“connect us to potential economic
partners, provide high-quality
information, and vouch for us.”77 A
decline in locally available credit may
have an especially dramatic impact on
high-risk borrowers, who are most
likely to take out payday loans.
The rise of consumer culture
and the corresponding norm of
consumer credit dependence may also
lead payday borrowers to perceive
that reducing expenses is not an
alternative to payday loans. Credit
cards have become very common in
American households, leading to a
strong perception that borrowing to
fund household expenses is socially
acceptable. This supports a
“defiant . . . consumption culture”78
that makes “immediately obtainable
consumption markers whose
acquisition was less available to . . .
the working and middle classes of
previous generations.”79 In one study,
8% of payday borrowers reported
taking out loans to purchase
“something special” and 81% of
borrowers reported that they would
cut back on their original expenses if
they lacked access to payday loans. 80
This result suggests that the borrowers
are using these loans to cover
expenses that are, at some level,
discretionary.
THE POVERTY PENALTY AND THE
DEBT SPIRAL
While some spending from
payday loans is discretionary, many
borrowers use the cash advances for
necessary and recurring expenses. 81
Because of their vulnerable position,
15
Payday
lenders are 2.4
times more
concentrated
in African
American and
Latino
communities.
these borrowers often have little
choice but to accept payday lenders’
high interest rates.
This is often
referred to as a “poverty penalty.”82
In a 2009 study, only 17.5% of
borrowers said they had enough cash
in the bank to pay for expenses when
they took out the loan; 50.6% reported
that the payday loan was their only
option.83 Because they lack assets and
alternative credit options, payday
borrowers are especially prone to
financial distress. While only 3.9% of
all consumers spend 30% or more of
their household income on debt
service, nearly a third of payday
borrowers do so. 84 Payday borrowers
are also nearly four times more likely
to have filed for bankruptcy within the
past five years than other
consumers.85
Many
borrowers use
the cash
advances for
necessary and
recurring
expenses.
Customers’ precarious financial
positions are compounded by the high
interest rates attached to payday loans,
putting borrowers at risk of falling
into a “debt spiral.” An estimated 91%
of all payday loans go to returning
borrowers,86 and customers that take
out 12 or more loans per year account
for 60% of the industry’s business.87
Nearly half of a typical store’s cash
advances are rollovers or extensions
of an existing loan.88 As loan renewal
rates go up, so does profitability: older
locations with proven customer bases
tend to be far more profitable than
newer payday lending locations.89
Payday lenders are thus motivated to
target financially vulnerable
customers likely to become repeat
16
borrowers.
THE PSYCHOLOGY OF
PAYDAY LENDING
In addition to external factors,
the psychological conditions impacting
borrowers’ decisions help explain why
payday lending is such a thriving
industry and why the economic model
might not be as efficient as economists
perceive.
POVERTY IMPAIRS PEOPLE’S
ABILITY TO MAKE RATIONAL
FINANCIAL DECISIONS
People tend to over-value
immediate rewards over more distant,
future ones in a tendency known as
“delay discounting.” This undermines
rational decision-making in a variety of
circumstances, including financial
decisions.90 Poverty exacerbates the
effects of delay discounting by causing
people to focus more on immediate
rewards at the expense of long-term
returns.
This is consistent with
Mullainathan and Shafir’s theory of
“scarcity,” which holds that money or
time scarcity captures people’s attention
and impairs rational, future-oriented
decision-making.
Experimental data
bears this out. For instance, in one
neuro-economic experiment, people
assigned to a mock condition of poverty
over-borrowed significantly.91
Scientific findings confirm that
stress—in particular, chronic stress and
its associated hormones—impair brain
functions involved in rational financial
decision-making. The pre-frontal cortex
(PFC) in the brain is involved in
complex cognitive behavior and
d e c i s i o n - m a k i n g .92 T h e P F C i s
responsible, among other things, for
helping people avoid delay discounting.
But its functioning is highly vulnerable
to disruption.
People affected by
financial scarcity are more susceptible to
irrational financial decisions due to
chronic stress induced by their situation,
which in turn impairs PFC functioning.93
In addition, those under chronic stress
tend to rely heavily on habits, which
makes them less sensitive to outcome
value.94
In general, poverty, scarcity, and
chronic stress impede one’s ability to
make sound financial decisions or form
reasoned judgments of future financial
risk, which is critical in evaluating
whether a loan will provide more benefit
than harm.
Thus, socioeconomically
disadvantaged groups are particularly
susceptible to accepting payday loans
without reasoned regard for the interest
rates offered.
LACK OF ACCESS TO MAINSTREAM
BANKS ENCOURAGES DISTRUST
Disadvantaged populations’ lack
of access to mainstream banks
exacerbates this situation. Mainstream
banks have a less developed
infrastructure in lower income
communities,95 and hence people in
those communities lack the protections
of mainstream financial systems that are
“composed of attractive ‘no-fee’ options,
automatic deposits, reminders . . .
built to shelter them from grave or
repeated error.”96 In 2011, 28.3% of
US households were unbanked or
under-banked, which means that they
conducted “some or all of their
financial transactions outside of the
mainstream banking system.”97
While some payday lenders do
not live within physical proximity of
t r a d i t i o n a l b a n k s ,98 n e g a t i v e
perceptions of mainstream banking
systems also play a role in
exacerbating people’s lack of access
to credit. Those without access to
mainstream financing perceive banks
as serving only the better off, creating
an ingroup/outgroup mentality that
pushes them further away from more
m a i n s t r e a m f i n a n c i n g99 a n d
encouraging a general distrust of
financial institutions.100 Lack of trust
creates a negative cycle, further
reducing an individual’s desire to
conform to social norms and
participate in the mainstream financial
system.101 As a result, payday loans
become an increasingly attractive
option and borrowers assume they
need to pay a premium to get any
access to credit.
PAYDAY LENDERS TARGET THESE
VULNERABILITIES
Payday lenders tend to
advertise their product merely in
terms of the immediate reward,
highlighting the quality that
populations with severe scarcity are
already predisposed to over-value.
17
Poverty,
scarcity, and
chronic stress
impede one’s
ability to
make sound
financial
decisions.
Payday loan advertisements often
exclusively refer to the gains
associated with them. For example,
payday loans use taglines like “Get
Cash NOW!”102 to ostensibly promise
fast cash with minimum hassle.
Payday
lenders tend
to advertise
their product
merely in
terms of the
immediate
reward,
highlighting
the quality
that
populations
with severe
scarcity are
already
predisposed
to over-value.
This type of advertising exploits
three additional types of cognitive
biases. First, it takes advantage of the
“framing effect,” in which people’s
A borrower’s story: Domingho started a
federal class action against a payday loan
store in Chicago. He initially borrowed
about $2600, but each of the 9 times the
lender renewed or “flipped” his loan, the
amount he owed grew. Even though he
paid about $5000 over 10 months, he only
managed to reduce the principal balance
on his loan by $30. The rest was applied
to fees.
The lender, Dominginho said, set its
customers up to fail and then harassed
them. In his case, they used an automatic
dialing system to call repeatedly about his
balance and paperwork, even after he
asked them to stop.
Unfortunately, Dominginho’s loan
agreements contained arbitration
requirements and class action waivers. He
argued that these provisions were
unconscionable and unenforceable, but the
court enforced them anyway.
Adapted from http://www.courthousenews.com/
2009/07/14/
Class_Calls_Payday_Lender_a_Shark.htm, https://
a.next.westlaw.com/Document/
Ief59d089d14a11df84cb933efb759da4/View/
FullText.html
18
choices are heavily influenced by the
manner in which options are presented.
A series of studies have demonstrated
that people preferentially choose options
that are framed positively. For example,
people are more likely to purchase
condoms advertised as 95% effective as
opposed to those advertised as having a
5% risk of failure.103 Second, it
encourages “ambiguity aversion” —
people prefer options with more certain
outcomes.104 The certainty of immediate
cash makes payday loans seem more
attractive, especially in contrast with a
m u r k y, c o m p l i c a t e d m a i n s t r e a m
financial system. Third, it speaks to
“time-variant preferences”— preferences
for activities that deliver immediate
benefits and delay perceived costs.105
Even if advertisements made the
risks of payday loans explicit, cognitive
biases would still lead consumers to
underestimate product risks. “Optimistic
bias,” in which consumers view
themselves as less vulnerable to a
particular risk, militates against full
apprehension of the risks of payday
loans.106 “Cognitive dissonance” is also
at play—people often ignore information
that casts doubt on their decisions, such
as the decision to resort to a payday loan
vendor.107 Making matters worse,
payday lenders design contracts in ways
that augment these biases.
Contract
design often minimizes the perceived
total price by increasing the price of
dimensions that consumers are most
likely to underestimate.108
The lender’s strategy exploits the
vulnerabilities of low-income
populations.
In fact, some payday
lenders reach out to potential applicants
personally.109 Although everyone is
susceptible to cognitive biases that lead
to outcomes traditionally perceived as
irrational, people in vulnerable
socioeconomic groups are especially
susceptible to the predatory nature of
payday lending.110
THE SHIFTING MEDIA
LANDSCAPE
Since the 2008 financial crisis,
the media has begun incorporating the
lessons of psychology to reframe
attributional frameworks for borrowers
and lenders. Media coverage of payday
loans was limited before the recession
and borrowers were generally assumed
to be dispositionist actors.
Today,
however, most journalistic reports share
two characterizations: dispositionist
lenders and situationist borrowers.
Reflecting
these
characterizations, articles, videos, and
news broadcasts often aim to warn
consumers about the danger of payday
loans. For example, an article published
in Business Insider used the headline “6
Outrageous Facts That Show How
Payday Lenders Screw Consumers,”
accompanied by a photo of a brightly
colored display window of an unnamed
lender’s store.111 The brief article gives a
summary of payday loans and the
controversy encircling the industry. The
introduction employs the verb “prey” to
describe the actions taken by lenders in
soliciting business from borrowers. The
lenders are portrayed as taking
advantage of borrowers, whose
decisions to take out payday loans are
shown as products of their situations.
CASE STUDIES IN VICTIMIZATION
Case studies published by the
Center for Responsible Lending
illustrate stories of the dispositionist
lender and the situationist borrower,
detailing the experiences of various
“victims of payday lending.”112
In the introduction, Mr.
Jackson was referred to as a “26er” by
the industry because he renewed his
loan bimonthly in accordance with
paycheck deposits, resulting in 26 fee
payments per year.
The same
attributional scheme invoked in Mr.
Jackson’s saga colors the story of
Sandra Harris. 113 Ms. Harris was a
successful radio show host when her
husband lost his job.
When her
family could not afford to pay their
car insurance bill, she contacted
Payday Loans Direct and took out a
small loan. She was prepared to pay
back the first loan on her next payday,
but the clerk convinced her to renew.
Soon, Ms. Harris was taking out
payday loans to repay previous loans
and paying rollover fees on six loans
simultaneously. Eventually she wound
up facing eviction, her car was
repossessed, and her checks started
bouncing. The situation came to a
head when she found herself sobbing
in between segments of her radio
show. Despite her successful career,
Ms. Harris still feels financially
19
People in
vulnerable
socioeconomic
groups are
especially
susceptible to
the predatory
nature of
payday
lending.
behind “because she got caught in the
debt trap.”114
THE ROLE OF ADVERTISING
The following excerpts from
advertisements by payday lenders
illustrate the skewed image of payday
loans that lenders present to
consumers. Loans are portrayed as
no-hassle, convenient solutions to
recurring problems or emergencies.
Lenders portray themselves as an
integral part of the community and
attempt to establish trust by
referencing their history in the
community and desire to help their
fellow neighbors “breathe” until the
next paycheck arrives.
“It’s easy!” “Easy!” “Really easy!”
“So this time, next time, every time you
need cash—Ace Cash Express. Earning
your trust since 1968.”
Figure 3: “Designed With You In Mind”
by Montel Williams for MoneyMutual116
“Would an extra $1,000 come in handy
right now? Then I’d like to talk to you
about MoneyMutual. It’s your trusted
source to over 60 lenders to get you up
to $1,000 fast. That big medical bill?
Paid! The car? Fixed! Breathing room
till payday? Done! [. . .] No credit score
required. Need cash tomorrow? Go to
moneymutual.com today!”
PAYDAY LENDING ON TRIAL
Figure 2: “Loans Up To $1,000 in
Minutes” by Ace Cash Express 115
“The fridge broke!”
“We had to take Buddy to the vet.”
“My car wouldn’t start. Again!”
“When the unexpected happens and
you need cash, visit your
neighborhood Ace Cash Express or go
to acecashexpress.com. In just
minutes, you can get a payday loan
for up to a $1,000 with no credit
hassles.”
20
The media has also begun to
report on administrative and legal issues
stemming from recent regulatory action.
In its coverage of the lawsuit against
Western Sky Financial, the New York
Times continuously referred to lenders as
gulling millions of helpless borrowers
into unsustainable long-term debt and
trapping them “under a crescendo of
interest costs.”117
In another case, a
class action in New Jersey was filed
against U.S. Bank for its role in online
payday lending and the suit attracted the
attention of the Minnesota Star Tribune.
Readers were introduced to a
“hardworking single mother that lives in
the state that has banned payday loans
and who paid over 600% APR on a
loan.”118 In the eyes of the media, the
situationist consumer again fell victim to
the dispositionist lender that utilized
technological loopholes to evade
regulation.
THE SITUATIONAL BORROWER
GAINS DISPOSITIONAL POWER
R e c e n t l y, t h e C o n s u m e r
Financial Protection Bureau (CFPB)
issued a statement on CNBC explaining
that it will allow consumers of payday
loans to file complaints against payday
lenders.119 The CFPB will forward
complaints to the payday lenders who
will then be permitted to reply.
Eventually, the entire complaint will be
available in a public database.
The
CFPB is seeking complaints about the
most common payday lending problems,
such as unexpected fees, inaccurate fees,
and unrequested loans.
The CFPB
Director, Richard Cordray, says this
practice will give “people a greater voice
in this market.” The CFPB believes it
will transform the situation of the
borrowers by allowing them to be more
dispositional decision-makers after
hearing the complaints of other
“victims.”
Despite the relatively small
amount of historical mainstream media
coverage of payday lending, consistent
attributional schemas are evident in the
portrayal of the industry. Given the
large market for payday lending and
ongoing implementation of
increasingly stringent and consumerminded regulation, the media attention
given to payday loans will probably
increase in the future, and it is unlikely
that the view of borrowers as
situational victims and lenders as
dispositional actors will change.
PUBLIC CHOICE
SITUATIONIST LENDERS?
With the media’s attributional
frames aligned against them, many
payday lenders argue that high interest
rates are necessary to provide credit to
certain populations. When making
this argument, they generally cite the
high rate of default.120 Most who can
pay back their loans choose to borrow
elsewhere, which leaves a pool of
mostly high-risk borrowers for payday
lenders. Because many transactional
costs do not increase with the size of
the loan, these costs comprise a larger
portion of the principal of smaller
loans. In addition, payday lenders
have many locations and keep longer
hours than banks, which are helpful to
customers and a necessary part of the
business model, but also expensive to
maintain.121
Given these factors, payday
lenders argue that their interest rates
are necessary to maintain viable
businesses.122 Even non-profit payday
lenders run by credit unions charge
similar interest rates of up to 500%. 123
Their customers have few other
options: 73% of payday loan
21
Payday
lenders argue
that high
interest rates
are necessary
to provide
credit to
certain
populations.
borrowers have been denied a loan
from another source in the prior five
years,124 and the few available
alternatives, like bank overdrafts,
pawn shops, and auto title loans, have
similarly high interest rates.125
Payday lenders
have an interest
in blocking any
potential
expansion of
tort law to
cover loans
resulting in
financial ruin,
but such
expansion will
not necessarily
destroy their
businesses.
Payday lenders have an interest
in blocking any potential expansion of
tort law to cover loans resulting in
financial ruin, but such expansion will
not necessarily destroy their
businesses. Payday lenders make
about the same profits per loan from
both high-frequency and lowfrequency borrowers, and a business
only making loans to low-frequency
borrowers could still be viable, even if
less profitable.126
THE ANTI-REGULATION
COALITION
To protect their interests, payday
lenders and their representatives have
increased their contributions to
national political candidates in recent
years. 127 Their federal lobbying
expenditures in the 111th Congress
alone (2009-10) exceeded $9
million.128 In Texas, where lenders
exploit a legal loophole to operate as
“credit service organizations,” lenders
contributed over $1.3 million to state
officials in the 2009-2010 election
cycle.129 Comprehensive payday
lending reform failed in the Texas
House of Representatives earlier this
year.130
Other financial institutions
feature in the public choice landscape.
22
Firms providing capital for small-loan
operators are predictably interested in
preserving the system.131 Major banks
have also supported the payday loan
industry in lobbying efforts.
This
support could be explained in at least
three ways. First, some of these banks
themselves offer small-dollar, short-term
loans or other similar services. Wells
Fargo, for instance, provides Direct
Deposit Advances for a fee of $1.50 per
A borrower’s story: Lisa from North
Carolina was raising her five-year-old
daughter alone, with barely any child
support.
She felt bad about getting
financial help from her parents, so when
she started seeing payday loan ads and
storefronts she was excited to find a new
way of making ends meet.
The boost to her sense of dignity would
not last long.
In less than eighteen
months, Lisa wound up paying over $1200
on a loan that was supposed to be for $255
because she did not understand the interest
and fee terms of the loan she was taking
out. When she finally understood what
was happening, she said, “I was almost
relieved, because then I understood why I
was more broke than I was before the
payday loans.”
To escape the cycle of payday debt, Lisa
intentionally bounced a check, terminating
her eligibility for new loans. It would take
two years more to pay off the check and
fees.
Adapted from: http://www.responsiblelending.org/
payday-lending/tools-resources/victims-1.html
$20. 132 Second, banks and payday
lenders share an interest in blocking
federal financial regulation.
Despite
payday lending’s generally unfavorable
public image, banks have been willing to
join with payday lenders in funding
campaigns against the CFPB, for
example.133 Finally, major banks can
benefit from payment collection for
payday loans.134 Although payday
lending is presented as a tool for
avoiding overdraft fees, 27% of all
borrowers and 46% of online borrowers
claim to have incurred such fees in the
last year as a result of lenders accessing
their accounts.135 Overdraft fees
constitute revenue for banks—including
those that knowingly allow payday
lenders to withdraw from underfunded
accounts.136
THE COALITION FOR REGULATION
Consumer
advocacy
organizations have tried to develop
models for responsible lending and are
the largest force pushing for the
regulation of payday loans.
The
National Consumer Law Center has
developed criteria to determine what
constitutes a responsible loan (such as
36% APR caps, longer loan periods, and
alternatives to balloon payments).137
Consumer advocacy organizations have
also identified groups that are
particularly vulnerable to payday
lending. For instance, the Center for
Responsible Lending identified military
families as particularly vulnerable and
encouraged the Department of Defense
to limit the types of loans available to
them.138
The Center for Responsible
Lending’s approach to predatory loans
aimed at military families is a good
example of how these organizations
influence the law.
They regularly
provide feedback on proposed
regulations, as when the Department
of Defense considered regulating the
types of financing available to military
f a m i l i e s .139 T h e C e n t e r f o r
Responsible Lending is pursuing a
similar strategy in cooperation with
the CFPB, which is attempting to
regulate overdraft fees (often a
complication of payday lending). 140
Their strategies all attempt to shift the
debate from the needs of the industry
to the impact of payday lending on
families who find themselves trapped
in debt.
Consumer advocacy groups
have also spent money opposing
payday lenders. In 2008, advocacy
groups spent over $1.5 million to
oppose a ballot initiative in Arizona to
reinstate payday lending after the
legislature banned it 141 and to support
a ballot initiative in Ohio capping
interest rates at 28% and loan amounts
at $500.142 That same year, however, a
proposed ballot initiative to cap rates
at 36% backed by church groups and
labor unions in Missouri failed to
make the ballot.
Payday lending
supporters spent $2.8 million
opposing the initiative and circulated
decoy alternative proposals, which
23
Although
payday lending
is presented as
a tool for
avoiding
overdraft fees,
27% of all
borrowers and
46% of online
borrowers
claim to have
incurred such
fees in the last
year as a result
of lenders
accessing their
accounts.
confused voters about which
proposals were real.143
Many aspects
of the payday
loan writing
process are
ripe for
reform,
but rules
surrounding
mandatory
disclosures to
consumers
are perhaps
most so.
While consumer advocacy
groups are prominent in pushing for
regulation, other groups have also
signed on to efforts to regulate payday
lending. For instance, a report by
Arkansans Against Abusive Payday
Lending listed the AFL-CIO,
NAACP-Arkansas, and the Interfaith
Alliance of Arkansas as cosponsors.144 These organizations
support efforts to regulate payday
lending due to the disproportionate
impact those loans have on their
constituent groups. While pushing for
regulations is not their primary
purpose, they have the ability to give
credibility and power to the
recommendations of consumer
advocate organizations, which often
lack the direct access that groups like
the NAACP and AFL-CIO can offer.
Credit unions, whose small loans
sometimes face competition from
payday loans, have also been known
to join labor unions and consumer
protection advocates in supporting
state-level payday lending
restrictions.145 PROPOSED
RECOMMENDATIONS
disclosures to consumers are perhaps
most so.
Currently, a baseline of
disclosures by lenders to consumers is
required under the Truth in Lending Act
(TILA).146 These requirements ensure
that consumers receive basic information
about the loan terms (the amount
financed, the APR, the payment
schedule, and other key elements) prior
to signing.147 But these rudimentary
details of the loan terms might not be
particularly meaningful to consumers of
payday loans, since consumers might not
effectively absorb this relatively abstract
set of numbers when they are focused on
A borrower’s story: When the Consumer
Financial Protection Bureau came to
Birmingham, Quinn was there. He told
officials the story of his 21-year-old sister,
who took out a payday loan to buy books.
When she found she couldn’t pay off her
initial loan, Quinn’s sister decided to get a
car title loan. The collateral was a car she
had bought with a portion of her
inheritance after their mother’s death.
Even with the new loan, she couldn’t keep
up with payments. In desperation, she
stole a check from a family member.
As far as Quinn is concerned, a payday
loan “killed” his sister. “I haven’t seen
[her] in two Christmases,” he says,
POLICY SOLUTIONS
“because there’s so much shame that she
has with the family.”
Current Policy
Many aspects of the payday loan
writing process are ripe for reform,
but rules surrounding mandatory
24
Adapted from http://files.consumerfinance.gov/f/
201201_cfpb_transcript_payday-lending-fieldhearing-alabama.pdf
little beyond obtaining cash as quickly as
possible.
Disclosure as a Solution
One solution would be going
beyond the comparatively minimal
TILA disclosures toward requirements
that will better provide loan customers
with relevant, contextualized
information prior to agreeing to the
loans. For example, lenders might be
required to present customers with an
analysis of a given loan’s near-term
financial implications, prepared on a
case-by-case basis.148 This would allow
a customer to better apply the meaning
of the payday loan to her specific
context, rather than merely forcing her to
face abstract concepts that she might not
fully understand or appreciate.
Put
differently, an astronomically high
interest rate may mean one thing to a
consumer, while seeing the implications
of that rate on her future paychecks and
other financial obligations may have a
different, eye-opening effect.
These disclosure requirements
are aimed at better informing consumers
so that they might avoid the “debt trap”
perils associated with falling into a cycle
of payday loans. In addition, we could
consider requiring payday lenders to
afford customers other product-related
types of pre-signing disclosure. One
recent proposal in the U.S. House of
Representatives focused on requiring
payday lenders to remind customers that
their products are “not intended to meet
long-term financial needs,” that they
“should be used only to meet short-term
cash needs,” and that lower-cost
alternatives for obtaining resources
may be available elsewhere.149 Ian
Ayers and Alan Schwartz have
proposed a similar cautionary
requirement whereby payday lenders
would be required to disclose and
explain the key terms of a loan in a
designated warning box; this approach
would prevent the lenders from
burying the unfavorable aspects of the
loan within lengthy contracts. 150
Perhaps more of this sort of
disclosure, relating to the general
nature of payday loans themselves
and the implications of a loan’s terms
rather than simply the specific terms
of a given loan, could benefit
consumers going forward as well.
Preventing Default
An additional, potentially
complementary way to address the
issues raised by payday loans in their
current form would be to place more
of an onus on lenders to preemptively
protect their customers from
defaulting. As it stands, the default
rate for first-time payday borrowers
has been shown to be as high as
12%.151 High default rates force
lenders to raise loan interest rates,
which in turn causes the debt burden
on the borrowers to be even greater.
In an effort to require payday lenders
to exercise due diligence when giving
out a loan, we might propose
requiring lenders to check credit
histories for prior payday loans.
Restricting loan access to consumers
25
These
disclosure
requirements
are aimed at
better
informing
consumers so
that they might
avoid the “debt
trap” perils
associated with
falling into a
cycle of payday
loans.
Restricting
loan access to
consumers
who are not
already
saddled with
large amounts
of outstanding
debts would
ultimately
advantage
both the
consumer and
the lender.
who are not already saddled with large
amounts of outstanding debts would
ultimately advantage both the
consumer and the lender. Specifically,
consumers would avoid assuming a
burden they could not manage, while
lenders would be able to retain credit
that might otherwise have been
ruined.
Requiring consumers to provide
some sort of collateral before securing
a loan could similarly trigger this
outcome.
If payday lenders were
forced to require collateral from their
would-be debtors, they would not lose
the full amount of the loan in the
event of a default. Thus, the loans
would be slightly less risky and the
interest rates on the loans could be
lowered.152 On the other hand, high
interest rates are not the only problem
borrowers face and requiring
collateral for low-income borrowers is
dangerously similar to pawn shop
loans and car title loans, two of the
most predatory categories of shortterm, small-dollar loans.153
Regulatory Approaches
An alternative policy route would
involve pursuing more interventionist
approaches. As an example, a number
of states have already imposed strict
caps on fees and interest rates. These
caps generally lead to a precipitous
drop in the supply of payday loans in
those states. In the year following
Oregon’s capping of interest rates at
36% APR in 2007, payday lender
licenses in the state dropped from 346
26
to 82.154 From this example, it appears
that some lenders continued to issue
payday loans with significantly lower
rates, but the caps undoubtedly had an
effect in significantly reducing the
number of payday loans and lender
storefronts. Extrapolating from these
results, the imposition of strict caps on
fees and interests rates on payday
lenders seems to offer a direct way of
forcing the industry to lend in a more
reasonable manner, or to cease doing so
altogether.
Another highly interventionist
approach would involve imposing caps
on the size of payday loans. Of the 27
states that provide little other regulation
for payday loans, 21 cap the size of
small-dollar, short-term loans, usually at
$500.155 This seems to imply that these
state legislatures acknowledge the
potential of exorbitant interest rates to
harm their citizens.
Though this
approach might not eliminate the
extortionate rates that payday lenders
can charge, it would at the very least
mitigate the damages such rates could
have on borrowers.
Reforming the lump-sum
payment scheme could also help protect
payday loan consumers from predatory
practices. One reason that payday loan
borrowers get trapped in a cycle of debt
is that most cash advance companies
only allow repayment of the loan
principal in one lump sum.156 For those
living paycheck-to-paycheck, that sort of
repayment is often impossible to make,
which forces them to pay additional fees
to renew their loans. While regulators
want to stop payday borrowers from
being trapped in perpetual cycles of
debt, they also worry that regulating
payday loans out of existence will
foreclose certain populations from
readily accessing credit. A ban on lumpsum repayment schemes could provide a
solution to this dilemma. Lenders could
still charge whatever interest rate they
need to justify the risk of a loan, but they
would not be allowed to prevent
borrowers from paying off the principal
more gradually. If borrowers could pay
a few dollars toward the principal every
month, they could escape the payday
loan “trap” without needing to rely on
some sort of outside cash infusion.
The overarching dilemma
surrounding regulation of payday loans
is that overregulation could foreclose
access to credit. Economists therefore
warn of the “substitution effect,” in
which desperate borrowers will face
even less desirable alternatives as a
result of government interference in this
market. Even now, most payday loan
borrowers do not have many appealing
alternatives. Seventy percent of payday
loan borrowers in Oregon said that they
did not have any alternative sources to
credit when the interest rate cap went
into effect in 2007.157 While some
borrowers reported that they could cut
down on spending, others claimed they
would need to max out credit cards or
overdraw their checking accounts to pay
their bills.
Alternatives to Payday Loans
A solution to this problem
could be to give borrowers better
options by providing positive
alternatives. The government could
encourage or fund the reestablishment
of community banks.
It could
subsidize microloans to the poor, like
it currently does for some small
businesses through the Small Business
Administration.158 Or it could broaden
the social safety net so that people no
longer need payday loans to fund
basic living expenses. Additionally,
the private sector might also be able
to provide viable alternatives to
payday loans. The Grameen Bank,
which has revolutionized the
developing world with the innovation
of microloans, recently started a
Grameen America branch that
provides microloans to Americans
who lack access to capital. 159 With
interest rates often above 50%,
microloans can still be expensive for
borrowers and are often profitable for
banks that supply them.160 While the
profit margins are presumably smaller
than those for payday loans, microlending banks might be able to
provide a private sector solution for
expanding access to credit.
By
providing such alternatives, we could
ensure that the regulation of payday
lending and consequent changes in
industry practices would truly be in
the best interest of the consumer.
LITIGATION-BASED SOLUTIONS
In recent years, a number of
states have passed laws and
27
A ban on lumpsum repayment
schemes could
provide a
solution to this
dilemma.
A plaintiff may be
able to bring a
viable tort claim
under theories of
negligence,
fraud and
misrepresentation,
or products
liability.
regulations that address payday
lending abuses.161 Although there is a
wide variety in state regimes
governing payday lending, most
efforts have focused on limiting
interest rates and service fees, capping
the size of loans, and fixing the
minimum and maximum repayment
terms of loans. 162 As previously
mentioned, some states have also
required payday lenders to provide
more information about their financial
products to customers.163 Growing
awareness of the problems associated
with payday lending has even led the
federal government to begin taking
steps to address payday lending
abuses. The Dodd-Frank Wall Street
Reform and Consumer Protection Act,
passed in 2010, gave the federal
government new powers to regulate
payday lending.164 As a result, the
Consumer Financial Protection
Bureau, Federal Deposit Insurance
Corporation, and Office of the
Comptroller of the Currency are
currently developing rules to govern
payday lending.165
In addition to statutory law, civil
litigation is a potential solution to the
problems associated with payday
lending. A plaintiff may be able to
bring a viable tort claim under
theories of negligence, fraud and
misrepresentation, or products
liability. We consider these theories
below and also propose a new ex-post
incentive-based liability tort to
combat payday lending abuses.
Negligence and Lender Liability
28
Claims of negligence are one
potential strategy to deal with the
problems of payday lending.
In
common law, negligence occurs when a
defendant breaches a duty to a plaintiff
and causes the plaintiff harm. Under this
schema, borrowers could bring claims of
negligence against payday lenders that
either intentionally or unintentionally
cause harm by breaching duties of care
that are owed to the borrowers.
Proceeding on claims of
negligence would require that courts
expand their understanding of a lender’s
duty to care for their customers. In just
three decades, the concept of lender
liability has “gained acceptance as a
substantive body of law.”166 Generally
speaking, lender liability law imposes a
duty on lenders to treat their borrowers
fairly. In addition to honoring the terms
of the loan contract, this duty can
include honoring any side deals that
were not clearly detailed in the loan
document, properly renewing a loan, and
processing loans in a timely fashion.167
As lending abuses have become apparent
in industries like home mortgages, courts
have been willing to expand lender
liability to encompass a broader array of
issues, which has made bringing suits
based on a range of other claims, like
misrepresentation and breach of
contract, easier for victimized borrowers.
Misrepresentation
Finding certain payday lenders
guilty of misrepresentation is another
potentially fruitful tort solution to the
problem of lending abuse.
Misrepresentation can be based on either
intent or negligence.
The tort of
intentional misrepresentation, also
known as fraud or deceit, is committed
when a potential defendant knowingly
makes a false material statement to the
potential plaintiff with the intent that the
plaintiff rely on that false information.
The plaintiff can then recover if she can
demonstrate reliance on the false claim
and damages suffered as a result.168
Misrepresentation is an attractive tort
solution to the harm of payday lending
because it can apply specifically to
pecuniary damages.
The primary
challenge for a plaintiff using this tort
will be to demonstrate that the payday
loan supplier made a false material
statement. In the easiest cases, the loan
provider will have lied about the interest
rate, leading the plaintiff to agree to a
loan that she might have otherwise
rejected. In most cases, however, such a
clear misrepresentation will not have
occurred. The lender might have only
been silent as to the interest rate or other
terms of the loan. While the actual loan
document will contain the necessary
information, someone in the borrower’s
situation might not have the financial
literacy or desire to read the fine print.
If this is the case, the lender’s failure to
openly disclose the terms of the loan
could be seen as contributing to the
borrower’s decision to take the loan. In
many states, an omission of pertinent
information qualifies as
misrepresentation. For example, in the
District of Columbia, plaintiffs can show
the defendant made a false statement or
an omission of fact to establish a
misrepresentation claim.169
Courts might be receptive to
applying negligent misrepresentation
to payday lending. Consider Arthur
Jackson, the warehouse worker who
took out a $300 loan to supplement his
income and help his daughter open her
small business, only to be saddled
with debt as a result of frequent
rollovers on his original loan.
In
response to Arthur’s initial inquiry
about obtaining a loan, agents of
Advance America failed to tell him
about how the terms would be
modified should he need to roll the
loan over. Given the frequency with
which borrowers are forced to roll
over their loans, a case could be made
that Arthur’s lender engaged in
misrepresentation by not fully and
openly disclosing the terms of the
loan. Similarly, Sandra Harris, the
accounting technician who now owes
thousands of dollars in back taxes as a
result of payday loans, might be able
to bring a suit of misrepresentation
against the lenders who failed to
disclose to her the potential dangers
that could ensue as a result of her loan
renewals.
Product Liability
Under existing law, at least
two kinds of products liability claims
are available against manufacturers
and vendors: negligence and strict
liability. The former lets plaintiffs
recover where their cases meet the
ordinary standards of negligence (i.e.
29
Courts might be
receptive to
applying
negligent
misrepresentation
to payday
lending.
Although the
odds might seem
stacked against
the plaintiff due
to the restrictive
definition of
“products,” it
would certainly
not be foreign to
the common law
tradition for
judges to
expand the
meaning of a
legal term to
reflect the
changing social
trend and
achieve a just
outcome.
where the defendant knew or should
have known that the product was
dangerous and still proceeded to sell it
to the plaintiff, thereby damaging
her).170 In the latter case, while
plaintiffs need not show negligence
they still must show that the product
was defective, and that the defendant
was a “merchant.”
However, tort law today does not
recognize service providers as
“merchants,” so strict liability is not
applicable.171 Additionally, the term
“products,” as it is used in both types
A borrower’s story: Stevie is a Baptist
minister in Kansas City. When his father
became terminally ill he began working
less to care for him. Stevie and his wife
eventually fell behind on mortgage
payments, even after withdrawing from
her retirement account to attempt to keep
up.
Stevie took out a $500 payday loan and
expected to pay it back in two weeks.
Within four months the amount he owed
had grown from $500 to $1250.
He says he was so alarmed that he
“scraped together” the money and paid it
off, but Stevie joined with other religious
leaders in the area to push for an end to
what he calls “a debt trap” and “a
nightmare.” “Many consumers, like my
wife and I, aren’t stupid,” he says. “We
need no pity.”
Adapted from http://www.piconetwork.org/newsmedia/coverage/2009/0203, https://
www.youtube.cofm/watch?v=Dv7CaPsZxqQ
30
of liability claims does not include
financial “products,” but only physical
products.172 Finally, the damages
recoverable are limited to physical
damages to the person or property under
both claims.173
Given these legal constraints, the
first hurdle for any plaintiff who seeks a
tort remedy in products liability is to
show that payday loans are “products.”
Although the odds might seem stacked
against the plaintiff due to the restrictive
definition of “products,” it would
certainly not be foreign to the common
law tradition for judges to expand the
meaning of a legal term to reflect the
changing social trend and achieve a just
outcome.174 The case of the payday loan
might well be such an exceptional
occasion. Because consumers suffer in
the same way from defective nonphysical products as they do from
defective physical products, restricting
remedies to claims for defective physical
products seems unjust.
Once payday loans are
recognized as products, the loan
providers will likely be considered as
commercial sellers, paving the way for
strict liability.
Under this theory, a
plaintiff only has to prove damages and
product deficiency.
If economic
damages are recognized, the damages
will consist of the plaintiff’s economic
loss. The deficiency is likely to be found
in the exorbitant interest rate, which was
probably unclear to the consumer at first
glance given the way payday loans are
marketed.
Abnormally Dangerous Lending: A
New Tort?
While courts could possibly be
persuaded to expand existing tort
liabilities to account for payday lending
practices, a more direct tort solution to
the problem would be the creation of a
new tort cause of action. Based on
evidence of the deceptive and damaging
practices provided earlier in this white
paper, we propose the new tort of
abnormally dangerous lending.
Under this new legal regime, a
borrower could present the story of the
lending practices used against him and
the resultant impact to a neutral fact
finder.
After receiving the lender’s
perspective of the events, the neutral
body would decide if the behavior was
abnormally dangerous or usurious. If so,
the lender would be entitled to recover
the loan principal and nothing more from
the defaulted borrower, releasing that
harmed borrower from a possible debt
spiral.
Since lenders have regularly
sidestepped regulations, we would
intentionally give the fact finder wide
discretion to decide whether the lender
engaged in lending that meets a standard
of unreasonably dangerous or usurious
practices. That said, we would propose
that the following considerations factor
into the final decision: whether the
borrower was made aware of the risk
involved in taking and renewing the
loan; how the lender marketed the loan
both at the point of sale and, if
applicable, in the community at large;
and whether the borrower’s condition
has been significantly worsened by
the loan. With these general factors—
as opposed to specific and more
avoidable triggers for liability—
guiding the neutral group’s inquiry,
payday lenders will not be able to
benefit from the inherently dangerous
lending currently being practiced.
While the exact details of how this
abnormally dangerous lending tort
would be adjudicated are not
a t t e m p t e d i n t h i s p a p e r, w e
nevertheless hope to have
demonstrated that such an expansion
of the tort frontier might be warranted
to curb a practice currently harming
millions of Americans.
CONCLUSION
Predatory lending is a
problem, and payday loans are a type
of predatory lending that is especially
troublesome today. Predatory lending
is deeply rooted in our history, and
although the situation of the borrower
has changed throughout history,
predatory lending remains a problem.
The same is true of payday loans.
Those who use payday loans
have not chosen to engage in a known
risk, but rather have been targeted,
bamboozled, and placed into an
unending and inescapable debtor's
cycle. The Predatory Lending Group
at Harvard Law School identified
practical policy solutions, a current
tort solution, and a newly created tort
to free the prey from their predators.
31
Based on
evidence of the
deceptive and
damaging
practices
provided
earlier in this
white paper,
we propose the
new tort of
abnormally
dangerous
lending.
After the presentation on November
20, 2013, members of Section Six
voted on every policy and tort solution
proposed by this white paper.
Each one of
these proposed
solutions
account for a
multitude of
factors, and
could help solve
the problems
borrowers face
with payday
loans.
For policy solutions, fifty-five
members of the class voted to replace
the balloon payment structure of
payday loans with an amortized
structure, and fifty-three members
voted to cap the interest rates or
amount borrowers could receive in a
loan. For tort solutions, forty-four
members of the class voted for
utilizing the doctrine of
misrepresentation. Finally, fifty-four
members of the class voted for the
newly created "abnormally dangerous
credit marketing tort." Each one of
these proposed solutions account for a
multitude of factors, and could help
solve the problems borrowers face
with payday loans.
32
REFERENCES
1
PayDay Loan Consumer Information, CONSUMER FEDERATION OF AMERICA, http://www.paydayloaninfo.org/facts
(last visited Nov. 24, 2013).
2
Id.
3
Paige Marta Skiba and Jeremy Tobacman, Do Payday Loans Cause Bankruptcy?, VANDERBILT LAW AND
ECONOMICS RESEARCH PAPER NO. 11-13 21, available at http://ssrn.com/abstract=1266215.
4
Hayley Peterson, 6 Outrageous Facts That Show How Payday Lenders Screw Consumers, BUSINESS INSIDER (Oct.
25, 2013), http://www.businessinsider.com/outrageous-facts-about-payday-loans-2013-10; Victims of Payday
Lending: Sandra Harris, CENTER FOR RESPONSIBLE LENDING, http://www.responsiblelending.org/payday-lending/
tools-resources/victims-2.html (last visited Nov. 22, 2013); Victims of Payday Lending: Arthur Jackson, CENTER
FOR RESPONSIBLE LENDING, http://www.responsiblelending.org/payday-lending/tools-resources/victims-4.html (last
visited Nov. 22, 2013).
5
Victims of Payday Lending: Sandra Harris, CENTER FOR RESPONSIBLE LENDING, http://
www.responsiblelending.org/payday-lending/tools-resources/victims-4.html (last visited Nov. 22, 2013).
6
About Us, ADVANCE AMERICA, https://www.advanceamerica.net/about-us (last visited Nov. 24, 2013).
7
About Cash Advances, ADVANCE AMERICA, https://www.advanceamerica.net/about-us/about-cash-advances (last
visited Nov. 24, 2013).
8
Id.
9
John P. Caskey, Payday Lending: New Research and the Big Question 1 (Fed. Reserve Bank of Phila., Working
Paper No. 10-32, 2010), available at http://www.phil.frb.org/research-and-data/publications/working-papers/2010/
wp10-32.pdf.
10
Nick Bourke et al., PAYDAY LENDING IN AMERICA: WHO BORROWS, WHERE THEY BORROW AND WHY, THE PEW
CHARITABLE TRUSTS REPORT 4 (2012) available at http://www.pewtrusts.org/our_work_report_detail.aspx?
id=85899406010.
11
See Niraj Chokshi, Paydayloans suck up billions in fees in states where they’re unregulated, GOVBEAT (Sept. 11,
2013, 8:45am), http://www.washingtonpost.com/blogs/govbeat/wp/2013/09/11/payday-loans-still-suck-up-billionsin-fees-in-states-where-theyre-unregulated/; N.Y. Times Editorial Board, Progress on Predatory Lending, N.Y.
TIMES, Sept. 15, 2013, http://www.nytimes.com/2013/09/16/opinion/progress-on-predatory-lending.html.
12
GARY RIVLIN, BROKE, USA: FROM PAWNSHOPS TO POVERTY, INC. 32-33 (HarperCollins, 2010). (Industry
consultants advise payday lenders in marketing approaches to encourage repeat borrowing claiming that such loyal
customers can pay from $2,000-$4,000 per year in fees).
13
Michael A. Stegman, Payday Lending, 21 J. Econ. Perspectives 169-71 (2007).See also Rivlin, supra note 12.
14
Legal Status of Payday Loans by State, CONSUMER FEDERATION OF AMERICA, http://www.paydayloaninfo.org/
state-information (last visited Nov. 24, 2013).See also CFBP Examines Payday Lending, CONSUMER FINANCIAL
PROTECTION BUREAU, http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureauexamines-payday-lending/ (last visited Nov. 24, 2013).
15
Rates, WESTERN SKY FINANCIAL, http://www.westernsky.com/General/Rates.aspx (last visited Nov. 24, 2013).
33
16
For biblical references see, e.g., Leviticus 25:36-37, Exodus 22:24, and Deuteronomy 23:20-21. The Code of
Hammurabi specifically mentions usury; both ancient Roman and Greek law prohibited usury. Medieval canon law
went further and prohibited interest altogether, although avoidance techniques were abundant. James M. Ackerman,
Interest Rates and the Law: A History of Usury, 1981 ARIZ. ST. L.J. 61, 66-70 (1981). Famous literary references
include Dante's Divine Comedy and Shakespeare's Merchant of Venice, both demonizing and abhorring usury.
However, changing attitudes and outright attacks against usury statutes appeared in the late seventeenth and early
eighteenth centuries in the works of liberal philosophers, most notably John Locke and Jeremy Bentham. Id. at
82-83. In America, early colonial usury laws were modeled after the English Statute of Anne which capped interest
at 5% (Act to Reduce Rate of Interest, 13 Anne, c. 15 (1713)), but were later repealed or severely modified in many
states under the influence of the laissez-faire philosophy. Id. at 85-87. Further to that, right from the get-go the
history of American usury law has been a history of exceptions. By the 1950s, these exceptions threatened to
overwhelm the rule. Although nearly all states retained a general usury limit, regulation was increasingly provided
by a bewildering and disorganized array of statutory exceptions. Id. at 94
17 Rebekah
Coleman, Evolution of the Payday Lending War, LOANS.ORG, http://loans.org/payday/articles/evolutioncash-advance-lending-war (last visited Nov. 24, 2013)
18
Robert Mayer, Loan Sharks, Interest-Rate Caps, and Deregulation, 69 WASH. & LEE L. REV. 807, 811, 836
(2012).
19
ROBERT MAYER, QUICK CASH: THE STORY OF THE LOAN SHARK 15 (2010).
20
See generally MAYER, supra note 18.
21
Mayer, supra note 18, at 812.
22
See Mark H. Haller and John V. Alviti, Loansharking in American Cities: Historical Analysis of a Marginal
Enterprise, 21 AM. J. LEG. HIST. 125, 127 (1977) (noting that it was “frowned upon consumer borrowing as a sign
of poor budget management and moral weakness on the part of the borrower”).
23
See generally Elizabeth Anderson, Experts, Ideas, and Policy Change: The Russell Sage Foundation and Small
Loan Reform, 1909–1941, 37 THEORY & SOC’Y 271 (2008).
24
See Bruce G. Carruthers et al., Bringing "honest capital" to poor borrowers: The passage of the uniform small
loan law, 1907-1930 (Economic Growth Center, Discussion Paper No. 971, 2009) (noting that "[i]nterest rates of
3.5 percent per month sounded bizarre to many at the time, and defending it on some occasions led to the charge that
the Foundation was simply a front for high-rate lenders." and that "[i]n several state legislatures RSF was asked to
explain its connection to lender’s organizations; was it simply an industry group? ").
25
See id.
26
The adoption of USLA was a long process, but ultimately all states except Arkansas passed a version of it, albeit
not always uniform. The interest rate was set at 18-42% annually, which was estimated as the minimal rate allowing
operation at a profitable level. See supra note 24.
27.
See Turner v. E-Z Check Cashing of Cookeville, TN, Inc., 35 F. Supp. 2d 1042, 1047 (M.D. Tenn. 1999) (“It
has been held that payday loans fall under the disclosure provisions of the TILA”).
28
Mayer, supra note 18, at 836.
29 Ackerman,
30
supra note 16, at 93.
439 U.S. 299 (1978).
31
Christopher L. Peterson, Truth, Understanding, and High-Cost Consumer Credit: The Historical Context of the
Truth in Lending Act, 55 FLA. L. REV. 807, 873 (2003). (“Most notably, this was the case in South Dakota, South
Carolina, Utah, and Delaware, which removed all interest rate caps”).
32
Pub. L. No. 96–221.
34
33
Ronald J. Mann & Jim Hawkins, Just Until Payday, 54 UCLA L. REV. 855, 867 (2007).
34
Id at 866, 868 (hypothesizing that there is a chronic violation of applicable laws governing usury, as well as
cheating).
35
See Id at 874-880 (dividing the states into categories of "explicit toleration," "underenforced prohibition," and
"true prohibition").
36
12 U.S.C. § 5517(o).
37
See 10 U.S.C. § 987.
38
Id.
39
See 10 U.S.C. § 934.
40
Jessica Silver-Greenberg & Peter Eavis, Service Members Left Vulnerable to Payday Loans, DEALBOOK (Nov.
21, 2013, 8:48 PM), http://dealbook.nytimes.com/2013/11/21/service-members-left-vulnerable-to-payday-loans/?
_r=1.
41
Caskey, supra note 9.
42
Consumer Financial Protection Bureau, Payday Loans and Deposit Advance Products: A White Paper of Initial
Data Findings 6 (2013), available at http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf.
43
See id. at 9.
44
See, HOW BORROWERS CHOOSE AND REPAY PAYDAY LOANS, THE PEW CHARITABLE TRUSTS REPORT 4 (2013)
available at http://www.pewstates.org/research/reports/how-borrowers-choose-and-repay-paydayloans-85899452131. (“In deciding whether to borrow from a payday lender, more than 3 in 4 borrowers rely on
lenders to provide accurate information about the product, and lenders describe loans as ‘safe,’ ‘a sensible financial
choice,’ and ‘the best alternative to meet their current needs’ for a ‘one-time fixed fee.’”). See also ROB LEVY &
JOSHUA SLEDGE, CTR. FOR FIN. SERVS. INNOVATION, A COMPLEX PORTRAIT: AN EXAMINATION OF SMALL-DOLLAR
CREDIT CONSUMERS 15 (2012). See generally Ian Ayres & Alan Schwartz, The No Reading Problem in Consumer
Contract Law, STANFORD L. REV. (forthcoming 2013).
45
See Truth in Lending Act, 15 U.S.C. §§ 1601-1667f (2010).
46
Gregory Elliehausen & Edward Lawrence, Payday Advance Credit in America: An Analysis of Customer Demand
(Credit Research Ctr., Monograph No. 35, 2001), available at http://faculty.msb.edu/prog/CRC/pdf/Mono35.PDF.
47
RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW § 1.1 at 10 (4th ed. 1992).
48
See id. § 1.2 at 13. Note that efficiency here refers to Kaldor-Hicks efficiency, which means only that overall
social value, or wealth, is maximized. The question of whether the transaction’s participants or third parties benefit
individually does not figure into Kaldor-Hicks efficiency.
49
See, e.g., Dean Karlan & Jonathan Zinman, Op-Ed., In Defense of Usury, WALL ST. J., Nov. 1, 2007, http://
online.wsj.com/article/SB119388104410378595.html.
50
Daniel P. Morgan & Michael R. Strain, Payday Holiday: How Households Fare after Payday Credit Bans 3
(Fed. Reserve Bank of N.Y., Staff Report No. 309, 2008), available at http://www.newyorkfed.org/research/
staff_reports/sr309.pdf.
51
See Mark Flannery & Katherine Samolyk, Payday Lending: Do the Costs Justify the Price? (FDIC, Working
Paper No. 2005-09, 2005), available at http://www.fdic.gov/bank/analytical/cfr/2005/wp2005/
CFRWP_2005-09_Flannery_Samolyk.pdf.
35
52 As
Joseph Stiglitz, who won the Nobel Prize in Economics for his work on imperfect information, has written,
“[t]he standard theorems that underlie the presumption that markets are efficient are no longer valid once we take
into account the fact that information is costly and imperfect. . . . The fact that markets with imperfect information
do not work perfectly provides a rationale for potential government actions.” Joseph E. Stiglitz, Information,
LIBRARY OF ECONOMICS AND LIBERTY, http://www.econlib.org/library/Enc/Information.html (last visited Nov. 23,
2013).
53
See infra The Psychology of Payday Lending at 24.
54
Id.
55
See infra Examining the External Situation at 19.
56
See LEVY & SLEDGE, supra at 44; PEW, supra at 44.
57
See Michael Bertics, Note, Fixing Payday Lending: The Potential of Greater Bank Involvement, 9 N.C. BANKING
INST. J. 133, 142 (2005) (arguing that imperfect information, among other factors, produces “tacit collusion” among
payday lenders, with the result that “monopolists earn excess return on capital, economic rent, and the consumer is
worse off than if the market functioned perfectly”).
58
Tyler Cowen, Public Goods and Externalities, LIBRARY OF ECONOMICS AND LIBERTY, http://www.econlib.org/
library/Enc1/PublicGoodsandExternalities.html (last visited Nov. 23, 2013).
59
See WARD FARNSWORTH, THE LEGAL ANALYST 47-56 (2007).
60
Escola v. Coca Cola Bottling Co. of Fresno, 150 P.2d 436, 441 (1944).
61
Payday Lending in America: Who Borrows, Where They Borrow, and Why, PEW CHARITABLE TRUSTS 1, 4–5, (July
2012), http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Safe_Small_Dollar_Loans/
LOANS_Payday%20Lending%20Report%20Final_web.pdf.
62
Id. at 4.
63
Id. at 4.
64
Id. at 8.
65 Id.
at 10-11.
66
Nathalie Martin and Ernesto Longa, High-Interest Loans and Class: Do Payday and Title Loans Really Serve the
Middle Class?, 24 LOYOLA CONSUMER L. REV. 524, 524 (2012).
67
Michael A. Stegman, Payday Lending, 21 J. ECON. PERS. 169, 170 (2007).
68
Nathalie Martin, 1,000% Interest — Good While Supplies Last: A Study of Payday Loan Practices and Solutions,
52 ARIZ. L. REV. 1, 10 (2010).
69
Id. at 10-11.
70
Payday Lending in America: Policy Solutions, PEW CHARITABLE TRUSTS (Oct. 2013), http://www.pewstates.org/
research/reports/payday-lending-in-america-policy-solutions-85899513326.
71
Wei Li et al., Predatory Profiling: The Role of Race and Ethnicity in the Location of Payday Lenders in
California, CENTER FOR RESPONSIBLE LENDING (Mar. 26, 2009), 3, http://www.responsiblelending.org/california/
ca-payday/research-analysis/predatory-profiling.html.
72
Jean Ann Fox, The Military Lending Act Five Years Later, CONSUMER FED’N OF AM. (May 29, 2012), 31, http://
www.consumerfed.org/pdfs/Studies.MilitaryLendingAct.5.29.12.pdf.
36
73See
Steve Hawkes, Martin Lewis: Payday Lenders Target Children’s TV to ‘Groom’ Next Generation of Borrowers,
THE TELEGRAPH (Nov. 5, 2013, 11:02 AM), http://www.telegraph.co.uk/news/politics/10427061/Martin-Lewispayday-lenders-target-childrens-TV-to-groom-next-generation-of-borrowers.html.
74See
Jennifer E. Glick, Immigration and Changing Patterns of Extended Family Household Structure in the United
States, 79 J. MARRIAGE & FAM. 177, 177 (1997).
75
Payday Lending in America, supra note 62, at 16.
76See
77
ROBERT D. PUTNAM, BOWLING ALONE: THE COLLAPSE AND REVIVAL OF AMERICAN COMMUNITY 19 (2000).
Id. at 321.
78
ROBERT D. MANNING, CREDIT CARD NATION: THE CONSEQUENCES OF AMERICA’S ADDICTION TO CREDIT 3
(2000).
79
Matthew J. Bernthal et al., Credit Cards as Lifestyle Facilitators, 32 J. CONSUMER RES. 130, 131 (2005).
80
Payday Lending in America, supra note 62, at 16.
81
Id. at 5.
82
See, e.g., Alice Gallmeyer and Wade T. Roberts, Payday Lenders and Economically Distressed Communities, 46
SOCIAL SCI. J. 521, 522 (2009).
83
Gregory Elliehausen, An Analysis of Consumers’ Use of Payday Loans, 1 GEO. WASH. U. SCH. OF BUS. FIN.
SERVICES RES. PROGRAM 41 (2009), http://www.approvedcashadvance.com/docs/GWUAnalysis_01-2009.pdf.
84
Id. at 32.
85
Id. at 33.
86
GALLMEYER & ROBERTS, supra note 82, at 522.
87
Fast Facts: Payday Loans, CENTER FOR RESPONSIBLE LENDING, http://www.responsiblelending.org/paydaylending/tools-resources/fast-facts.html (last visited Nov. 11, 2013).
88
Mark Flannery and Katherine Samolyk, Payday Lending: Do the Costs Justify the Price?,12 (June 23, 2005),
http://www.fdic.gov/bank/analytical/cfr/2005/wp2005/CFRWP_2005-09_Flannery_Samolyk.pdf.
89
Id. at 12, 12-19.
90
Taiki Takahashi et al., Cultural Neuroeconomics of Intertemporal Choice, 30 NEUROENDOCRINOLOGY LETTERS
185, 185-191 (2009).
Anuj K. Shah et al., Some Consequences of Having Too Little, 338 SCIENCE 682, 682–85 (2012).
91
92
Y. Yang & A. Raine, Prefrontal Structural and Functional Brain Imaging Findings in Antisocial, Violent, and
Psychopathic Individuals: A Meta-Analysis, 174 PSYCHIATRY RES. 81, 81–88 (2009).
93
Bruce S. McEwen & John H. Morrison, The Brain on Stress: Vulnerability and Plasticity of the Prefrontal
Cortex over the Life Course. 79 NEURON 16, 16–29 (2013).
94
J. M. Soares et al., Stress-induced Changes in Human Decision-Making are Reversible, 2 TRANSLATIONAL
PSYCHIATRY 131 (2012).
95 Marianne
Bertrand et al., Behavioral Economics and Marketing in Aid of Decision Making Among the Poor, 25
JOURNAL OF PUBLIC POLICY AND MARKETING 8, 11 (2006).
37
96
Id. at 8.
97
FED. DEP’T INS. CORP., 2011 FDIC NATIONAL SURVEY OF UNBANKED AND UNDERBANKED HOUSEHOLDS (2012).
98
BERTRANDT ET AL. supra note 99, at 12.
99
Id.
100
Id. at 11.
101
Tom R. Tyler, Multiculturalism and the Willingness of Citizens to Defer to Law and to Legal Authorities, 25
LAW & SOCIAL INQUIRY 983, 991 (2000).
102
Tagline from a payday loan lender, ezmoneypaydayloans.com
103
Russell Revlin, Cognition: Theory and Practice 352 (2013).
104
Craig R. Fox & Amos Tversky, Ambiguity Aversion and Comparative Ignorance, Q. J. ECON. 585, 587 (1995)
105
Jon D. Hanson & Douglas A. Kysar, Taking Behavioralism Seriously: The Problem of Market Manipulation, 74
N.Y.U. L. REV. 630, 735 (1999).
106
Id. at 654
107
Id. at 658
108
Late fees are a common example of this phenomenon. Oren Bar-Gill, Seduction by Contract: Law, Economics,
and Psychology in Consumer Markets, 3 (2012)
109
Pam Fessler, I Applied For An Online Payday Loan. Here’s What Happened Next, NAT’L PUBLIC RADIO (Nov. 6,
2013, 3:03 AM), http://www.npr.org/blogs/money/2013/11/06/242351534/i-applied-for-an-online-payday-loanheres-what-happened-next.
110
Marianne Bertrand et al., Behavioral Economics and Marketing in Aid of Decision Making Among the Poor, 25 J.
PU. POL’Y & MARKETING 8, 8 (2006).
111
Hayley Peterson, 6 Outrageous Facts That Show How Payday Lenders Screw Consumers, BUS. INSIDER (Oct.
25, 2013), http://www.businessinsider.com/outrageous-facts-about-payday-loans-2013-10.
112
Victims of Payday Lending: Sandra Harris, CENTER FOR RESPONSIBLE LENDING, http://
www.responsiblelending.org/payday-lending/tools-resources/victims-2.html (last visited Nov. 12, 2013).
113
Victims of Payday Lending: Arthur Jackson, CENTER FOR RESPONSIBLE LENDING, http://
www.responsiblelending.org/payday-lending/tools-resources/victims-4.html (last visited Nov. 12, 2013).
114
Victims of Payday Lending: Sandra Harris, supra note 117.
115Ace
Cash Express, Loans Up to $1,000 in Minutes, YOUTUBE (Nov. 22, 2013), http://www.youtube.com/
watch?v=gvAocaVnY9k.
116
MoneyMutual, Designed With You In Mind, YOUTUBE (Nov. 22, 2013), http://www.youtube.com/watch?
v=oTuHQY-07hA.
117
Editorial Board, Cracking Down on Predatory Payday Lenders, N.Y. TIMES (Aug. 29, 2013), http://
www.nytimes.com/2013/08/30/opinion/cracking-down-on-predatory-payday-lenders.html?_r=0.
118
Jennifer Bjorhus, Fight Against Illegal Payday Loans Turns to Banks, STAR TRIBUNE (Nov. 9, 2013), http://
www.startribune.com/business/231213561.html?page=1&c=y.
38
119
Herb Weisbaum, Have a Problem with a Payday Loan? The Feds Want Your Complaint, TODAY MONEY (Nov. 8,
2013), http://www.today.com/money/have-problem-payday-loan-feds-want-your-complaint-8C11554115.
120
See, e.g., Tim Worstall, Why Payday Loans Are So Expensive, FORBES (Dec. 20, 2011), http://www.forbes.com/
sites/timworstall/2011/12/20/why-payday-loans-are-so-expensive/.
121
Megan McArdle, Can Credit Unions Replace 'Predatory' Lending?, THE ATLANTIC (Jan. 6, 2012, 2:13 PM),
http://www.theatlantic.com/business/archive/2012/01/can-credit-unions-replace-predatory-lending/251004/.
122
Mark Flannery and Katherine Samolyk, Payday Lending: Do the Costs Justify the Price?, FED. DEPOSIT INS.
CORP. (June 2005), http://www.fdic.gov/bank/analytical/cfr/2005/wp2005/cfrwp_2005-09_flannery_samolyk.pdf.
123
John Leland, Nonprofit Payday Loans? Yes, to Mixed Reviews, N.Y. TIMES, (Aug. 28, 2007), http://
www.nytimes.com/2007/08/28/us/28payday.html.
124
Megan McArdle, On Poverty, Interest Rates, and Payday Loans, THE ATLANTIC (Nov. 18, 2009), http://
www.theatlantic.com/business/archive/2009/11/on-poverty-interest-rates-and-payday-loans/30431/.
125
Understanding Loans; Five Loans to Avoid, NEW YORK CITY DEPT. OF CONSUMER AFFAIRS (last visited Nov. 9,
2013), http://www.nyc.gov/html/ofe/html/help/avoid.shtml; Car Title Lending: Driving Borrowers to Financial
Ruin, CENTER FOR RESPONSIBLE LENDING (Nov. 9, 2013), http://www.responsiblelending.org/other-consumerloans/car-title-loans/research-analysis/car-title-lending-driving-borrowers-to-financial-ruin.html.
126
Flannery and Samolyk, supra note 122.
127
T.W. Farnam, Payday Lenders Up Their Contributions To Candidates, WASH. POST (Apr. 18, 2012), http://
www.washingtonpost.com/politics/payday-lenders-up-their-contributions-to-candidates/2012/04/18/
gIQAziioRT_story.html.
128
Payday Lenders Pay More, CITIZENS FOR RESPONSIBILITY AND ETHICS IN WASHINGTON (Mar. 15, 2011), http://
www.scribd.com/doc/50785926/CREW-Payday-Lenders-Report-2011.
129 Loan-Shark-Financed
Campaigns Threaten Payday-Loan Reform, TEXANS FOR PUBLIC JUSTICE (Mar. 2011),
http://info.tpj.org/reports/pdf/PaydayReport.mar2011.pdf.
130
Forrest Wilder, A Last-Ditch Effort to Rein in Payday Loans, TEX. OBSERVER (May 8, 2013), http://
www.texasobserver.org/a-last-ditch-effort-to-rein-in-payday-loans/
131
See, e.g., Lawrence Meyers, Payday Loan ‘Cycle of Debt’ is a False Narrative, DALLAS MORNING NEWS (Apr.
10, 2013), http://www.dallasnews.com/opinion/latest-columns/20130410-lawrence-meyers-payday-loan-cycle-ofdebt-is-a-false-narrative.ece.
132
Direct Deposit Advance Service Agreement and Product Guide, WELLS FARGO (Apr. 1, 2013), https://
www.wellsfargo.com/assets/pdf/personal/checking/direct-deposit-advance/termsandconditions_english.pdf.
133
Zach Carter, In Stealth Lobbying Move, Wall Street Coordinates With Check-Cashers, Payday Lenders To Gut
CFPB, HUFFINGTON POST (May 25, 2011), http://www.huffingtonpost.com/2011/03/01/cfpb-lobbying-checkcashers-payday-lenders_n_829838.html.
134
Sophia Pearson, BMO Harris Bank Among Companies Sued Over Payday Loans, BLOOMBERG BUSINESSWEEK
(Oct. 12, 2013), http://www.businessweek.com/news/2013-10-11/bmo-harris-bank-among-companies-sued-overpayday-loans-1.
135
Payday Lending in America: Report 2: How Borrowers Choose and Repay Payday Loans, PEW CHARITABLE
TRUSTS 35 (Feb. 2013), http://www.pewstates.org/uploadedFiles/PCS_Assets/2013/
Pew_Choosing_Borrowing_Payday_Feb2013.pdf.
136
Jessica Silver-Greenberg, Major Banks Aid in Payday Loans Banned by States, N.Y. TIMES (Feb. 23, 2013),
http://www.nytimes.com/2013/02/24/business/major-banks-aid-in-payday-loans-banned-by-states.html.
39
137
Lauren K. Saunders, Leah A. Plunkett, and Carolyn Carter, Stopping the Payday Loan Trap: Alternatives that
Work, Ones that Don’t, NAT’L CONSUMER LAW CTR. (June 2010), http://www.nclc.org/images/pdf/
high_cost_small_loans/payday_loans/report-stopping-payday-trap.pdf
138
For a brief history of payday lending to military personnel, see Military and Payday, CTR. FOR RESPONSIBLE
LENDING (Nov. 22, 2010), http://www.responsiblelending.org/payday-lending/policy-legislation/congress/militaryand-payday.html
139
Implementation of Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, CTR.
(Feb. 25, 2008), http://www.responsiblelending.org/payday-lending/policy-legislation/
congress/MIL_DOD_08_MLA_CommentsFinal-2_23.pdf;Limitations on Terms of Consumer Credit Extended to
Service Members and Dependents, CTR. FOR RESPONSIBLE LENDING (Aug. 1, 2013), http://
www.responsiblelending.org/payday-lending/policy-legislation/regulators/
CFA_Comments_DoD_ANPR_13_8_1.pdf.
FOR RESPONSIBLE LENDING
140
Impact of Overdraft Programs on Consumers, CTR. FOR RESPONSIBLE LENDING (June 29, 2012), http://
www.responsiblelending.org/overdraft-loans/policy-legislation/regulators/Overdraft-Comment-by-CRL-CFA-andNCLC-Docket-No-CFPB-2012-0007.pdf.
141
Tyler Evilsizer, Lenders Couldn’t Buy Laws, NAT’L INST.
www.followthemoney.org/press/Reports/Payday.pdf.
ON MONEY IN STATE POLITICS
(Aug. 18, 2009), http://
142
Ohio Issues Report, OFFICE OF THE OHIO SEC’Y OF STATE 17 (2008), http://www.sos.state.oh.us/sos/upload/
publications/election/Issues_08.pdf.
143
Paul Kiel, The Payday Playbook: How High Cost Lenders Fight to Stay Legal, PRO PUBLICA (Aug. 2, 2013),
http://www.propublica.org/article/how-high-cost-lenders-fight-to-stay-legal.
144
Payday Lenders in Arkansas: Consumers Win as Predatory Industry Leaves Arkansas for Good, ARKANSANS
AGAINST ABUSIVE PAYDAY LENDING (Aug. 2009), http://www.paydayloaninfo.org/elements/
www.paydayloaninfo.org/File/aaapl_08_09_study%281%29.pdf.
145
Tyler Evilsizer, supra note 140.
146
TILA treats payday loans like most any other form of closed-end credit—the FDIC applies the disclosure
requirements of its Regulation Z. See Truth in Lending Act, FDIC COMPLIANCE MANUAL (June 2013), available at
http://www.fdic.gov/regulations/compliance/manual/pdf/V-1.1.pdf.
147
The State of Indiana has prepared a useful set of examples of the types of disclosures that TILA requires be
provided to payday loan customers. Truth in Lending Disclosure Examples: Closed-End Disclosures. IND. DEP’T
OF FIN. INST…available at http://www.in.gov/dfi/2583.htm.
148
Here, we might envision lenders providing potential customers with something like a six-month-long analysis of
what signing the loan would mean for that customer. That is, the document given to the customer would detail
principal payments and finance charges, vis-à-vis the customer’s expected earnings over that interval and other such
relevant information over that same time period.
149
Payday Loan Reform Act of 2009, H.R. 1214, 111th Cong. § 2 (2009), available at https://www.govtrack.us/
congress/bills/111/hr1214/text.
150
Ian Ayers & Alan Schwartz, The No Reading Problem in Consumer Contract Law, STAN. L. REV. (forthcoming
2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2341840.
151
Paige Marta Skiba & Jeremy Tobacman, Payday Loans, Uncertainty and Discounting: Explaining Patterns of
Borrowing, Repayment and Default, FDIC (November 19, 2007), http://www.fdic.gov/bank/analytical/cfr/2008/jan/
CFR_SS_2008Tobacman1.pdf.
152
Of course, this would put payday loans in competition with other collateralized loans; the resulting implications
might ultimately make this solution less feasible than other alternatives.
40
153
Bob Sullivan, Pay $2,140 to borrow $950? That’s how car title loans work, NBC NEWS (Mar. 5, 2013, 2:49 PM),
http://www.nbcnews.com/technology/pay-2-140-borrow-950-thats-how-car-title-loans-1C8703205.
154
Colin Morgan-Cross & Marieka Klawitter, Effects of State Payday Loan Price Caps & Regulation, UNIVERSITY
(Dec. 2, 2011), http://depts.washington.edu/wcpc/sites/default/files/papers/Payday%20Lending
%20Brief.pdf.
OF WASHINGTON 4
155
Id., at 1.
156
Payday Lending in America: Policy Solutions, PEW CHARITABLE TRUSTS (Oct. 30, 2013), http://
www.pewstates.org/research/reports/payday-lending-in-america-policy-solutions-85899513326?p=3.
157
Colin Morgan-Cross & Marieka Klawitter, supra note 153, at 5.
158
SBA Loan Programs, U.S. SMALL BUS. ADMIN., http://www.sba.gov/content/microloan-program (last accessed
Nov. 24, 2013).
159
Shalia Dewan, Microcredit for Americans, N.Y. TIMES (Oct. 28, 2013), http://www.nytimes.com/2013/10/29/
business/microcredit-for-americans.html.
160
Neil MacFarquhar, Banks Making Big Profits from Tiny Loans, N.Y. TIMES (Apr. 13, 2013), http://
www.nytimes.com/2010/04/14/world/14microfinance.html?pagewanted=all.
161
See National Conference of State Legislatures: Payday Lending Statutes, available at http://www.ncsl.org/
research/financial-services-and-commerce/payday-lending-state-statutes.aspx.
162
Id.
163
Id.
164
DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT, 124 Stat 1376.§ 1202-1209.
165
For a recent enforcement action by the Consumer Financial Protection Bureau, see Jim Puzzanghera, Payday
Lender Fined by Consumer Financial Protection Bureau, L.A. TIMES, Nov. 20, 2013.
166
Cappello & Noel, LLP, What is Lender Liability? FINDLAW (2008).
167
John R. Ruhl, 10 Commandments for Avoiding Lender Liability, RYAN SWANSON & CLEVELAND, PPLC.
168
Negligent misrepresentation provides a slightly lower bar for recovery of damages. The elements of a negligent
misrepresentation tort are 1) misrepresentation by a defendant in a business or professional capacity 2) a breach of
duty toward the plaintiff 3) a justifiable reliance by the plaintiff on the false statement and 4) damages.
169
See Doe v. District of Columbia, No. 05-1060, 2013 WL 3957448, at *17-18 (D. D.C. Aug. 1, 2013) (To
establish a claim for negligent misrepresentation under District of Columbia law, a plaintiff must show that the
defendant made a false statement or omission of a fact).
170
RESTATEMENT (SECOND) OF TORTS § 399 (1965).
171
Id., at § 402A.
172
Id.
173
Id., § 399, § 402A; 12 AM. JUR. TRIALS 1 § 41 (Originally published in 1966).
174
See, e.g., Vosburg v. Putney, 50 N.W. 403 (1891); Kerans v. Porter Paint Co., Inc., 656 F. Supp. 267 (S.D.
Ohio 1987).
41