Symposium 2012

This article gathers the available evidence on the problems in for-profit higher education, particularly higher debts and default rates than in conventional higher education, and examines the intractability of regulating this sector, given its inevitable focus on the bottom line and use of a business model based on tapping federal student aid as its primary revenue stream. The industry targets low-income students, loads them up with debt, and then fails to increase their income potential in many instances, resulting in a high default rate. The article also explores the risky public policy strategy that the federal government is pursuing. It is funding the rapid growth of for-profit colleges in hopes that producing more degree recipients will increase employment and wages. Not only may the strategy fail to work for society as a whole, but this public policy approach entails some degree of tolerance of predatory lending, allowing students to put themselves at elevated risk of default and attendant consequences, including inability to resume education, increased cost for credit in general, and potentially being subject to collection efforts for life. The implications of this strategy for sustainable household finances are profound.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act called for a government study of the regulatory options for on-line Peer-to-Peer lending. On-line P2P sites, most notably for-profit sites Prosper.com and LendingClub.com, offer individual “investors” the chance to lend funds to individual “borrowers.” The sites promise lower interest rates for borrowers and high rates of return for investors. In addition to the media attention such sites have generated, they also raise significant regulatory concerns on both the state and federal level. The Governmental Accountability Office report produced in response to the Dodd-Frank Act failed to make a strong recommendation between two primary regulatory options – a multi-faceted regulatory approach in which different federal and state agencies would exercise authority over different aspects of on-line P2P lending, or a single-regulator approach, in which a single agency (most likely the new Consumer Financial Protection Bureau) would be given total regulatory control over on-line P2P lending. After discussing the origins of on-line P2P lending, its particular risks, and its place in the broader context of non-commercial lending, this paper argues in favor of a multi-agency regulatory approach for on-line P2P that mirrors the approach used to regulate traditional lending.

Despite the fact they are used by millions of Americans, auto title loans have received little attention in the legal literature about consumer credit. Friends and foes of title lending make confident statements about their net welfare effects, but we still lack empirical data on many of the central policy questions that title lending raises.

This Article offers new evidence about the title lending transaction, paying special attention to the risks borrowers face when they use their vehicles as collateral for the loan. I gathered this evidence by obtaining new reports from state regulators about the title lending industry, examining public disclosure statements by title lenders, interviewing title lenders, and surveying a small group of title lending customers.

Additionally, it organizes the different legal responses to title lending, creating a taxonomy of regulatory approaches. Based on the new data uncovered by my research, I offer tentative evaluations of these diverse regulatory strategies.

Consumers can use payday loans to cushion the effects of financial shocks. However, consumer advocates allege that payday loans catch some consumers in a "debt trap" that leads to financial collapse and bankruptcy. Critics further allege that payday lenders target minority and military communities, making these groups especially vulnerable to this trap. This article uses data to test these claims. The results, like those of the existing literature, are mixed. Bankruptcy filings don't increase after states legalize payday lending; filings fall in counties with large military or minority communities. This result supports the beneficial view of payday lending, but it may be due to states' incentives in enacting laws. This article tests the effect of a change in federal law that should have had a disparate impact according to the prior choice of state law. This second test does not offer clear support for either the beneficial view or the debt trap hypothesis.

In 2007, Congress enacted a law, commonly referred to as the Military Lending Act ("MLA"), which placed a 36-percent interest rate cap on several consumer loans, including payday loans, and prohibits lenders from engaging in several practices considered predatory. However, the MLA only grants these protections from predatory loans to active-duty military members and their dependent family members. Democrats tried unsuccessfully for years to get federal legislation passed that would afford all Americans protection from payday loans.

In the wake of the mortgage foreclosure crisis, Congress passed and President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Wall Street Reform Act"), which creates a new federal agency, the Bureau of Consumer Financial Protection ("CFPB"), as a financial watchdog to focus on protecting consumers in the credit market place. In this article, I assert that the newly-created CFPB can now use its authority to afford to ordinary Americans protections similar to those now enjoyed exclusively by military families. To support my assertion, I first describe how payday loans entrap civilian Americans in a cycle of indebtedness just like they once ensnared military families and yet both groups are equally lacking in financial sophistication. I further describe how regular payday lenders and now major banks, such as Wells Fargo, are engage in reckless payday lending because when issuing a payday loan, they fail to do any assessment of a borrower's ability to repay, charge triple-digit-interest rates averaging over 400%, issue loans frequently in excess of the borrower's next paycheck, and require loans to be repaid in a single balloon payment usually in 14 days or less. Second, I argue federal regulation is needed by explaining that despite attempts by several states to curb payday lending, payday lenders exploit loopholes in state laws or use scams to skirt consumer protection laws.

Third, I compare military families to civilian families and demonstrate that military families enjoy a strong social safety net, which is comprised of numerous benefits, including complete health care coverage, educational assistance, subsidized housing, and childcare assistance. In contrast, average low-to-moderate-income civilian families face financial difficulties due to high unemployment rates and an ever-shrinking compensation and benefits package from both private and public sector employers. If military families, who enjoy taxpayer-sponsored economic security, need protection from payday loans, then unquestionably civilian Americans, who are largely left to fend for themselves, deserve protection from payday loans.

Under Title X of the Wall Street Reform Act, the CFPB has the authority to take action to prevent a covered financial institution from committing an unfair, deceptive, or abusive act in connection with any consumer financial product or service transaction or offering. While the CFPB is explicitly prevented from establishing a Federal usury limit, such as the 36% APR cap mentioned above, I posit that the CFPB can, however, establish regulations that require payday lenders to comply with responsible lending standards. Such payday loan standards should include (1) a minimum loan repayment term so that consumers would have a reasonable time period to repay the loan, (2) an installment repayment plan so consumers can make partial payments to repay the loan, and (3) a loan repayment assessment procedure so that loan amounts are determined based upon the consumer's ability to repay. So that, for example, a lender should not be able to issue a $2,000 loan to a civilian borrower with a monthly income of $1,000 and have her pay it off in only one month.

The CFPB's imposition of standards for payday loans will not bring an end to short-term small dollar loans in America; rather it will promote profitable, yet fair loans by responsible lenders. The results of a recent pilot program implemented by the FDIC demonstrate that banks can issue small dollar loans capped at a 36% APR and make a profit. By issuing standards that prohibit reckless lending, the CFPB will foster the expansion of affordable small dollar loan programs and cause them to emerge as a viable alternative to the typical payday loan. The CFPB will simultaneously afford ordinary Americans protections similar to those extended to military families.

States around the nation have spent years crafting payday lending regulation, and yet lenders have managed to stay one step ahead of such laws. Unless a state places a firm interest rate cap on all consumer credit products, payday lenders continue to exploit loopholes in whatever regulation is enacted. In the latest incarnation, internet-based payday lenders are attaching themselves to Indian tribes in order to evade state control. Indian tribes engaged in tribal business enterprises are immune from state laws, an immunity coveted by payday lenders. This Article will explore this new development in lender loopholes.

It will start with an analysis of cases dealing with tribal immunity in the context of tribal enterprises. It will explore what it means to be a tribal enterprise and who must be engaged in this activity in order to obtain immunity. It will discuss Kiowa Tribe of Oklahoma v. Manufacturing Technologies, Inc., the "arm of the tribe" test, and all cases decided thus far dealing specifically with payday lenders and tribes.

The next part of the Article will focus on what tribes themselves might gain or lose when teaming with payday lenders, placing these alliances within a broader context of tribal economic development. It will analyze the policies behind tribal immunity, discuss other types of business collaborations between tribes and outsiders, and assess the relative economic benefit tribes themselves receive from these collaborations. It will then discuss the possibility that partnering with payday lenders might denigrate tribal sovereignty, through the backlash of Congress and the courts. Without attempting to answer it, the Article will pose the question of whether tribes might be best off voluntarily forgoing these alliances as contrary to their long-term interests.

This Article will conclude with a discussion of how the use of tribal sovereignty to skirt consumer protection laws might weaken consumer protection laws across the board. It will discuss whether the Consumer Financial Protection Bureau has the authority to effectively regulate against this problem, and if not, whether it might be time for a federal usury cap.

Defenders of payday lending sometimes claim that imposing interest rate caps will bring back the loans sharks which that product is said to have helped starve into extinction. This is the loan shark thesis. But in this paper I will show that the dynamics of the market for expensive cash advances are complicated and are not well described by this simple formula. Indeed, if we define "loan shark" in the original sense of the epithet, as a dealer in small sums who lends in such a way as to trap debtors and prolong interest payments, then the loan shark thesis is quite mistaken. Payday lenders are "loan sharks" in the original sense of this Americanism, but their industry was spawned by interest-rate deregulation, not interest-rate caps.

In recent decades, however, the term "loan shark" has acquired a different connotation. It now often refers to a violent method of debt collection, not to the repayment structure of the debt itself. In this second sense, "loan-sharking" is associated with organized crime. Yet, even if we define the "loan shark" as a mob lender who uses threats of violence to extract repayment, the loan shark thesis remains false. For, in the first place, mob payday lending died off well before interest-rate deregulation and the modern payday lending industry appeared on the scene. The payday lending industry cannot take credit for that development. Second, low levels of violent loan-sharking continue to occur even where interest-rate caps have been lifted. Thus deregulation cannot entirely solve that problem. Third, imposing rate caps for small loans has not spawned increases in violent forms of debt collection. Mob lending has not swelled where payday lending has been made illegal. Fourth, black-market credit has been transformed by technological advances, in particular the rise of the internet, and in its cyber version illegal payday lending no longer relies on violence to collect debts. The twenty-first century black-market lenders are very different from their mob predecessors. They operate in every jurisdiction, whether there are interest-rate caps or not. Hence, for all of these reasons, the loan shark thesis is mistaken.

Interest-rate deregulation will not exterminate the loan sharks in either of the two senses described above. Indeed, that policy has revived the loan shark as debt-trapper. In this paper I will show that imposing interest-rate caps at some level for small cash loans produces more well-being than a deregulated market can.

The Wire is the greatest television series of all-time. Not only that, it is the most important. One of the most memorable story arcs from The Wire’s five seasons is the rise and fall of Hamsterdam – a quasi-legalized drug zone in West Baltimore. Stories are powerful teaching tools because they marry information and context. By seeing how the application of law affects characters we know and care about, we become more attune to the potential effects of legal decisions in the real world. The story of Hamsterdam – which is essentially an attempt to transform a black market into a fringe market – presents just such an opportunity. When considering the various dimensions of the fringe economy, life in Hamsterdam imparts three critical insights:

(1) Markets arise wherever there exists market demand.

Drug dealers exist because sufficient numbers of people desire to use drugs. When one drug dealer in The Wire is taken off the streets through incarceration or death, another drug dealer readily takes his place. Similarly, the fringe economy exists because enough people perceive a need for the services it offers. And where there is demand, there is supply. The lasting lesson is that the fringe economy is going to exist whether we like it or not.

(2) Legalization and regulation, not prohibition, represent the best method for controlling the negative externalities of fringe markets.

A key aspect of the Hamsterdam covenant between the police and the drug dealers centers on its mutuality of promises. The police promise immunity for all dealing within Hamsterdam’s confines; the dealers agree not to deal anywhere else. In essence, the dealers consent to submit to regulation in exchange for legalization. Prohibition, conversely, precludes this type of agreement because it drives drug dealers and others who trade in outlawed goods into the shadows away from law’s light. Black markets inevitably fill the void created by these outright legal bans, transforming a regulatory problem into a law enforcement problem. A rise in violence necessarily follows, as the suppliers of black market goods become responsible for enforcing their own norms in law’s absence. The lesson for policymakers is that regulating a fringe economy can often induce better behavior from questionable economic actors than the alternative of policing an underground economy.

(3) Mustering the political will to provide legal sanction to the fringe economy is a difficult, if not impossible, task.

Hamsterdam fails because Baltimore’s politicians fear that embracing its success will lead to electoral defeat. Regulation is a tool of nuance; prohibition is a blunt instrument. Even though the former promotes the greater good, voters better understand the latter. The Wire teaches that this reality presents a structural impediment to genuine reform. In a political world where courage is in short supply, the possibility of real change is illusory. The lesson is that innovative thinking in handling the problems created by the fringe and underground economies will likely meet significant resistance at the point of implementation. Good ideas will remain untested, and long-term problems will continue unaddressed.

Over a hundred different local governments around the country have adopted ordinances restricting payday lending. This trend reflects the solid majority of the American public that opposes the legality of triple-digit interest rate loans and the long historical tradition of treating payday lending as a serious crime. Nevertheless, perhaps owing to limits on municipal power, local payday lending law has generated relatively little scholarship or commentary. This paper describes the existing local law of payday lending and proposes a more emphatic ordinance that better reflects the policy judgment of many local leaders. In particular, this paper (1) describes the limits of local government legal authority in regulating usurious lending; (2) catalogues and classifies all local payday lending ordinances adopted with this authority to date; (3) analyzes the limited usefulness of existing local law; (4) proposes a model ordinance requiring payday lenders include the cautionary message "Warning: Predatory Lender" on their street, storefront, and other on-premises signs; and, (5) argues that the well-established municipal authority over signage provides a solid constitutional and statutory basis for such a law. An appendix with a model ordinance suitable for adoption by most local governments follows.

This essay addresses a key social problem of fringe lending— the nonfinancial harms of unmanageable debt. In the consumer protection context, most research on American families assesses the extent of harm from overindebtedness along a single dimension: debt, or its kissing cousin, wealth. I examine the limitation of this analytical approach and argue that debt may harm families' well-being in ways that cannot be captured by financial measures. This critique may be particularly apt in the context of fringe lending, which often consists of small dollar loans that do not register as measurable harms using traditional metric of dollars of debt to assess harm. Drawing on the poverty economics and its concern with human capabilities, I make a parallel between the limitations of income to assess the harms of poverty and the limitations of debt to assess the harms of borrowing. I construct a multidimensional framework for studying the nonfinancial harms of debt that examines how borrowing may alter people's preferences, endowments, and access to social opportunity. I apply this framework to the existing research on the nonfinancial harms of overindebtedness and suggest new avenues for empirical research. A richer framework for assessing the damage of debt will improve the regulation of the consumer credit markets, including fringe credit, by providing policymakers with information on the nonfinancial harms of borrowing.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act called for a government study of the regulatory options for on-line Peer-to-Peer lending. On-line P2P sites, most notably for-profit sites Prosper.com and LendingClub.com, offer individual “investors” the chance to lend funds to individual “borrowers.” The sites promise lower interest rates for borrowers and high rates of return for investors. In addition to the media attention such sites have generated, they also raise significant regulatory concerns on both the state and federal level. The Governmental Accountability Office report produced in response to the Dodd-Frank Act failed to make a strong recommendation between two primary regulatory options – a multi-faceted regulatory approach in which different federal and state agencies would exercise authority over different aspects of on-line P2P lending, or a single-regulator approach, in which a single agency (most likely the new Consumer Financial Protection Bureau) would be given total regulatory control over on-line P2P lending. After discussing the origins of on-line P2P lending, its particular risks, and its place in the broader context of non-commercial lending, this paper argues in favor of a multi-agency regulatory approach for on-line P2P that mirrors the approach used to regulate traditional lending.

Federal and state regulation of payday loans takes many forms, including outright bans, interest rate caps, limits on renewals, information disclosure rules, regulations specific to military personnel, ceilings and floors on loan amounts and loan duration. Meanwhile some states have no payday-specific regulation and others are considering relaxing existing laws. I explore the consequences (intended or otherwise) of these various constraints on borrowing by analyzing existing empirical evidence on consumers' use of payday loans. I argue that many attempts at constraining borrowing are misguided and decrease overall welfare of consumers. I conclude by summarizing payday-borrower behavior in the context of a rational actor model and examine which deviations from rationality may warrant intervention. Finally, I link this discussion of economic rationality into the broader literature on justifications for regulation, such as the unconscionability doctrine.