{"id":4057,"date":"2015-12-06T17:51:47","date_gmt":"2015-12-06T22:51:47","guid":{"rendered":"http:\/\/journals.law.harvard.edu\/hblr\/?p=4057"},"modified":"2016-07-04T22:37:24","modified_gmt":"2016-07-05T02:37:24","slug":"www-paydayloans-gov-a-solution-for-restoring-price-competition-to-short-term-credit-loans","status":"publish","type":"post","link":"https:\/\/journals.law.harvard.edu\/hblr\/www-paydayloans-gov-a-solution-for-restoring-price-competition-to-short-term-credit-loans\/","title":{"rendered":"www.PayDayLoans.gov: A Solution for Restoring Price-Competition to Short-Term Credit Loans"},"content":{"rendered":"

Download PDF<\/a><\/p>\n

Eric J. Chang\u2020<\/sup><\/a><\/p>\n

I. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0<\/strong><\/a> Introduction<\/strong><\/p>\n

Disclosure has been the primary mechanism for federal credit regulation[1]<\/sup><\/sup><\/a> since the passage of the Truth in Lending Act (TILA) in 1968.[2]<\/sup><\/sup><\/a> By mandating lenders to disclose key terms, TILA attempts to empower borrowers by enabling them to compare different lenders\u2019 rates before choosing one. As a result of this \u201ccomparison-shopping,\u201d lenders, in theory, price-compete among each other to offer the best rates or terms in order to attract the business of the borrower.[3]<\/sup><\/sup><\/a> Legislators, regulators, and the credit industry have long favored disclosure-based rules because they are less costly and burdensome than traditional interest rate caps or other forms of direct regulation.[4]<\/sup><\/sup><\/a><\/p>\n

Unfortunately, TILA has been ineffective with regards to payday lending. As explained below, payday loan borrowers have been unable to use the mandated disclosures to comparison-shop, and consequently, lenders have had no incentives to price-compete.[5]<\/sup><\/sup><\/a> Without price-competition, payday loan interest rates have remained exceptionally high.[6]<\/sup><\/sup><\/a> As a result, millions of payday loan borrowers end up owing more money to their payday lenders than to their original debtors.[7]<\/sup><\/sup><\/a><\/p>\n

The Consumer Financial Protection Bureau (CFPB) has recently concluded that this lack of price-competition among payday lenders means that more direct regulation is needed.[8]<\/sup><\/sup><\/a> In March 2015, the CFPB released an advanced notice of proposed rulemaking and announced that it was considering two options in their forthcoming rules.[9]<\/sup><\/sup><\/a> Before issuing loans, lenders would either be required to verify a borrower\u2019s ability to repay the loan or else be required to provide affordable repayment options, such as a \u201cno-cost\u201d extension if borrowers default on their loans more than two times.[10]<\/sup><\/sup><\/a> However, these types of regulations have not only been proven ineffective in the few states that have already experimented with them,[11]<\/sup><\/sup><\/a> but also run contrary to the principles of free-market economics and would thus further increase the cost of loans to borrowers.[12]<\/sup><\/sup><\/a><\/p>\n

Instead, this Article argues that price-competition among payday lenders may be easily restored by creating an online exchange platform for them to voluntarily post their rates and offer their services to borrowers.[13]<\/sup><\/sup><\/a> By listing lenders\u2019 interest rates side by side, this website can <\/a><\/a>facilitate comparison-shopping by providing borrowers with a tool to easily compare the rates and terms of different lenders. A federally operated website with a \u201c.gov\u201d web address will stand out amidst the myriad of for-profit comparison websites that currently dominate Internet searches.[14]<\/sup><\/sup><\/a><\/p>\n

Part II provides the background for this Article by defining the payday loan, examining its dangers, and introducing TILA. Part III argues that TILA has failed to facilitate price-competition among payday lenders, and identifies three factors contributing to this problem. Part IV proposes the creation of an online comparison site and argues that this solution will directly address the three previously identified factors. Part V discusses and rebuts potential criticisms of this solution. Part VI addresses the CFPB\u2019s recent proposal and argues that it will be less effective than this Article\u2019s proposal.<\/p>\n

II. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Background: Payday Lending in America and the Regulatory Landscape<\/strong><\/p>\n

A. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Defining the Payday Loan<\/strong><\/p>\n

Despite being labeled by one lawmaker as \u201cthe worst financial product out there,\u201d[15]<\/sup><\/sup><\/a> the literal definition of a payday loan is simple: a short-term, small-dollar loan that is paid back in a single lump sum.[16]<\/sup><\/sup><\/a> Payday loans are particularly attractive to low-income individuals who do not qualify for traditional forms of credit,[17]<\/sup><\/sup><\/a> and they are less costly than informal credit options such as overdraft protection, bounced checks, or late payment fees.[18]<\/sup><\/sup><\/a><\/p>\n

A variety of independent studies have extensively documented America\u2019s need for some level of short-term, small-dollar loans.[19]<\/sup><\/sup><\/a> For instance, a 2011 study by the National Bureau of Economic Research found that nearly half of all American households could \u201cprobably not\u201d or \u201ccertainly not\u201d come up with $2,000 to deal with a financial shock of that size\u2014even if given thirty days.[20]<\/sup><\/sup><\/a> Another report from the National Foundation for Credit Counseling concluded that to pay for an unplanned expense of $1,000, sixty-four percent of households would have to seek credit elsewhere, such as borrowing from friends or family, or disregarding other monthly expenses.[21]<\/sup><\/sup><\/a> A report by the Federal Reserve Bank of New York further showed that states that have banned payday lending suffer from higher rates of bankruptcy and bounced checks than states in which payday lending is permitted.[22]<\/sup><\/sup><\/a><\/p>\n

With such a well-documented need, it is no surprise that the payday lending industry has seen exceptional growth throughout the country. Emerging in the early 1990s,[23]<\/sup><\/sup><\/a> the number of payday lenders in America grew to over 10,000 by the year 2000.[24]<\/sup><\/sup><\/a> Just ten years later, this number has doubled, and there are now twice as many payday lenders as Starbucks coffee locations.[25]<\/sup><\/sup><\/a> In 2012, storefront lenders processed roughly 90 million transactions\u00a0and provided nearly 30 billion dollars in loans.[26]<\/sup><\/sup><\/a> Today, payday lenders provide loans to over nineteen million American households, particularly those households that suffer from poor credit scores and lack access to more traditional forms of credit.[27]<\/sup><\/sup><\/a><\/p>\n

B. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0The Danger of Payday Lending<\/strong><\/p>\n

Despite serving a legitimate need, the current payday lending landscape is undoubtedly problematic. The vast majority of payday loans in America tend to carry extremely high interest rates with a median rate of fifteen percent for a fourteen-day period,[28]<\/sup><\/sup><\/a> which translates to an annual interest rate of around 391%.[29]<\/sup><\/sup><\/a> These high interest rates are a primary contributor to nearly every real-life example of \u201cpayday lending gone bad.\u201d[30]<\/sup><\/sup><\/a><\/p>\n

A recent federal study helps illustrate this danger by providing a few more data points.[31]<\/sup><\/sup><\/a> First, the report shows that in 2012, the median payday loan principal was $350.[32]<\/sup><\/sup><\/a> Using the fourteen-day median interest rate from above, the cost of the loan is approximately $52.50 for just two weeks. If at the end of the two-week term, the borrower cannot fully pay off the entire sum of $402.50, the loan must be extended for another two weeks and another fifteen percent fee. Simple math shows that when a typical borrower misses the loan deadline just once, perhaps due to another financial emergency, the borrower ends up owing a total of $105 on top of the original principal. For these borrowers already facing financial difficulties, this is a huge sum that may potentially trap them in a debt cycle or \u201cdebt treadmill,\u201d where borrowers must continually take out loans with multiple lenders to pay off debts from other lenders.[33]<\/sup><\/sup><\/a><\/p>\n

C. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0The Truth in Lending Act <\/strong><\/p>\n

In the face of this growing danger, the Federal Reserve Board officially included payday lenders as a covered entity under TILA in March of 2000.[34]<\/sup><\/sup><\/a> TILA remains the primary body of law governing payday lenders today.[35]<\/sup><\/sup><\/a> Originally passed in 1968, TILA is a disclosure statute that does not control what terms a creditor must offer, but requires that those terms be uniformly disclosed to the consumer. TILA presumes that rational consumers who are given \u201caccurate and meaningful disclosure of the costs of consumer credit\u201d will be able \u201cto make informed choices\u201d[36]<\/sup><\/sup><\/a> and borrow money at the best price available.[37]<\/sup><\/sup><\/a> Subsequently, as informed borrowers begin to gravitate towards the \u201cbest price,\u201d other lenders are forced to lower prices to match or beat the \u201cbest price\u201d or \u201cbest terms\u201d to stay competitive.[38]<\/sup><\/sup><\/a><\/p>\n

To demonstrate, suppose there are two gas stations that are located at the same street corner. Both gas stations advertise their prices for drivers to see. Since antitrust laws prevent the stations from cooperatively setting high prices, price disclosure facilitates market competition by eliminating the possibility that any station can charge an unfair price. In order for either station to remain competitive, the station must set the price as low as possible so that it does not lose business to the neighboring station, but high enough that it still earns a fair profit. As a result, consumers who buy gas at either station are able to obtain it at what economists call the \u201cequilibrium price,\u201d the price where supply meets demand perfectly; both gas stations make fair income, and further government regulation is unnecessary.[39]<\/sup><\/sup><\/a> This scenario demonstrates the primary presumption that drives all disclosure-based regulation, which has been affirmed in law reviews,[40]<\/sup><\/sup><\/a> social science literature,[41]<\/sup><\/sup><\/a> treatises,[42]<\/sup><\/sup><\/a> administrative regulations,[43]<\/sup><\/sup><\/a> U.S. Supreme Court decisions,[44]<\/sup><\/sup><\/a> and a wide variety of other sources.[45]<\/sup><\/sup><\/a><\/p>\n

III. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Recognizing the Problem: Why TILA has Failed to Facilitate Price-Competition among Payday Lenders<\/strong><\/p>\n

Unfortunately, TILA\u2019s mandated disclosures have not effectively facilitated price-competition for payday lending.[46]<\/sup><\/sup><\/a> While the number of lenders in the marketplace has increased,[47]<\/sup><\/sup><\/a> payday lending prices remain remarkably high.[48]<\/sup><\/sup><\/a> Scholars repeatedly cite three factors as the primary contributors to TILA\u2019s ineffectiveness in facilitating price-competition among payday lenders: (A) consumers\u2019 inability to understand disclosures,[49]<\/sup><\/sup><\/a> (B) high transactions costs of comparison-shopping,[50]<\/sup><\/sup><\/a> and (C) deception by payday lenders.[51]<\/sup><\/sup><\/a><\/p>\n

A. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0The First Factor: Many Borrowers Do Not Understand TILA\u2019s Disclosures<\/strong><\/p>\n

The first contributing factor has been discussed at length both before and after the passage of TILA: consumers may purchase credit even when they do not fully understand the costs of doing so.[52]<\/sup><\/sup><\/a> One study by the University of Michigan\u2019s Survey Research Center has gone so far as to state that most \u201cconsumers are wholly unaware\u201d of the rate they pay for credit.[53]<\/sup><\/sup><\/a> In addition, while many studies have established that consumer awareness of the \u201cannual percentage rate\u201d (APR) has significantly increased, these studies also reveal that consumers have difficulty processing that information.[54]<\/sup><\/sup><\/a> For instance, one leading study indicates that as consumers become more knowledgeable about the APR, their knowledge of other equally important terms, like the finance charge, decreases.[55]<\/sup><\/sup><\/a> Therefore, many scholars conclude that TILA has \u201csucceeded in making consumers increasingly aware, but . . . has not managed to explain to them what . . . they have been made aware of.\u201d[56]<\/sup><\/sup><\/a> As a result of borrowers\u2019 difficulty in deciphering what price or terms are actually in their best interest, the lenders\u2019 incentive to price-compete is removed, and the market is prevented from ever reaching the \u201cequilibrium price.\u201d<\/p>\n

Regrettably, this problem has proved particularly difficult to solve for low-income borrowers. They often have trouble understanding the English language and have general financial literacy or educational problems that may further limit their understanding of credit disclosures.[57]<\/sup><\/sup><\/a><\/p>\n

B. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0The Second Factor: Transaction Costs of Comparison-Shopping Are Too High for Payday Loan Borrowers<\/strong><\/p>\n

Comparison-shopping also requires significant upfront costs of time and effort. A prospective borrower is often required to fill out a loan application and verify his employment before the interest rate is ever disclosed to him.[58]<\/sup><\/sup><\/a> By definition, comparison-shopping requires multiple rates for comparison, so a prospective borrower looking to comparison-shop would have to repeat this loan application process multiple times.[59]<\/sup><\/sup><\/a> Given that the majority of borrowers tend to turn to payday lending out of a need for emergency<\/em> credit, these upfront costs of time and effort are impractical, if not unmanageable.[60]<\/sup><\/sup><\/a><\/p>\n

Furthermore, privacy concerns may impose additional costs on the transaction. For instance, many studies have reported that verifying a borrower\u2019s employment is often conducted by calling the borrower\u2019s supervisor.[61]<\/sup><\/sup><\/a> Visiting multiple lenders and having each of them call a borrower\u2019s supervisor to verify employment can be understandably unfavorable.[62]<\/sup><\/sup><\/a><\/p>\n

C. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0The Third Factor: Deceptive Practices by Lenders to Hide Disclosures<\/strong><\/p>\n

Lastly, even if borrowers were able to understand the disclosures and could afford comparison-shopping\u2019s transactions costs, many payday lenders would still use deceptive practices to manipulate borrowers.[63]<\/sup><\/sup><\/a> For example, lenders have been reported to accompany disclosures with comments that marginalize the information by describing the terms as \u201cjust standard language\u201d or purposely providing nonresponsive answers.[64]<\/sup><\/sup><\/a> Aggressive salesmen might also intimidate borrowers by convincing them that they are the only possible loan source for a person like the borrower.[65]<\/sup><\/sup><\/a> Lastly, some lenders provide no disclosures at all; instead, they offer the borrower a document with blanks that will be \u201ccompleted later.\u201d[66]<\/sup><\/sup><\/a> Given a combination of borrowers\u2019 deference to lenders\u2019 expertise, and borrowers\u2019 insecurity or fear of appearing ignorant, these marginalizing disclosures and nonresponsive explanations are rarely questioned.[67]<\/sup><\/sup><\/a><\/p>\n

IV.\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0The Proposed Solution: Facilitating Price-Competition with an Online Exchange<\/strong><\/p>\n

To address these three factors, this Article proposes creating a federally operated online exchange (Exchange) for payday lenders to post their rates and for borrowers to apply and receive payday loans. By listing dozens of lenders\u2019 rates side by side, the Exchange restores comparison-shopping by providing borrowers with a tool to easily compare the rates and terms of different lenders. A federally operated online exchange with a \u201c.<\/strong>gov\u201d web address is not only less susceptible to moral hazards, but will stand out amidst the for-profit comparison sites and advertisements that currently dominate a borrower\u2019s web search for payday lenders.[68]<\/sup><\/sup><\/a> The Exchange will aim to be a \u201cone-stop\u201d destination for prospective borrowers looking for payday loans, and payday lenders will voluntarily register with the Exchange in order to reach these potential customers.[69]<\/sup><\/sup><\/a><\/p>\n

While the technical details of the Exchange\u2019s user interface are not the subject of this Article, it is not difficult to visualize how the hypothetical Exchange might operate: prospective borrowers visiting the Exchange\u2019s web address will be prompted to enter a loan amount, location, loan duration, and other necessary facts similar to the information currently required by traditional storefront or online lenders. Borrowers will then be provided with a list of lenders and the total cost of each loan. They will then select a lender and confirm to complete the loan. This simple system will address all three flaws in TILA\u2019s disclosure regime.[70]<\/sup><\/sup><\/a><\/p>\n

A. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0The Exchange Helps Borrowers Understand Disclosures<\/strong><\/p>\n

First, the Exchange directly addresses a borrower\u2019s inability to understand disclosures or contract terms. The Exchange can offer standard disclosures and contract terms in virtually every language and afford the borrower as much time as necessary to digest the information. Likewise, the Exchange can provide definitions of confusing terms and improve the financial literacy of a subpopulation that arguably needs it the most.[71]<\/sup><\/sup><\/a><\/p>\n

More importantly, it realizes an additional layer of protection for borrowers. With the total costs of different lenders\u2019 loans side by side, a borrower\u2019s misunderstanding of contractual or financial terms is much less relevant. As long as the borrower selects the lowest total cost available, it matters little whether he truly understands what an interest rate or finance charge actually includes.[72]<\/sup><\/sup><\/a><\/p>\n

B. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0The Exchange Severely Reduces Transaction Costs of Comparison-Shopping<\/strong><\/p>\n

The Exchange also addresses the current reality that the costs of comparison-shopping are prohibitively high for prospective payday loan borrowers. By providing near instant comparisons, the Exchange significantly reduces the costs of comparison-shopping. Borrowers are required to fill out necessary loan information just once and are no longer required to seek out or travel to different lenders to compare rates and terms.<\/p>\n

With the transaction costs reduced, borrowers will have more incentive to comparison-shop, and lenders will be re-incentivized to price-compete.[73]<\/sup><\/sup><\/a> Professor Chris Peterson, Senior Counsel for Enforcement Policy and Strategy at the CFPB,[74]<\/sup><\/sup><\/a> noted the high transaction costs of comparison-shopping:<\/p>\n

Until there is proof that\u00a0[comparison] shopping costs . . . do not swamp the benefits of shopping, there can be no safety in the belief that market forces will drive down prices. For example, if seven lenders were all lined up in a row, each with clearly described prices, we might feel confident that debtors had a financial incentive to compare the prices of each lender, and in turn, each lender would have an incentive to price-compete. But, if each lender were spread out, one on each of the seven continents, no debtor would bear the cost of shopping at each location.[75]<\/sup><\/sup><\/a><\/p><\/blockquote>\n

While Peterson uses the hypothetical row of seven lenders as an intentionally unrealistic \u201cideal scenario,\u201d this is the very reality that the Exchange creates. Only instead of seven lenders side by side, the Exchange could host hundreds.<\/p>\n

C. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0The Exchange Reduces Deceptive Sales Tactics by Lenders<\/strong><\/p>\n

Lastly, the Exchange addresses the current problem of lenders using deceptive sales tactics to prevent borrowers from benefiting from disclosures. The Exchange addresses this problem by removing any interaction between the borrower and lender prior to loan commitment.<\/p>\n

Without any interaction, lenders have no opportunity to intimidate borrowers or evade and marginalize disclosures. Similarly, borrowers can overcome uninformative or confusing disclosure terms by hovering a cursor over a confusing term or simply opening a new tab and consulting Google.<\/p>\n

Moreover, by originating payday loan transactions over a government-controlled medium, federal regulators would have more access to statistical data, which would allow them to better address bad actors with enforcement actions. For instance, a recent federal report on consumer-submitted complaints revealed that of all the payday loan borrowers submitting complaints, thirty-eight percent of the claims were for borrowers who were \u201ccharged fees or interest [they] did not expect,\u201d while another twenty percent \u201capplied for a loan, but [did not] receive money.\u201d[76]<\/sup><\/sup><\/a> Other common complaints included claims that the \u201c[l]ender charged [the borrower\u2019s] bank account on the wrong day or for the wrong amount\u201d and that borrowers \u201creceived a loan [they] did not apply for.\u201d[77]<\/sup><\/sup><\/a> While industry professionals have criticized federal agencies for basing enforcement actions on these \u201cunverifiable\u201d consumer complaints, implementing the Exchange would allow regulators to cross-reference these complaints against the Exchange\u2019s records. This would result in reduced costs and improved accuracy for federal regulators looking at payday lenders.[78]<\/sup><\/sup><\/a><\/p>\n

V. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Addressing Potential Obstacles and Criticisms<\/strong><\/p>\n

Before addressing potential criticisms, it is important to recognize that the Exchange imposes neither new laws nor legal regulations on any parties. Lenders will voluntarily offer rates on the Exchange to reach prospective borrowers;[79]<\/sup><\/sup><\/a> consumers will voluntarily visit the Exchange in search for lower prices; regulators will voluntarily use the information gathered by the new platform; and taxpayers will be minimally burdened.[80]<\/sup><\/sup><\/a><\/p>\n

Nonetheless, one consideration is that a significant percentage of payday loan customers may lack Internet access and thus would be unable to access the Exchange. Studies have shown that among low-income households with a median salary under $30,000, nearly twenty-three percent of adults do not use the Internet,[81]<\/sup><\/sup><\/a> though nearly a third of these adults attribute their non-usage to a lack of interest, rather than a lack of access.[82]<\/sup><\/sup><\/a> However, even accounting for the continually decreasing percentage of non-users year-after-year, the current percentage of non-users is not insignificant.[83]<\/sup><\/sup><\/a><\/p>\n

However, even those borrowers without access to the Exchange will benefit from its existence. Neoclassical economists have long maintained that not all consumers must comparison-shop in order for the markets to function effectively.[84]<\/sup><\/sup><\/a> As Professors Ted Cruz and Jeffrey Hinck explain, \u201cif a sufficient number of buyers are well-informed regarding the price and quality of a product, then it will [benefit] the seller to sell . . . at the competitive price to all<\/em> buyers.\u201d[85]<\/sup><\/sup><\/a> Essentially, a small number of \u201cwell-informed consumers can \u2018police the market\u2019\u201d as long as lenders are not able to differentiate between the informed and uninformed consumers.[86]<\/sup><\/sup><\/a><\/p>\n

Lastly, this paper has admittedly operated on the assumption that TILA has been ineffective in regulating payday lenders thus far. While this assumption represents the majority view,[87]<\/sup><\/sup><\/a> the minority argues that payday loans, while expensive for consumers, are not actually overly profitable for lenders.[88]<\/sup><\/sup><\/a> These scholars and industry advocates argue that while payday loans are expensive, they are necessarily so, and further price-competition will not change this.[89]<\/sup><\/sup><\/a> For instance, one study argues that payday lenders face substantial costs because payday loan transactions suffer from significantly higher rates of loan defaults.[90]<\/sup><\/sup><\/a> Similarly, payday loan institutions have higher store operating costs because they must maintain longer hours than typical financial institutions.[91]<\/sup><\/sup><\/a> Critics of the Exchange may point to these costs and argue that the Exchange will not reduce payday loan interest rates to the equilibrium price because these rates are already<\/em> at<\/em> equilibrium.<\/p>\n

However, even assuming the validity of these reported costs, the Exchange will still drastically reduce payday loan interest rates by shifting lenders\u2019 incentives to forgo certain inefficiencies. For example, while lenders currently have no incentives to compete on price, they do face incentives to compete on \u201clocation of store, flashy signs . . . and name recognition\u201d in order to attract business.[92]<\/sup><\/sup><\/a> Implementing the Exchange will change these incentives. As borrowers begin to use the Exchange as the \u201cone-stop destination\u201d for payday loans, lenders will face less incentive to continue spending money on advertisements or expensive leases at busy locations. In addition, as more borrowers go online to the Exchange, the incentive for online lenders to pay for costly advertisements and search-engine-optimization, and for brick and mortar lenders to maintain costly storefronts, might be further reduced for those lenders not serving significant numbers of in-person borrowers. These reductions in overhead costs for lenders, coupled with increased price-competition, should yield lower interest rates.<\/p>\n

To illustrate the magnitude of these interest rate reductions, consider a few useful statistics from an article written by William M. Webster, IV, chairman of two major national payday lenders. In his article, Webster defends the high rates of his stores by stating that in a typical hundred-dollar loan, the lender generates eighteen dollars.[93]<\/sup><\/sup><\/a> From this amount, $9.09 is spent on store operating expenses, including property leases, employee salaries, as well as radio, television, and online advertisements.[94]<\/sup><\/sup><\/a><\/p>\n

These figures demonstrate the magnitude of the potential reductions in interest rates that restoring price-competition with the Exchange could bring. If lenders were no longer incentivized to advertise or operate brick and mortar stores, the advent of the Exchange would immediately reduce interest rates by nearly sixty percent\u2014even if lenders maintained the same amount of profit as they currently do. Therefore, regardless of the debate on whether payday loan profits are unfairly high, the Exchange can be an effective solution to high payday loan interest rates by reducing lender costs and passing those savings to consumers.<\/p>\n

VI. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0<\/strong><\/a><\/a> The CFPB\u2019s Recent Proposal<\/strong><\/p>\n

In contrast to the Exchange\u2019s emphasis on lowering loan costs for borrowers, the CFPB appears to be moving in a different direction. On March 26, 2015, the CFPB publically announced that it would be considering rules that would impose one of two requirements on lenders making short-term loans: before issuing loans, lenders would either be required to verify a borrower\u2019s ability to repay the loan or else be required to provide borrowers with affordable repayment options, such as a \u201cno-cost extension\u201d on their loans if borrowers defaulted more than two times.[95]<\/sup><\/sup><\/a> Essentially, the CFPB\u2019s two proposals make no attempt to address the price<\/em> of current payday loan fees, only their recurring nature.<\/p>\n

To illustrate, the CFPB\u2019s first requirement that lenders verify borrowers\u2019 ability to repay would specifically mandate that lenders go beyond verifying borrowers\u2019 income and verify borrowers\u2019 \u201cmajor financial obligations . . . borrowing history . . . living expenses . . . [and] other outstanding covered loans with other lenders.\u201d[96]<\/sup><\/sup><\/a> According to the CFPB, these requirements would require the verification of \u201chousing payments (including mortgage or rent payments), required payments on debt obligations, child support, and other legally required payments.\u201d[97]<\/sup><\/sup><\/a> This extensive verification process would not only significantly lengthen the application process, but would also require borrowers to submit a wide variety of documentation to meet these ability-to-repay requirements. This would further increase the transaction costs of comparison-shopping, and because of the lack of price-competition, the actual costs of this verification process would be passed on to the borrower. Moreover, requiring borrowers prove their ability to repay would result in many low-income families being left without their \u201clender of last resort.\u201d[98]<\/sup><\/sup><\/a> Similarly, imposing a requirement that lenders offer a \u201cno-cost extension\u201d on defaulted loans would likewise incentivize lenders to increase initial loan charges to compensate for the loss of would-be renewal fees.<\/p>\n

While CFPB action demonstrates federal recognition of the problem, the CFPB\u2019s proposals are an imperfect solution. Their emphasis on reducing the \u201cdebt treadmill\u201d effect of recurring payday loan fees ignores the issue of loan price entirely and thus comes at the expense of increasing loan costs. As a result, while borrowers may pay fewer loan fees, each fee will cost more.<\/p>\n

VII. \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Conclusion<\/strong><\/p>\n

Along with exponential growth, the payday lending industry continues to face serious scrutiny and criticism. The rhetoric for federal action grows stronger as scholars, consumer advocates, and regulators emphasize high APRs and the repayment difficulties associated with them. However, despite the criticism and the need for change, it is important to recognize that the payday lending industry serves a genuine need for disenfranchised consumers.<\/p>\n

As the discussion on possible solutions continues to grow, this Article offers one solution\u2014creating a federally operated online exchange. This solution will facilitate the economic rationales that drive the Truth in Lending Act: inexpensive government enforcement costs, fair profits for lenders, and low prices for consumers.<\/p>\n

\u2020<\/a> J.D., The George Washington University Law School. B.A., University of California, Los Angeles. My gratitude to Dean Alan Morrison for his guidance and insight. Thank you to Professors Lesley Fair and Darren Long for their comments. I would like to acknowledge Jonathan Tse for his editorial assistance and H. Joshua Kotin Esq. for his comments and mentorship that helped inspire this paper\u2019s thesis. All errors are my own.<\/p>\n

[1]<\/a> Thomas A. Durkin & Gregory Elliehausen,\u00a0Disclosure\u00a0as a Consumer Protection<\/em>, in <\/em>The Impact of Public Policy on Consumer Credit 109, 110 (Thomas A. Durkin & Michael E. Staten, eds., 2002) (\u201c[M]andatory\u00a0disclosure\u00a0has become the main financial consumer-protection approach.\u201d); see also<\/em> Griffith L. Garwood, Robert J. Hobbs & Fred H. Miller, Consumer Disclosure\u00a0in the 1990\u2019s<\/em>, 9 Ga. St. L. Rev. 777, 777 (1993) (discussing the pervasiveness of\u00a0disclosure\u00a0in consumer protection law).<\/p>\n

[2]<\/a> 15 U.S.C. \u00a7\u00a7 1601\u201367 (2012).<\/p>\n

[3]<\/a> See<\/em> infra<\/em> text accompanying notes 38\u201339.<\/p>\n

[4]<\/a> See, e.g.<\/em>, Howard Beales, Richard Craswell, & Steven Salop, Information Remedies for Consumer Protection, <\/em>71 Am. Econ. Rev. 410, 411 (May 1981) (\u201cInformation strategies tend to be more compatible with incentives, less rigid, and do not require regulators to compromise diverse consumer preferences to a single standard.\u201d); Christopher L. Peterson, Truth, Understanding, and High-Cost Consumer Credit: The Historical Context of the Truth in Lending Act<\/em>, 55 Fla. L. Rev. 807, 881\u201383 (2003) (\u201cAlthough . . . neither industry nor consumer advocates have been entirely satisfied, the disclosure approach has in general garnered wide acceptance .\u00a0.\u00a0. high cost creditors have advocated disclosure rules to deflect legislative pressure for more substantive rules.\u201d); see also <\/em>Lynn Drysdale & Kathleen E. Keest, The Two-Tiered Consumer Financial Services Marketplace: The Fringe Banking System and Its Challenge to Current Thinking About the Role of Usury Laws in Today’s Society<\/em>, 51 S.C. L. Rev. 589, 659 (2000) (\u201cThe most frequently articulated view of usury . . . [is that] they interfere with matters best left to \u2018The Market.\u201d\u2019); Kathleen C. Engel & Patricia A. McCoy,\u00a0A Tale of Three Markets: The Law and Economics of Predatory Lending<\/em>, 80 Tex. L. Rev. 1255, 1314 (2002) (\u201cUltimately, price controls . . . restrict the flow of credit, thereby hurting the very individuals they are designed to serve.\u201d).<\/p>\n

[5]<\/a> Lauren E. Willis, Decisionmaking and the Limits of Disclosure: The Problem of Predatory Lending: Price<\/em>, 65 Md. L. Rev. 707, 751\u201354 (2006) (expressing that disclosures are not enough to motivate consumers to seek alternative sources of credit).<\/p>\n

[6]<\/a> See infra <\/em>note 8, at 9.<\/p>\n

[7]<\/a> Cf. <\/em>Jim Hawkins,\u00a0Regulating on the Fringe: Reexamining the Link Between Fringe Banking and Financial Distress<\/em>, 86\u00a0Ind. L.J.\u00a01361, 1384 n.128 (2011) (discussing how payday lending creates a \u201ccycle of debt\u201d and \u201ctraps consumers\u201d).<\/p>\n

[8]<\/a> Consumer Fin. Prot. Bureau, Payday Loans and Deposit Advance Products 45 (Apr. 24, 2013), http:\/\/files.consumerfinance.gov\/f\/201304_cfpb_payday-dap-whitepaper.pdf (stating that \u201cfurther attention is warranted to protect consumers\u201d) [hereinafter CFPB White Paper].<\/p>\n

[9]<\/a> Consumer Fin. Prot. Bureau, Factsheet: The CFPB Considers Proposal to End Payday Debt Traps 2\u00ad\u20133 (Mar. 26, 2015), http:\/\/files.consumerfinance.gov\/f\/201503_cfpb-proposal-under-consideration.pdf [hereinafter CFPB Proposal Factsheet].<\/p>\n

[10]<\/a> Id.<\/em><\/p>\n

[11]<\/a> See<\/em> Paige Marta Skiba, Regulation of Payday Loans: Misguided?<\/em>, 69 Wash. & Lee L. Rev. 1023, 1043\u201345 (2012) (surveying the ineffective solutions attempted by different state regulators).<\/p>\n

[12]<\/a> See <\/em>Dwight Jaffee & Joseph Stiglitz, Credit Rationing<\/em>, in <\/em>2 Handbook of Monetary Economics 838, 847 (B.M. Friedman & F.H. Hahn eds., 1990) (discussing how price controls create severe economic threats by interfering with supply and demand).<\/p>\n

[13]<\/a> Perhaps one of the greatest advantages of this solution is that payday lenders are not legally required to sign up. Instead, as more borrowers head to this website, payday lenders will be motivated to sign up simply because they want to reach this growing group of potential customers.<\/p>\n

[14]<\/a> A simple web search for \u201cpayday lending\u201d will reveal dozens of paid advertisements and websites that review and compare different lenders. See, e.g.<\/em>, Top 10 Payday Lenders, http:\/\/www.top10paydaylenders.com (last visited Nov. 5, 2015); Top 10 Personal Loans, http:\/\/www.top10personalloans.com (last visited Nov. 5, 2015); Payday Loan Comparison, http:\/\/paydayloancomparison.org (last visited Nov. 5, 2015); Compare USA Payday Lenders, http:\/\/online-payday-loans.org\/compare\/ (last visited Nov. 5, 2015).<\/p>\n

[15]<\/a> See <\/em>151\u00a0Cong. Rec.\u00a0E1386 (daily ed. June 28, 2005) (statement of Rep. Gutierrez) (\u201cThose who claim to support the troops should agree to restrict the\u00a0worst\u00a0financial\u00a0product\u00a0out there.\u201d); see<\/em> also<\/em> Christine Dalton, John Oliver\u2019s 14 Greatest Takedowns on \u2018Last Week Tonight\u2019<\/em>, Huffington Post, (Nov. 11, 2014, 10:26 AM) (\u201cPayday loans are like the Lay’s Potato Chips of finance. You can\u2019t have just one and they\u2019re TERRIBLE for you.\u201d) (quoting Last Week Tonight: Episode 14<\/em> (HBO television broadcast Aug. 10, 2014)).<\/p>\n

[16]<\/a> What is a Payday Loan?<\/em>, Consumer Fin. Prot. Bureau, http:\/\/www.consumerfinance.gov\/askcfpb\/1567\/what-payday-loan.html [hereinafter What is a Payday Loan?<\/em>] (last visited Oct. 19, 2014); see also<\/em>\u00a0Ronald Mann & James Hawkins,\u00a0Just Until Payday<\/em>, 54\u00a0UCLA L. Rev. 855, 857 (2007) (explaining the mechanics of a typical payday loan).<\/p>\n

[17]<\/a> See <\/em>Aaron Huckstep, Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits?<\/em>, 12 Fordham J. Corp. & Fin. L. 203, 209 (2007) (discussing credit requirements and the lack of viable alternatives to payday lending).<\/p>\n

[18]<\/a> See<\/em> Aimee A. Minnich, Rational Regulation of Payday Lending<\/em>, 16 Kan. J.L. & Pub. Pol’y, 84, 91\u201392.<\/p>\n

[19]<\/a> See, e.g.<\/em>, Fed. Deposit Ins. Corp., Nat’l Survey of Unbanked & Underbanked Households\u00a010 (Dec. 2009) (finding that about 7.7% of U.S. households, approximately nine million individuals, were \u201cunbanked,\u201d and approximately another 17.9%, about twenty-one million individuals, were \u201cunderbanked\u201d).<\/p>\n

[20]<\/a> See <\/em>Annamaria Lusardi, Daniel J. Schneider & Peter Tufano,\u00a0Financially Fragile Households: Evidence and Implications<\/em>\u00a02 (Nat\u2019l Bureau of Econ. Research, Working Paper No. 17072, 2011),\u00a0available at<\/em>\u00a0http:\/\/www.nber.org\/papers\/w17072.pdf.<\/p>\n

[21]<\/a> See <\/em>William M. Webster, IV, Payday Loan Prohibitions: Protecting Financially Challenged Consumers or Pushing Them over the Edge?<\/em>, 69 Wash. & Lee L. Rev. 1051, 1057\u201358 (2012).<\/p>\n

[22]<\/a> See<\/em> Donald Morgan & Michael Strain, Federal Reserve Bank of New York, Payday Holiday: How Households Fare after Payday Credit Bans 3 (2008), available at <\/em>http:\/\/www.newyorkfed.org\/research\/staff_reports\/sr309.pdf.<\/p>\n

[23]<\/a> See<\/em> Charles A. Bruch, Taking the Pay Out of Payday Loans: Putting an End to the Usurious and Unconscionable Interest Rates Charged by Payday Lenders<\/em>, 69 U. Cin. L. Rev. 1257, 1270 (2001).<\/p>\n

[24]<\/a> See<\/em> Mark Flannery & Katherine Samolyk, Payday Lending: Do the Costs Justify the Price?<\/em>, FDIC Center for Financial Research 1 (June 2005), https:\/\/www.fdic.gov\/bank\/analytical\/cfr\/2005\/wp2005\/CFRWP_2005-09_Flannery_Samolyk.pdf (showing that in 2000, there were approximately 10,000 payday lenders in America).<\/p>\n

[25]<\/a> 10 Shocking Facts About Payday Loans<\/em>, Payday Loans Blog (Oct. 26, 2009), http:\/\/www.paydayloans.org\/10-shocking-facts-about-payday-loans.<\/p>\n

[26]<\/a> Carter Dougherty, Payday Loans Curb Considered By Three Regulators<\/em>, BloombergBusiness (Apr. 24, 2013, 12:01 AM), http:\/\/www.bloomberg.com\/news\/2013-04-24\/payday-loan-curbs-considered-by-three-u-s-regulators.html (stating \u201cstorefronts made $30.1 billion of the $48.7 billion in total payday loans made in 2012\u201d).<\/p>\n

[27]<\/a> Glen Fest, A Case of Payday Loans<\/em>, The American Banker (July 1, 2011), http:\/\/www.americanbanker.com\/magazine\/121_7\/kansas-city-feds-case-for-payday-loans-1039318-1.html.<\/p>\n

[28]<\/a> See<\/em> CFPB White Paper, supra<\/em> note 8, at 9.<\/p>\n

[29]<\/a> It should be noted that the payday lending industry\u00a0advocates claim that the APR does not accurately describe the cost of payday loans because of the loans’ short terms. See<\/em> Michael S. Barr,\u00a0Banking the Poor<\/em>, 21 Yale J. on Reg. 121, 155 (2004).<\/p>\n

[30]<\/a> See, e.g.<\/em>, Bruch,\u00a0supra <\/em>note 23, at 1279\u201380 (arguing that it is the high interest rates that makes payday loans unconscionable); Benjamin D. Faller, Payday Loan Solutions: Slaying the Hydra (and Keeping It Dead)<\/em>, 59 Case W. Res. L. Rev. 125, 139 (2008) (stating that \u201c[t]he primary problem is that competition has not driven down prices.\u201d); Creola Johnson, Congress Protected the Troops: Can the New CFPB Protect Civilians from Payday Lending?<\/em>, 69 Wash. & Lee L. Rev. 649 (2012) (arguing for an interest rate cap of thirty-six percent as a solution to payday lending); Chris Peterson, Failed Markets, Failing Government, or Both? Learning from the Unintended Consequences of Utah Consumer Credit Law on Vulnerable Debtors<\/em>, 2001 Utah L. Rev. 543, 546\u201347 (2001) (explaining the \u201cconsequences the high cost consumer credit market poses\u201d).<\/p>\n

[31]<\/a> See <\/em>CFPB White Paper, supra<\/em> note 8.<\/p>\n

[32]<\/a> Id. <\/em>at 17.<\/p>\n

[33]<\/a> See, e.g.<\/em>, Bruch,\u00a0supra <\/em>note 23, at 1279\u201380 (2001).<\/p>\n

[34]<\/a> Robert W. Snarr, No Cash \u2019til Payday: The Payday Lending Industry<\/em>, Federal Reserve Bank of Philadelphia (2002), http:\/\/www.philadelphiafed.org\/bank-resources\/publications\/compliance-corner\/2002\/first-quarter\/q1cc1_02.cfm#one.<\/p>\n

[35]<\/a> Id<\/em>.<\/p>\n

[36]<\/a> Elizabeth Renuart & Kathleen E. Keest, Truth in Lending \u00a7 1.1.1, 33 (4th ed. 1999).<\/p>\n

[37]<\/a> See<\/em> Alan Schwartz & Louis L. Wilde,\u00a0Intervening in Markets on the Basis of Imperfect Information: A Legal and Economic Analysis<\/em>, 127 U. Pa. L. Rev. 630, 638 (1979)\u00a0(\u201cThe competitive price is the lowest price a market can sustain, and all consumers would, other things equal, prefer to purchase at the lowest price.\u201d).<\/p>\n

[38]<\/a> See<\/em> Patrick E. Hoog, Acceleration Clause Disclosure: A Truth in Lending Policy Analysis<\/em>, 53 Ind. L. J. 97, 101 (1977) (stating that the purpose of disclosure requirements is to \u201cpromote comparative shopping by consumers among creditors in the pursuit of increased competition among credit extenders\u201d).<\/p>\n

[39]<\/a> Joseph E. Stiglitz, Economics 87\u201388 (2d ed. 1997) (\u201c[Equilibrium\u00a0is] a situation where there are no [reasons] for change. No one has an incentive to change the result.\u201d).<\/p>\n

[40]<\/a> See, e.g.<\/em>, Peterson, supra <\/em>note 4, at 814 (\u201cThe hope was that with uniformly disclosed prices, consumers would be able to shop for the best deal, thus better protecting themselves and forcing creditors to offer lower prices.\u201d).<\/p>\n

[41]<\/a> See, e.g.<\/em>, Richard Hynes & Eric A. Posner, The Law and Economics of Consumer Finance<\/em>, 4 Am. Law & Econ. Rev. 168, 192\u201393 (2002) (\u201cThe stated goals of the Truth in Lending Act are to increase economic stability, to enhance the ability of consumers to shop for attractive loan terms, and to prevent inaccurate and unfair billing.\u201d).<\/p>\n

[42]<\/a> See, e.g.<\/em>, Ralph J. Rohner & Fred H. Miller, Truth in Lending 4 (Robert A. Cook et al. eds., 2000)\u00a0(\u201cThe primary purpose of [TILA] is to promote the informed use of credit.\u201d).<\/p>\n

[43]<\/a> See\u00a0<\/em>12 C.F.R. \u00a7 226.1(b) (2010)\u00a0(stating that Regulation Z is meant \u201cto promote the informed use of consumer credit by requiring disclosures about its terms and cost\u201d).<\/p>\n

[44]<\/a> See\u00a0Ford Motor Credit Co. v. Milhollin<\/em>, 444 U.S. 555, 559 (1981)\u00a0(\u201cThe Truth in Lending Act has the broad purpose of promoting \u2018the informed use of credit\u2019 by assuring \u2018meaningful disclosure of credit terms’ to consumers.\u201d) (citing\u00a015 U.S.C. \u00a7 1601 (2012)).<\/p>\n

[45]<\/a> Government regulation of securities also uses disclosure as the primary means to protect investors in the same manner. See<\/em> Stephen M. Bainbridge,\u00a0Mandatory Disclosure: A Behavioral Analysis<\/em>, 68 U. Cin. L. Rev. 1023, 1023 (2000) (\u201cMandatory\u00a0disclosure\u00a0is a\u2014if not the\u2014defining characteristic of U.S. securities regulation.\u201d); Troy Paredes,\u00a0Blinded by the Light: Information Overload and Its Consequences for Securities Regulation<\/em>, 81 Wash. U. L.Q. 417, 421 n.11 (2003) (describing the literature on mandatory\u00a0disclosure\u00a0in securities law as \u201cvoluminous\u201d).<\/p>\n

[46]<\/a> Cf. <\/em>Pearl Chin, Note,\u00a0Payday Loans: The Case for Federal Legislation<\/em>, 2004 U. Ill. L. Rev. 723, 739\u201342.<\/p>\n

[47]<\/a> See<\/em> 10 Shocking Facts About Payday Loans<\/em>, supra <\/em>note 25.<\/p>\n

[48]<\/a> See<\/em> Paul Chessin,\u00a0Borrowing from Peter to Pay Paul: A Statistical Analysis of Colorado’s Deferred Deposit Loan Act<\/em>, 83 Denv. U. L. Rev. 387, 408\u201309 (2005) (describing how payday lending competition is not determining prices); Faller, supra <\/em>note 30, at 139 (describing the payday lending market as a failed one).<\/p>\n

[49]<\/a> See, e.g.<\/em>, 152\u00a0Cong. Rec.\u00a0S6405, S6406 (daily ed. June 22, 2006) (statement of Sen. Talent) (\u201c[T]hese young men and women, many of whom are just out of high school, are not financially sophisticated and fall way behind in these payments.\u201d); Matthew A. Edwards,\u00a0Empirical and Behavioral Critiques of Mandatory Disclosure: Socio-Economics and the Quest for Truth in Lending<\/em>, 14 Cornell J.L. & Pub. Pol\u2019y\u00a0199, 224 n.136 (2005)\u00a0(discussing criticism of unnecessarily complex contracts in the industry); Peterson, supra<\/em> note 30, at 571 (listing borrowers\u2019 failure to understand disclosures as the first of five factors leading to ineffective regulation).<\/p>\n

[50]<\/a> See <\/em>Peterson, supra <\/em>note 30, at 572\u201373 (arguing that economic models relied upon in regulating payday lending do not properly account for transaction costs); see also <\/em>Bruch, supra<\/em> note 23, at 1282\u201383 (stating that payday loan consumers are often in dire financial straits and that lenders subsequently benefit from a \u201ccaptive market\u201d); Chessin, supra<\/em> note 48, at 409 n.93 (describing borrowers as \u201crate insensitive\u201d); Scott Andrew Schaaf,\u00a0From Checks to Cash: The Regulation of the Payday Lending Industry<\/em>, 5 N.C. Banking Inst. 339, 344 (2001) (stating that borrowers are not \u201cprice driven\u201d).<\/p>\n

[51]<\/a> See<\/em> Faller, supra <\/em>note 30, at 140\u201341 (listing \u201cabusive practices\u201d by lenders as one of two problems with implementing regulations against payday lenders); see also<\/em> Edwards, supra <\/em>note 49, at 200\u201305 (discussing how lenders use \u201cinformation asymmetry\u201d to take advantage of borrowers).<\/p>\n

[52]<\/a> See, e.g.<\/em>, Edward L. Rubin,\u00a0Legislative Methodology: Some Lessons from the Truth-in-Lending Act<\/em>, 80 Geo. L.J. 233, 243\u201364 (1991)\u00a0(discussing the legislative debates prior to Congress\u2019s passage of the TILA).<\/p>\n

[53]<\/a> See<\/em> id. <\/em>at 244 (citing S. 2755, 86th Cong., 2d Sess. (1960),\u00a0reprinted in Consumer Credit Labeling Bill, 1960: Hearings on S. 2755 Before the Subcomm. on Production and Stabilization of the S. Comm. on Banking and Currency,<\/em>\u00a086th Cong., 2d Sess. 803\u201314 (1960)).<\/p>\n

[54]<\/a> Id<\/em>. at 235\u2013236.<\/p>\n

[55]<\/a> Id. <\/em>at 236 (citing William K. Brandt & George S. Day,\u00a0Information Disclosure and Consumer Behavior: An Empirical Evaluation of Truth-in-Lending<\/em>, 7\u00a0U. Mich. J.L. Ref.\u00a0297, 303\u201307 (1974)).<\/p>\n

[56]<\/a> Id.<\/em> at 236.<\/p>\n

[57]<\/a> See, e.g<\/em>., Jeffrey Davis, Protecting Consumers from Overdisclosure and Gobbledygook: An Empirical Look at the Simplification of Consumer-Credit Contracts<\/em>, 63 Va. L. Rev. 841, 842 (1977) (stating that the benefits of disclosure laws \u201chave been experienced almost entirely by those consumers who least need the protection\u2014middle and upper class consumers\u201d).<\/p>\n

[58]<\/a> See <\/em>Peterson, supra<\/em> note 30, at 573. While TILA requires lenders to make clear and conspicuous loan disclosures on a written form before the lender extends the loan, 12 C.F.R. \u00a7 226.17(a)\u2013(b) (2015), in both the Fourth and the Seventh Circuits, however, lenders do not have to make these until immediately before consummation of the loan. See<\/em> Spearman v. Tom Wood Pontiac-GMC, Inc<\/em>., 312 F.3d 848, 851 (7th Cir. 2002); Gavin v. Koons Buick Pontiac GMC, Inc<\/em>., 28 F. App’x 220, 222 (4th Cir. 2002) (unpublished opinion).<\/p>\n

[59]<\/a> Even borrowers using Internet lenders instead of store fronts must not only sift through hundreds of thousands of payday lender websites, but also must differentiate between real and fake lenders. See, e.g.<\/em>, Carter Dougherty, Data From Payday Loan Applicants Sold in Online Auctions<\/em>, BloombergBusiness (Jun. 8, 2012, 12:01 AM), http:\/\/www.bloomberg.com\/news\/articles\/2012-06-08\/data-from-payday-loan-applicants-sold-in-online-auctions (describing a fake payday lender that merely sold applicant\u2019s data). Then after finding a genuine lender, borrowers must differentiate between lenders with legitimate endorsements and those with fake or paid-for ones. To complicate matters further, borrowers that find a website that seemingly offers the opportunity to compare many payday lenders\u2019 interest rates side by side, must differentiate between a website offering a genuine comparison service and one with for-profit or other ulterior motives. Some of these sites are simply aggregators that gather your information to sell.\u00a0 See<\/em> Colleen Tressler, Loan Aggregators, or Loan Aggravators?<\/em>, Fed. Trade Comm\u2019n Consumer Info. Blog (Feb. 20, 2013), http:\/\/www.consumer.ftc.gov\/blog\/loan-aggregators-or-loan-aggravators. Others are paid-for or owned by one of the lenders they purport to compare. See, e.g.<\/em>, Payday Lender Reviews<\/em>, Top 10 Payday Lenders, http:\/\/www.top10paydaylenders.com\/doc\/reviews (last visited Nov. 6, 2015) (providing reviews and comparison charts for the site\u2019s own \u201clending partners\u201d).<\/p>\n

[60]<\/a> See<\/em> supra<\/em> Part II.A.<\/p>\n

[61]<\/a> See <\/em>Peterson, supra<\/em> note 30, at 573.<\/p>\n

[62]<\/a> Michael Bertics, Fixing Payday Lending: The Potential of Greater Bank Involvement<\/em>, 9 N.C. Banking Inst. 133, 140 (2005) (describing the risk of \u201cpotential embarrassment and employment risk that bombardment of confirmation calls by multiple payday lenders would pose\u201d).<\/p>\n

[63]<\/a> See<\/em> Edwards, supra <\/em>note 49, at 227 (describing how salesman may use \u201chigh-pressure\u201d tactics to discourage consumers from walking away); Peterson, supra <\/em>note 30, at 573 (describing how lenders may purposefully or unconsciously increase shopping costs for borrowers to discourage comparison-shopping).<\/p>\n

[64]<\/a> Lloyd T. Wilson, Jr., Effecting Responsibility in the Mortgage Broker-Borrower Relationship: A Role for Agency Principles in Predatory Lending Regulation<\/em>, 73 U. Cin. L. Rev. 1471, 1500 (2005).<\/p>\n

[65]<\/a> Id.<\/em> at 1500\u201301.<\/p>\n

[66]<\/a> Id. <\/em>at 1501.<\/p>\n

[67]<\/a> See\u00a0<\/em>Kathleen C. Engel & Patricia A. McCoy,\u00a0A Tale of Three Markets: The Law and Economics of Predatory Lending<\/em>, 80\u00a0Tex. L. Rev.\u00a01255, 1309 (2002) (discussing questions that are \u201clikely to result in self-serving answers\u201d).<\/p>\n

[68]<\/a> The Internet is currently littered with privately operated lender-comparison websites. Unfortunately, the vast majority are owned by self-serving payday lenders. See supra <\/em>Part III.C.<\/p>\n

[69]<\/a> Lenders will not be legally forced sign up with the Exchange; however, the market will incentivize them to sign up if they want to reach the Exchange\u2019s growing group of potential customers. See infra<\/em> note 79\u201383 and accompanying text.<\/p>\n

[70]<\/a> See supra <\/em>Part III.<\/p>\n

[71]<\/a> See, e.g.<\/em>, Megan S. Knize,\u00a0Payday Lending in Louisiana, Mississippi, and Arkansas: Toward Effective Protections for Borrowers<\/em>, 69 La. L. Rev. 317, 325 (2009) (\u201cPayday lenders know where to find their desired customers: economically disadvantaged areas, towns near military bases, and minority neighborhoods.\u201d); Wei Li et al., Ctr. For Responsible Lending, Predatory Profiling: The Role of Race and Ethnicity in the Location of Payday Lenders in California<\/em> 10 (Mar. 26, 2009), http:\/\/www.responsiblelending.org\/california\/ca-payday\/research-analysis\/predatory-profiling.pdf (finding that Californian payday lenders concentrate their storefronts in predominantly minority neighborhoods).<\/p>\n

[72]<\/a> This process essentially operates as the interest rate cap that many scholars currently advocate for. See, e.g<\/em>., Johnson, supra <\/em>note 30, at 713 (arguing for CFPB guidelines to cap interest rates at thirty-six percent); Nathalie Martin, Public Opinion and the Limits of State Law: The Case for A Federal Usury Cap<\/em>, 34 N. Ill. U. L. Rev. 259, 297\u2013304 (2014) (arguing for a federal interest rate cap of thirty-six percent). For example, if there are two lenders, the one that offers a lower interest rate functionally sets an interest rate cap, as the consumer has no incentive to select the higher rate. The higher-cost lender must either lower his price to equilibrium or leave the market.<\/p>\n

[73]<\/a> See supra<\/em>\u00a0Part II.C.<\/p>\n

[74]<\/a> Christopher Lewis Peterson, Faculty Profile<\/em>, Faculty.Utah.edu, https:\/\/faculty.utah.edu\/u0045920-CHRISTOPHER_LEWIS_PETERSON\/biography\/index.hml (last visited Oct. 23, 2015).<\/p>\n

[75]<\/a> Chris Peterson, Failed Markets, Failing Government, or Both? Learning from the Unintended Consequences of Utah Consumer Credit Law on Vulnerable Debtors<\/em>, 2001 Utah L. Rev. 543, 572\u201373 (2001).<\/p>\n

[76]<\/a> Consumer Fin. Prot. Bureau, Consumer Response: A Snapshot of Complaints Received 26 (July 2014), http:\/\/files.consumerfinance.gov\/f\/201407_cfpb_report_consumer-complaint-snapshot.pdf.<\/p>\n

[77]<\/a> Id.<\/em><\/p>\n

[78]<\/a> See<\/em> Alan S. Kaplinsky, CFPB Expanded Consumer Complaint Database Raises Concerns,<\/em> 67 Consumer Fin. L.Q. Rep. 189 (2013) (stating that \u201cnone of the complaints on the database have been or will be verified\u201d); see also<\/em> Consumer Fin. Prot. Bureau, Supervision and Examination Manual UDAAP 9 (2d ed. 2012) (\u201cConsumer complaints play a key role in the detection of unfair, deceptive, or abusive practices [and] have been an essential source of information for examinations, enforcement, and rule-making for regulators.\u201d).<\/p>\n

[79]<\/a> Even without an initial critical mass of consumers using the Exchange, lenders will be incentivized to use the Exchange for the opportunity to be listed on a \u201c.gov\u201d web address. See supra<\/em> text accompanying note 67. As discussed, lender\u2019s advertising costs are substantial because the payday lending business model relies upon being the first to reach customers that do not have time to comparison-shop. The opportunity to promote on a \u201c.gov\u201d web address provides real monetary value.<\/p>\n

[80]<\/a> First, much of the infrastructure for the Exchange can be copied from the government\u2019s already-implemented exchange platform, www.healthcare.gov. Second, posting rates on a \u201c.gov\u201d web address significantly reduces a lender\u2019s operating costs. See infra<\/em> text accompanying notes 92\u201395. The agency operating the website can charge lenders an operation fee, and so long as the fee charged to lenders is less than what lenders currently spend on advertising, there is value to be had. A number of states currently maintain databases of lenders, funded wholly by lender fees of one dollar per transaction. See, e.g.<\/em>, Fla. Stat. Ann. \u00a7 560.404(23). The Exchange could further drive this cost down through economies of scale.<\/p>\n

[81]<\/a> Susannah Fox & Lee Rainie, The Web at 25 in the U.S.<\/em>, Pew Research Ctr. 18 (Feb. 27, 2014), http:\/\/www.pewinternet.org\/files\/2014\/02\/PIP_25th-anniversary-of-the-Web_0227141.pdf.<\/p>\n

[82]<\/a> Kathryn Zickuhr & Aaron Smith, Digital Differences<\/em>, Pew Research Ctr. 7 (Apr. 13. 2012), http:\/\/www.pewinternet.org\/files\/old-media\/\/Files\/Reports\/2012\/PIP_Digital_differences_041312.pdf.<\/p>\n

[83]<\/a> Fox & Rainie, supra<\/em> note 79, at 18; see also<\/em> Monica Anderson & Andrew Perrin, 15% of Americans don\u2019t use the internet. Who are they?<\/em>, Pew Research Ctr. (Jul. 28, 2015) http:\/\/www.pewresearch.org\/fact-tank\/2015\/07\/28\/15-of-americans-dont-use-the-internet-who-are-they\/.<\/p>\n

[84]<\/a> See, e.g.<\/em>, Richard Hynes & Eric A. Posner, The Law and Economics of Consumer Finance<\/em>, 4 Am. Law & Econ. Rev. 168, 172\u201373 (2002).<\/p>\n

[85]<\/a> R. Ted Cruz & Jeffrey J. Hinck, Not My Brother’s Keeper: The Inability of an Informed Minority to Correct for Imperfect Information<\/em>, 47 Hastings L.J. 635, 646 (1996) (emphasis added).<\/p>\n

[86]<\/a> See<\/em> Edwards, supra <\/em>note 49, at 242 (quoting William K. Brandt & George S. Day, Information Disclosure and Consumer Behavior: An Empirical Evaluation of Truth-in-Lending<\/em>, 7 Mich. J. L. Ref. 297, 327 (1974)). Of course, some scholars contend that sometimes lenders are in fact \u201cable to differentiate between the informed and uninformed consumers\u201d and thus are able to \u201coffer less attractive terms to some consumers without risking the loss\u201d of the informed. Id.<\/em> at 243; see also <\/em>Michael I. Meyerson, The\u00a0Reunification of Contract Law: The Objective Theory of Consumer Form Contracts<\/em>, 47 U. Miami L. Rev. 1263, 1270-71 (1993)\u00a0(\u201c[T]here is no evidence that a small cadre of type-A consumers ferrets out the most beneficial subordinate contract terms, permitting the market to protect the vast majority of consumers.\u201d). For example, at least one study demonstrates differentiation on the part of sellers by showing that poorly dressed men received average price quotes on cars that were significantly higher than the price quotes given to their well-dressed counter-parts. See<\/em> Schwartz & Wilde, supra<\/em> note 37, at 682 n.82 (citing Gordon L.Wise,\u00a0Differential Pricing and Treatment by New-Car Salesmen: The Effect of the Prospect’s Race, Sex and Dress<\/em>, 47\u00a0J. Bus.\u00a0218 (1974). Similarly, critics might argue that payday lenders may submit one price to the Exchange, but still offer another higher price to those uninformed borrowers that visit the lender\u2019s brick and mortar location or directly visit the lender\u2019s website. Admittedly, the validity of this argument remains to be seen. However, even if the uninformed borrowers do not benefit immediately, those uninformed should progressively move away from their local lenders and towards the Exchange in search of lower prices.<\/p>\n

[87]<\/a> See, e.g.<\/em>, Bertics,\u00a0supra<\/em> note 62, at 148 (\u201cSadly, TILA has failed to provide real protection to payday borrowers.\u201d); Faller, supra<\/em> note 30, at 142 (arguing that TILA and its \u201cmarket ideology\u201d represents \u201cthe federal government\u2019s failure to deal with payday lending\u201d).<\/p>\n

[88]<\/a> See,<\/em> e.g.<\/em>, Huckstep, supra<\/em> note 17, at 231 (\u201cHigh profits for payday lenders . . . may be more myth than reality.\u201d); Webster, IV, supra<\/em> note 21, at 1085 (arguing that \u201cpayday lenders are not overly profitable organizations\u201d).<\/p>\n

[89]<\/a> See, e.g.<\/em>, Flannery & Samolyk, supra<\/em> note 24, at 21 (\u201c[T]he \u2018high\u2019 APRs implied by payday loan fees can be justified by the fixed costs of keeping stores open and the relatively high default losses suffered on these loans.\u201d).<\/p>\n

[90]<\/a> See id. <\/em>at 2. But see<\/em> Chessin, supra<\/em> note 48, at 408\u201309.<\/p>\n

[91]<\/a> See<\/em> Huckstep, supra <\/em>note 17, at 222.<\/p>\n

[92]<\/a> See <\/em>Bertics,\u00a0supra <\/em>note 62, at 143.<\/p>\n

[93]<\/a> See <\/em>Webster, IV, supra <\/em>note 21, at 1084; cf.<\/em> CFPB White Paper, supra<\/em> note 8, at 9 (stating the average fee is fifteen dollars per hundred-dollar loan).<\/p>\n

[94]<\/a> See <\/em>Webster, IV, supra <\/em>note 21, at 1084.<\/p>\n

[95]<\/a> See<\/em> CFPB Proposal Factsheet, supra<\/em> note 10, at 2\u20133.<\/p>\n

[96]<\/a> Id.<\/em><\/p>\n

[97]<\/a> Consumer Fin. Prot. Bureau, Outline of Proposals Under Consideration and Alternatives Considered 11\u201312 (Mar. 26, 2015), http:\/\/files.consumerfinance.gov\/f\/201503_cfpb_outline-of-the-proposals-from-small-business-review-panel.pdf.<\/p>\n

[98]<\/a> See <\/em>Glen Fest, A Case for Payday Loans<\/em>, The American Banker, (July 1, 2011), http:\/\/www.americanbanker.com\/magazine\/121_7\/kansas-city-feds-case-for-payday-loans-1039318-1.html. (stating that payday lenders meet the credit needs of borrowers who otherwise lack the credit scores necessary to attain credit).<\/p>\n","protected":false},"excerpt":{"rendered":"

Eric J. Chang: Much of United States financial regulation has been predominantly based upon using mandated disclosure to facilitate price-competition. However, in the realm of payday lending, disclosure based regulation has received significant criticisms from regulators and consumer advocates. While federal action may be necessary to solve the payday lending problem, this Article argues that a movement towards stricter and more stifling regulations is an overreaction to the statement that disclosure is not working. Instead, this Article proposes a less burdensome but much more effective alternative: a federal online exchange for payday lenders to list and post lending rates.<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[23,324,22,316],"tags":[144,320,88,322,321,146,323,319,317,318],"ppma_author":[374],"class_list":["post-4057","post","type-post","status-publish","format-standard","hentry","category-featured","category-financial-regulation","category-home","category-volume-6","tag-cfpb","tag-comparison-shopping","tag-consumer-financial-protection-bureau","tag-low-income-borrowing","tag-online-exchange","tag-payday-loans","tag-predatory-lending","tag-price-competition","tag-tila","tag-truth-in-lending-act"],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/pgKEUK-13r","jetpack-related-posts":[{"id":4097,"url":"https:\/\/journals.law.harvard.edu\/hblr\/can-voluntary-price-disclosures-fix-the-payday-lending-market\/","url_meta":{"origin":4057,"position":0},"title":"Can Voluntary Price Disclosures Fix the Payday Lending Market?","author":"ehansen","date":"March 28, 2016","format":false,"excerpt":"Jim Hawkins: Eric J. Chang\u2019s provocative article, www.PayDayLoans.gov: A Solution for Restoring Price-Competition to Short-Term Credit Loans\u2014which, as its title suggests, proposes to facilitate price competition in the payday lending market by creating a federal online exchange for payday lenders to post lending rates\u2014has sparked thoughtful reactions among consumer borrowing\u2026","rel":"","context":"In "Financial Regulation"","block_context":{"text":"Financial Regulation","link":"https:\/\/journals.law.harvard.edu\/hblr\/category\/us-business-law\/financial-regulation\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":4257,"url":"https:\/\/journals.law.harvard.edu\/hblr\/it-aint-broke-the-case-for-continued-sec-regulation-of-p2p-lending\/","url_meta":{"origin":4057,"position":1},"title":"It Ain’t Broke: The Case For Continued SEC Regulation of P2P Lending","author":"ehansen","date":"August 9, 2016","format":false,"excerpt":"Download PDF Benjamin Lo\u2020 Introductory Note In 2008, the Securities and Exchange Commission made waves by deciding to regulate the nascent peer-to-peer lending industry. 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