David Berman has written Lending Experimentalism: A New Regulatory Approach to Payday Loans, Forthcoming in the Georgetown Journal on Poverty Law Policy, Here is the abstract:
Payday loans entangle consumers with few alternatives in catastrophically harmful cycles of borrowing. But because of their design, payday loans are vexingly difficult to regulate effectively.
This article explains how the structure of regulatory oversight abets lenders’ evasion. In it, I focus on how dynamism frustrates attempts to regulate payday lending two ways: first, lenders employ a strategy of regulatory arbitrage to escape exacting state laws. Second, lenders take advantage of product innovation—what I term “recharacterization”—to circumvent state regulations by modifying loan attributes.
To overcome this dynamism, regulators should consider an experimentalist approach to regulation. A regulatory structure of this kind has three components: first regulators must adopt a broad “ability-to-pay” standard, which centers the borrower’s financial wellbeing. Second, regulators must find partners embedded in communities to license as lenders. Finally, I argue that there must be a holistic review of borrower financial health after receiving the loan.