Is payday lending the fentanyl of consumer lending?

Some years back, I had major surgery. When I woke up after the surgery, I was on fentanyl for pain relief. The following day, I was stepped down to morphine. Morphine was less effective at blocking the pain, but the staff explained that it was too risky to keep me on fentanyl. And in the days that followed, I was moved to even less effective pain relievers. At the time, I wasn’t too happy. Now, of course, I’m glad that I didn’t develop an addiction. And the pain is long gone.

Society regulates fentanyl and similar drugs because of the risks they pose. At the same time, fentanyl can be very useful if used properly. So some access to fentanyl is desirable, though only under certain circumstances and even then its use needs to be regulated.

Much the same can be said of payday lending. Under its first director, Richard Cordray, the CFPB cocluded that 80% of payday loan borrowers got caught in a debt trap and ended up unable to pay back the principal, meaning that they were stuck paying interest for lengthy periods. For them, payday loans were like fentanyl: a fix for a short-term problem that itself becomes a serious long-term problem.  On the other hand, 20% of the payday loan borrowers were able to repay the loans and move on with their lives. For them, the ability to take out a payday loan may have been a positive, just like fentanyl can be used positively with no negative long term consequences. Back in 2017, the CFPB issued a payday lending rule that would have allowed lenders to make payday loans only if the lender determined that the borrower would be able to repay the loan in full and on time without additional borrowing. That’s the equivalent of the rules that allowed me to have fentanyl in the hospital but only for one day. But when former President Trump got to name the CFPB’s leaders, they eliminated the ability to pay requirement from the payday lending rule, the equivalent of allowing patients to continue taking fentanyl even when the risk of long-term consequences is high (even the amended rule is still mired in litigation, all these years later; indeed, the Supreme Court’s recent decision upholding the CFPB’s constitutionality came in a case challenging the payday lending rule).

An argument sometimes made against rules limiting the power of consumers and lenders to agree to particular loan terms, as the CFPB’s original payday lending rule would have done, is that the rule is paternalistic: who knows better what you and your family needs–you or some government bureaucrat who doesn’t even know you? When it comes to fentanyl, society gives one answer–the bureaucrat–and when it comes to payday lending, the federal government gives a different answer at the moment–you (though some states effectively bar payday lending by capping interest rates at amounts too low for payday lenders to operate profitably). And yet, fentanyl and payday lending are remarkably similar in their effects in different aspects of people’s lives: used properly and in a limited way, they may be helpful to solve short-term problems but used improperly, they can be hugely damaging in the long-term. Why should we treat them differently? Yes, those who need money in the short term can be very unhappy at not being allowed to get it from a payday lender who is willing to lend it to them–but then, I was pretty unhappy at experiencing the pain I had to endure. Sometimes the short-term fix is the enemy of the long-term.

All of which raises another question: now that the Supreme Court has upheld the Bureau’s constitutionality, will the CFPB restore the ability to pay requirement to its payday lending rule?

1 thoughts on “Is payday lending the fentanyl of consumer lending?

  1. Dash R says:

    Great analogy, Professor. If Fentanyl is payday lending, then consumer installment lending can often be the morphine–time and place, but still dangerous.

Leave a Reply

Your email address will not be published. Required fields are marked *