Eric	Palmer "Payday	lending:	America's	unsecured	loan	market" [Business	Ethics	Case	Study,	5000	words,	Eric	Palmer] Some	changes	expected	in	published	revision.	Email	epalmer@allegheny.edu	for published	version	copy. Eric	Palmer,	"Payday	lending:	America's	unsecured	loan	market" 8	May	2018	copyright	Eric	Palmer.	http://orcid.org/0000-0002-1406-8060. Not	for	commercial	reproduction.	Eric	Palmer	licenses	this	version	for	reproduction and	use	in	classrooms	and	for	personal	study	and	creative	use: Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International Forthcoming	in	Alex	Sager,	Fritz	Allhoff	and	Anand	Vaidya,	eds.	Business	Cases	in Ethical	Focus.	Broadview	Press,	2019. Supplementary	teaching	materials	follow	the	case	study. Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 1 Payday	lending:	America's	unsecured	loan	market [Business	Ethics	Case	Study,	5000	words,	Eric	Palmer] Loans	of	money	are	called	"unsecured"	if	they	are	granted	without	collateral. Collateral	provides	a	material	guarantee	against	at	least	some	of	the	loan's	value: holding	the	deed	to	a	house	and	land	in	trust,	for	example,	provides	a	bank	with collateral	against	a	home	loan.	If	something	can	stand	in	place	of	collateral,	then	a similar	security	for	the	lender	might	be	ensured.	Something	of	the	right	sort	was found	in	the	United	States	during	the	1990's	by	owners	of	check-cashing	storefront businesses	that	operated	in	all	cities	and	many	towns. Check	cashing	businesses	provide	a	necessary	service,	charging	fees	to	cash checks	and	to	draft	checks	and	money	orders	for	their	clients,	many	of	whom	do	not have	access	to	personal	bank	accounts.	Check	cashing	services	found	that	they	could expand	their	business	to	a	new	group	of	customers	who	did	have	access	to	checking accounts,	by	offering	"advance	check	cashing"	services.	In	place	of	loan	collateral, customers	could	provide	the	lender	evidence,	in	the	form	of	a	recent	paystub,	of their	ability	to	pay	in	the	future,	plus	an	indication	of	intent	to	repay,	in	the	form	of	a post-dated	check	or	electronic	fund	transfer	agreement	for	the	value	of	the	loan	plus interest	and	fees.	The	recipient,	then,	could	purchase	the	service	of	"advance	check cashing"	against	a	future	paycheck,	a	loan	secured	by	money	that	would	presumably be	available	in	the	recipient's	checking	account	at	the	next	payday. A	borrower	might	take	the	money	and	run,	as	is	a	concern	with	any	loan.	In this	case,	one	might	close	the	bank	account	or	neglect	to	supply	it	with	sufficient funds,	but	the	penalty	incurred	would	be	significant.	The	value	of	maintaining	a bank	account	and	good	credit	history	is	apparent	to	most	borrowers,	fees	charged	to account	holders	for	bounced	checks	are	usually	substantial,	and,	of	course,	the	loan balance	remains	on	the	customer's	record.	Such	a	balance	might	also	be	sold	to	a debt	collection	service,	which	would	ask	for	further	fees	on	top	of	the	balance.	With no	collateral,	lenders	have	nothing	to	show	in	cases	of	default,	but	they	have	found the	arrangement	to	be	stable	anyway	because	the	penalty	of	default	provides sufficient	incentive	for	repayment.	Thus,	penalty	replaces	collateral. Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 2 Payday	lending	storefronts	have	proliferated	across	35	states,	increasing from	about	500	locations	in	1990	to	over	24,000	by	2007	and	reducing	to	about 16,500	at	present.	They	serve	about	twelve	million	customers	in	the	USA,	or	5%	of the	adult	census	population.	The	largest	company,	Advance	America,	has	2,100 locations	in	28	states.	It	has	been	owned	by	Grupo	Salinas	since	2012.1	The storefront	market	has	reduced	because	of	rising	activity	facilitated	through	the internet,	to	which	we	turn	shortly. Advance	check	cashing	–	now	more	commonly	known	as	payday	lending	– commonly	provides	an	advance	of	up	to	50%	of	the	value	estimated	from	a	paystub plus	interest	and	fees,	all	due	on	the	date	of	the	next	paycheck.	The	value	of	a	loan	is typically	about	$350.	The	loans	are	most	frequently	advanced	for	approximately	a two-week	period,	reflecting	total	charges	of	roughly	15%	of	the	principal	on average.	Business	owners	originally	circumvented	usury	laws,	which	are	upper limits	set	by	states	upon	interest	rates,	by	introducing	the	practice	under	the	name of	check	cashing,	rather	than	lending.	Litigation	and	legislation	followed	the introduction	of	the	practice,	with	the	result	that	such	loans	are	now	available	in most	states,	with	a	fee	structure	that	usually	reflects	a	combined	fee	plus	interest rate	charge	of	about	400%	per	annum.	2 Unsecured	loans	are	now	generally	available	across	the	entire	nation	because transactions	may	occur	across	state	lines,	particularly	by	loan	application	on	the internet.	An	examination	of	an	offering	at	mypaydayloan.com	is	illustrative	of current	internet	arrangements.3	Online	coupon	aggregator	websites	may	provide 1	Statistics	concerning	the	general	characteristics	of	the	industry	have	been	drawn	from	Consumer Finance	Protection	Bureau	(2017);	if	not	found	in	that	publication,	they	are	drawn	from	other	cited sources	dated	2007	to	present. 2	For	details	of	this	history,	see	Katherine	Samolyk,	"Payday	lending:	Evolution,	issues	and	evidence," in	Sumit	Agarwal	and	Brent	W.	Ambrose,	eds.	Household	Credit	Usage:	Personal	Debt	and	Mortgage (New	York:	Palgrave,	2007),	175-201. 3	At	https://www.mypaydayloan.com/cash-advance,	https://www.mypaydayloan.com/faq.	The	first of	these	links	was	the	first	link	to	be	displayed	on	a	google	search	for	"payday	loan"	using	an anonymized	browser,	accessed	January	27,	2018. Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 3 access	to	a	first	"Free	Loan"	opportunity	for	some	customers	of	the	lender.	An	online application	accompanied	by	photographs	of	a	pay	stub	and	a	postmarked	envelope with	address	visible	may	lead	to	approval	in	"less	than	5	minutes	during	normal business	hours."	If	the	application	arrives	early	in	the	business	day,	funds	arrive	in the	borrower's	checking	account	on	the	same	day.	First-time	customers	are	limited to	a	$600	loan	and	the	ceiling	for	repeat	borrowers	is	$1000.	Text	drawn	from	the "frequently	asked	questions"	page	explain	further	details	of	lending	arrangements: If	you	have	poor	credit,	it	will	not	affect	the	approval	of	your	loan.	However,	if	you	have	filed for	bankruptcy	within	the	past	year	or	if	you	have	filed	multiple	times,	we	will	not	be	able	to extend	an	advance	to	you.	... The	fee	for	advancing	a	payday	loan	is	$30	per	every	$100	borrowed.	... Online	payday	loans	are	intended	to	be	used	for	quick	cash	in	the	case	of	a	financial emergency.	... Payments	are	normally	due	every	10	to	14	days,	depending	on	your	next	payday	and regardless	of	how	often	you	are	paid.	Even	if	you	are	paid	once	a	month,	your	payments	will still	be	due	every	two	weeks	with	a	payday	loan.	... You	are	allowed	to	extend	your	payday	loan	as	many	times	as	necessary;	however,	keep	in mind	that	a	payday	loan	is	a	short-term	loan	that	should	be	paid	back	quickly.	... The	minimum	amount	[due]	is	simply	the	fees	associated	with	your	current	principal balance.	...	You	have	3	payment	options	to	choose	from: 1)	Elect	to	pay	the	total	amount	due	(fees	will	be	waived	if	you	are	a	Free	Loan	customer) 2)	Elect	to	pay	the	minimum	amount	and	extend	the	loan	with	a	*new	contract 3)	Elect	to	pay	more	than	the	minimum	amount	and	extend	the	loan	with	a	*new	contract (payment	will	initially	be	applied	to	the	fees	and	the	remainder	of	the	payment	will	be applied	to	the	principal) A	*new	contract	means	you	are	entering	into	a	new	loan	period,	which	obligates	you	to	pay the	finance	charge	associated	with	your	new	principal	balance	at	the	end	of	the	next	pay period.	... If	you	fail	to	submit	a	payment	request	by	the	deadline,	as	a	courtesy,	we	may	debit	the minimum	due	only.	However,	please	be	aware	that	this	is	a	courtesy	we	extend	at	our discretion.	Per	the	Check	Advance	Agreement,	you	are	required	to	submit	a	payment	request prior	to	each	due	date	to	ensure	that	the	payment	amount	you	desire	will	be	debited	from your	account.	... If	your	payment	is	returned	due	to	NSF	[non-sufficient	funds]	(or	Account	Frozen	or	Account Closed),	our	collections	department	will	contact	you	to	arrange	a	second	attempt	to	debit	the payment.	A	return	item	fee	of	$25	and	a	late	fee	of	$50	will	also	be	collected	with	the	next debit. If	you	have	an	issue	with	a	fraudulent	lender	and	require	further	assistance,	please	call	the OLA	Consumer	Hotline	at	...	and	they	will	assist	you	reporting	fraud. Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 4 Mypaydayloan.com	charges	a	"fee,"	rather	than	interest.	Were	a	two	week	loan	of this	sort	to	extend	over	a	full	year	without	repayment	of	principal,	fees	would	total 7.8	times	the	unpaid	principal	(780%).	In	the	event	that	a	borrower	does	not	select a	payment	option	by	the	due	date,	either	the	lending	fee	or	a	greater	sum	is automatically	debited	from	the	borrower's	checking	account:	in	those circumstances,	conditions	apply	that	are	similar	to	option	2	or	option	3	above.	The "OLA	consumer	hotline"	mentioned	in	the	final	paragraph	above	rings	to	the	Online Lenders	Alliance,	which	is	one	of	several	trade	associations	that	publish	best practices	and	advocate	on	behalf	of	member	lending	businesses	in	government. Analysis 1.	Repeat	borrowing:	a	debt	trap? Payday	loans	are	marketed	in	the	United	States	as	short-term	solutions	for debt;	that	is,	they	are	portrayed	as	useful	tools	for	individuals	facing	emergency financial	shortfalls.4	A	challenge	to	that	claim,	which	subsequently	drew	national attention	to	payday	lending,	was	introduced	a	decade	ago	by	the	US	consumer advocacy	group	Center	for	Responsible	Lending,	which	is	funded	by	and	affiliated with	credit	unions	that	offer	alternative	models	for	short-term	lending.5	Center authors	argued	that	payday	lending	is	predatory:	both	dishonest	in	its	marketing	as a	solution	to	debt,	and	usurious	in	its	fee	structure.	They	held	that	a	study	of	public records	showed	that	over	3⁄4	of	payday	lending	was	what	they	called	"phantom demand"	generated	by	the	requirement	of	debt	service	on	such	loans.	The	authors argued	that,	because	payday	loans	require	immediate	debt	cancellation	at	the	date 4	See,	for	example,	claims	at	mypaydayloan.com,	and	see	the	website	of	the	leading	industry	advocacy group,	Consumer	Financial	Services	Association	of	America,	which	provides	an	explanation	of	the product	for	consumers	at:	http://cfsaa.com/what-is-a-payday-advance/is-a-payday-advanceappropriate-for-you.aspx	(accessed	27	January	2018). 5	The	Center	for	Responsible	Lending	indicates	on	its	website	that	Board	member	Martin	Eakes	"is CEO	and	founder	of	Self-Help,	a	community	development	lender	that	was	instrumental	in establishing	the	Center	for	Responsible	Lending."	http://responsiblelending.org/about-us/boarddirectors	(accessed	27	January,	2018). Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 5 of	the	next	paycheck	rather	than	payment	of	relatively	small	installments,	such loans	do	not	present	the	solutions	that	they	advertise.	Instead,	among	the	4/5	of loan	recipients	who	contracted	more	than	one	payday	loan	per	year,	half	took	out	a new	loan	at	the	next	opportunity	that	the	law	allows,	either	immediately	or	within two	days,	depending	upon	state	legislation.	Nearly	9/10	of	this	group	(87%)	would initiate	a	new	loan	before	the	next	paycheck,	and	9/10	of	payday	lending	business went	to	recipients	who	contract	for	at	least	five	payday	loans	within	one	year.	About a	quarter	of	all	borrowers	took	twenty-one	or	more	bi-weekly	loans	per	year.	A 2012	study	by	the	Pew	Charitable	Trusts	suggests	less	extreme,	but	significant levels	of	debt	for	a	larger	group	of	borrowers:	"on	average,	a	borrower	takes	out eight	loans	of	$375	each	per	year	and	spends	$520	on	interest."6 In	2014,	Pew	also	reported	on	the	emerging	area	of	internet	lending,	pointing to	practices	that	appear	to	represent	the	model	found	at	mypaydayloan.com:	"Many online	loans	are	designed	to	promote	renewals	and	long-term	indebtedness.	One	in 3	online	borrowers	has	taken	out	a	loan	that	was	set	up	to	withdraw	only	the	fee	on the	customer's	next	payday,	automatically	renewing	the	loan	without	reducing principal."	African	American,	separated	or	divorced,	and	less	educated	people	are disproportionate	among	borrowers.The	most	typical	borrower	is	white,	female, single	and	between	25	and	44	years	old.	Consequently	a	high	proportion	of	single heads	of	households	with	young	children	are	utilizing	these	services.7 6	Leslie	Parrish	and	Uriah	King,	"Phantom	Demand:	Short-term	due	date	generates	need	for	repeat payday	loans,	accounting	for	76%	of	total	volume."	2009,	Center	for	Responsible	Lending; 3-6 http://www.responsiblelending.org/payday-lending/research-analysis/phantom-demand-final.pdf; and	see	Uriah	King	and	Leslie	Parrish,	"Springing	the	debt	trap,"	Center	for	Responsible	Lending, 2007,	3.	http://www.responsiblelending.org/payday-lending/research-analysis/springing-the-debttrap.pdf.	Pew	Charitable	Trusts,	"Who	borrows,	where	they	borrow,	and	why:	Executive	summary and	key	findings." 2012. http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingexe csummarypdf.pdf 7	Pew	Charitable	Trusts,	"Fraud	and	abuse	online:	harmful	practices	in	internet	payday	lending." October	2014.	p.1,	Appendix	A.	http://www.pewtrusts.org/en/research-andanalysis/reports/2014/10/fraud-and-abuse-online-harmful-practices-in-internet-payday-lending Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 6 2.	Proposed	alternatives The	authors	of	Phantom	Demand	maintained	that,	because	payday	loans	are regularly	treated	as	longer-term	installment	loans	by	their	users,	the	arguments	that were	used	to	relax	state	regulations	in	the	1990's	should	not	apply	and	should	be repealed.	The	authors	recommended	adherence	to	U.S.	Federal	Deposit	Insurance Corporation	(FDIC)	recommendations	that	include	interest	rate	caps	of	36%	per annum	and	minimum	lending	terms	of	90	days.	They	also	suggested	that	options	be made	more	widely	available	for	installment	loans,	which	require	multiple	payments over	time	to	reduce	and	finally	cancel	lending	debt. Small	loans	might	also	be	offered	by	credit	unions	and	private	banks.	Many national	governments,	following	a	trail	blazed	by	India	in	the	1990s,	ensure	some forms	of	lending	and	savings	account	access	to	the	poor.	India	provides	funds guarantees,	sets	regulations	and	requires	private	banks	to	participate	in	savings	and lending	for	agriculture	loans	and	women's	self-help	group	arrangements.	In	USA, such	schemes	would	not	be	favored	among	some	banks	–	as	they	are	also	not	among some	Indian	banks	–	since	the	arrangements	would	very	expensive	to	administer, even	with	government	guarantees. The	National	Credit	Union	Administration	(NCUA),	an	independent	US federal	agency,	has	introduced	regulations	detailing	"payday	alternative	loans" (PAL).	Since	2010,	PAL	has	allowed	credit	unions	to	lend	$200-$1000	for	terms	of	1 to	6	months.	A	minimum	of	at	least	two	substantially	equal	payments	encompass payment	of	principal	as	well	as	charges.	Where	borrowers	cannot	close	these	loans, terms	may	be	extended	to	six	months	maximum.	Charges	are	limited	to	an application	fee	of	up	to	$20	and	an	interest	rate	of	up	to	28%	APR	(annual percentage	rate).	On	a	$300	loan	for	a	period	of	two	weeks,	this	would	amount	to application	fee	plus	$3.23	interest.8	Credit	unions	are	federally	insured	institutions, unlike	private	payday	lenders,	and	their	business	model,	which	includes	many 8	National	Credit	Union	Administration,	"Regulatory	Alert:	Final	Rule	Part	701,	Short-term,	Small Amount	Loans,"	October	2010. https://www.ncua.gov/Legal/Documents/Regulatory%20Alerts/RA2010-13.pdf	.	The Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 7 services	at	varied	scales,	does	not	strictly	demand	that	this	particular	lending arrangement	be	profitable. Another	innovative	option	relies	heavily	on	an	empirical	finding	cited	in Phantom	Demand:	"Consumer	Federation	of	America	researchers	found	that households	with	no	savings	earning	$25,000	or	less	annually	were	eight	times	more likely	to	use	a	payday	loan	than	similarly	situated	households	with	just	$500	in emergency	savings."	This	suggests	that	incentivizing	savings	of	small	amounts	might greatly	reduce	the	problem	of	debt	traps.	A	government	scheme	that	matches savings	dollar-for-dollar	up	to	$250	contributed	by	the	individual	might	greatly reduce	the	need	for	payday	lending	and	would	perhaps	lead	people	into	the	habit	of saving	still	more.	Another	novel	possibility	is	prize-linked	incentives	for	savings account	deposits.	People	generally	like	lotteries:	they	see	an	incentive	even	in	the slim	chance	that	they	will	win	a	lottery	payment.9 3.	Regulation Lending	law	in	USA	proceeds	generally	state-by-state,	though	the	Federal Deposit	Insurance	Corporation	(FDIC)	presents	recommendations	for	appropriate practices.	There	are	exceptions	from	the	state	rules,	particularly	for	US	military personnel,	for	whom	there	is	a	national	cap	of	36%	per	annum	on	lending,	but	state laws	apply	to	most	people.	Fifteen	states	have	enacted	limits	at	or	below	36%,	and Arkansas	sets	interest	plus	fees	at	5%	above	the	Federal	Discount	Rate.	But	internet sales,	offshore	incorporation	and	affiliation	of	lenders	with	Native	American governance	systems	erode	states'	effective	control.	In	states	that	effectively	outlaw payday	lending,	borrowing	rates	are	about	half	of	what	they	are	in	the	least restrictive	states.10 9	Shai	Akabas	&	Brian	Collins,	"Prize-Linked	Savings	Accounts	Are	Lotteries	with	No	Losers," Bipartisan	Policy	Center,	May	14,	2014.	http://bipartisanpolicy.org/blog/prize-linked-savingsaccounts-are-lotteries-no-losers/ 10	Pew	Charitable	Trusts,	"Fraud	and	abuse	online,"	22-3. Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 8 Other	states	have	less	restrictive	rules,	and	a	dilemma	arises	for	each	state, since	lenders	will	set	up	shop	in	the	most	permissive	states.	If	states	would	better serve	their	people	by	enacting	restrictions,	nevertheless,	each	state	would	be	better served	in	other	respects	if	they	keep	lenient	arrangements,	for	tax	revenue	and business	employment	accrue	to	the	home	states	with	lower	taxation	rates	and	lower regulation.	Six	states	have	no	cap	on	fees	for	payday	loans	or	have	no	explicit	law	on fees	(Delaware,	Idaho,	Nevada,	Texas,	Utah,	Wisconsin).	Two	states	have	no	explicit law	concerning	maximum	loan	amount	(Utah,	Wyoming).	Other	states	indicate either	dollar	maximums	of	$1000	(or	less),	or	a	proportion	of	35%	(or	less)	of	the borrower's	salary,	if	they	permit	lending	at	all.	The	owner	of	mypaydayloan.com	is "Zarvad	III	S.A",	A	Costa	Rica	corporation	registered	in	Utah	in	2009.11 The	US	Bureau	of	Consumer	Financial	Protection	(CFPB)	issued	more stringent	rules	for	payday	lenders	late	in	2017,	set	to	take	effect	August	2019.	The new	restrictions	explicitly	allow	NCUA's	PAL	lending	terms,	and	allow	non-credit union	lenders	to	lend	under	such	terms.	The	new	standards	for	payday	lending require	lenders	to	collect	detailed	information	concerning	borrowers'	credit	history and	ability	to	repay	before	extending	loans	above	$500.	These	requirements	would put	a	significant	burden	on	payday	lenders	and	would	reduce	their	pool	of	eligible borrowers.	For	lower-value	loans	structured	as	payday	lending,	these	strictures	do not	apply,	but	the	new	rules	restrict	sequential	loans	to	three	15-day	contract periods,	requiring	a	lending	structure	that	decreases	the	loan's	principal	to	close	out the	loan	over	the	three	contract	periods.	They	also	impose	a	mandatory	30	day "cooling	off	period"	before	any	lender	may	offer	another	such	loan.	The	CFPB anticipated	that	its	rules	would	increase	lenders'	expenses	and	that	"payday	loan volumes	will	decrease	by	62	percent	to	68	percent,	with	a	corresponding	decrease in	revenue." 11	See	proceedings	against	the	corporation	by	the	State	of	New	Hampshire	Banking	Department	in 2013	("Notice	of	order	to	cease	and	desist"	business	within	the	state	without	a	licence	(Case	10460)).	New	Hampshire	permits	payday	lending	at	an	interest	rate	of	36%	per	annum,	with	no	other charges	allowed;	no	such	businesses	are	currently	registered	in	New	Hampshire.	Zarvad	III	S.A's 2009	registration	in	Utah	lapsed	after	ten	months. Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 9 In	January	2018	a	change	in	leadership	occurred	at	the	CFPB.	Sixty	days	after the	CFPB	had	made	these	new	arrangements	official	federal	policy,	on	the	same	day upon	which	business	entities	were	required	to	register	for	compliance	with	the impending	2019	regulations,	the	CFPB	released	a	brief	statement	that	included	the following:	"The	Bureau	intends	to	engage	in	a	rulemaking	process	so	that	the Bureau	may	reconsider	the	Payday	Rule.	...	Recognizing	that	this	preliminary application	deadline	might	cause	some	entities	to	engage	in	work	in	preparing	an application	to	become	a	RIS	[Registered	Information	System],	the	Bureau	will entertain	waiver	requests	from	any	potential	applicant."12	The	Competitive Enterprise	Institute	released	a	study	on	the	following	day	that	included	the following	claim:	"While	the	CFPB	is	statutorily	limited	from	regulating	the	interest rates	of	small-dollar	loans,	it	has	sought	to	undermine	the	industry	through	onerous regulations	that	make	these	loans	unprofitable	for	lenders." 4.	Exploitation "Exploitation"	refers	to	a	variety	of	activities	that	may	be	deemed	appropriate	or inappropriate.	Exploitation	that	does	not	involve	the	engagement	of	more	than	one individual	–	exploitation	of	a	resource	for	personal	gain,	such	as	the	use	of	the sunshine,	or	the	exploitation	of	another's	writing	freely	provided	on	the	internet	– are	generally	accounted	as	appropriate,	and	such	cases	will	not	be	of	concern	here. Exploitation	of	another's	time	or	efforts	may	be	judged	both ethically	appropriate and	mutually	beneficial:	the	housepainter	may	contract	with	the	homeowner; similarly,	the	caller	to	a	toll-free	technical	help	line	might	reasonably	assume	that the	worker	at	the	other	end	has	chosen	such	work	and	is	appropriately compensated.	Exploitation	of	an	opponent's	weakness	in	a	sport	is	often	judged appropriate,	though	other	values	associated	with	being	a	good	sport	may	reverse the	appraisal	in	a	particular	case.	Exploitation	may	be	ethical,	but	still	be	disvalued 12	Consumer	Finance	Protection	Bureau.	"CFPB	Statement	on	Payday	Rule,"	January	16,	2018. https://www.consumerfinance.gov/about-us/newsroom/cfpb-statement-payday-rule/ Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 10 for	other	reasons:	there	may	be	nothing	at	all	unethical	in	exploiting	the	politeness or	timidness	of	others	in	a	group	by	taking	the	last	cookie,	even	if	doing	so	shows	a disregard	for	the	host's	own	true	intention	when	the	last	available	one	is	offered. Even	if	a	violation	of	politeness	results	in	an	unequal	final	distribution	of	cookies among	guests,	the	result	may	be	ethical	and	we	need	not	find	that	the	outcome should	have	been	different:	some	may	just	value	the	cookies	more	than	others,	some may	have	food	allergies,	and	others	may	prefer	to	be	polite.	Social	norms	like politeness	may	coincide	with	ethical	norms,	but	the	two	may	be	appropriately distinguished,	as	the	cookie	example	suggests,	and	as	is	shown	by	common	(socially accepted,	or	normative)	practices	that	ethicists	argue	should	be	negatively	valued, and	that	they	may	intend	to	address	and	alter. Payday	lending	is	exploitation	of	some	kind,	then.	Should	payday	lending	be disvalued?	Should	it	be	disvalued	because	it	is	somehow	an	unethical	kind	of institutional	or	structural	practice?	If	so,	on	what	grounds?	Is	it	unethical	because	it is	taking	unfair	advantage,	or	generates	disproportionate	gain	for	one	party?	Or does	it	arise	only	in	cases	of	harm?	Each	of	these	may	be	cases	that	some	call "unconscionable	contracts:"	debt	bondage,	dead	peasant	insurance,	and	markets	in human	organs	may	display	one	or	several	of	these	aspects.	Is	payday	lending	odious for	another	reason,	perhaps	because	it	is	taking	unfair	advantage	and	is	coercive, regardless	of	whether	or	not	it	is	harmful	to	either	party?	An	example	of	this	is offering	lower	pay	rates	to	workers	who	are	evidently	more	needy	and	lack	other options	because	of	their	social	status.	Philosophers	frequently	use	these	terms	but they	analyze	unethical	exploitation	in	very	different	ways,	and	those	who	appear	to agree	on	the	terms	also	may	judge	the	same	case	differently. Specific	discussion	of	payday	lending	is	uncommon	in	philosophy.	Business ethicists	dispute	whether	the	terms	of	payday	lending	are	justified	for	both	free market	and	regulated	cases.	Robert	Mayer	argues	that	some	payday	lending	is unethical:	it	is	exploitative	in	a	way	that	is	inequitable	(unfair)	and	coercive.	Yet Mayer's	analysis	may	surprise:	the	defaulting	debtor	is	cast	alongside	the	lender	as exploitative	of	other	borrowers	in	"a	sort	of	conspiracy	between	the	top	and	the Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 11 bottom	against	the	middle."	So,	Mayer	finds	an	interest	rate	cap	justifiable	because payday	lending	addresses	an	immediate	need,	and	borrowers	with	such	a	need	have limited	opportunity	to	shop	about	for	better	rates:	"Unless	prices	are	capped,	the more	solvent	majority	of	borrowers	is	compelled	to	cross-subsidize	the	least	solvent debtors,	who	have	a	high	rate	of	default." Responding	to	Mayer,	Matt	Zwolinski	argues	that	payday	lending's	model displays	the	marks	of	a	functioning	market	with	usual	rates	of	return	on	capital.	He finds	that	"payday	lending	is	...	sufficiently	constrained	by	competitive	pressures	to ensure	that	no	party	is	in	a	position	to	take	unfair	advantage	of	the	other."	Zwolinski also	provides	a	general	justification	of	usury	that	suggests	it	may	be	ethical,	even	if	it is	often	harmful: even	if	usury	is	a	form	of	exploitation,	it	is	usually	a	form	of	mutually beneficial	exploitation.	Both	parties	benefit	from	the	exchange,	even	if	one party	benefits	less	than	fairness	requires.	Suppressing	mutually	beneficial exploitation	prevents	unfairness,	to	be	sure,	but	it	also	often	makes	both parties	worse	off	than	they	otherwise	would	have	been,	and	this	often	has	a disproportionately	harmful	effect	on	the	most	vulnerable	party. Zwolinski	finds	no	compelling	reason	for	altering	open	payday	lending	conditions. Mayer	replies	that	the	social	role	of	government	demands	that	limits	be	placed	on the	lender	for	the	sake	of	both	the	defaulting	borrowers,	who	might	then	be excluded,	and	repaying	borrowers:	"when	government	caps	the	price	of	credit, lenders	are	prevented	from	boosting	the	fee	they	could	charge	to	the	solvent debtors	to	cover	these	losses.	Their	only	real	option	is	to	lend	more	cautiously." So,	Zwolinski	implies	that	lenders	should	price	the	poorest	out	of	a	free market.	Mayer	instead	relies	on	the	judgment	of	lenders	insofar	as	their	rate	options have	been	restricted	by	regulators,	and	he	suggests	a	15%	bi-weekly	rate	is appropriate,	as	it	has	been	shown	to	be	a	viable	ceiling	rate	in	the	markets	of	some Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 12 states.	Both	authors	consider	payday	lending	to	be	appropriate	in	one	or	another form	as	it	is	currently	pursued	in	the	USA.13 The	arguments	of	these	two	authors	concern	the	justice	of	institutional practices,	but	their	analyses	include	no	discussion	of	the	details	of	the	structure	of the	payday	lending	contract,	the	frequency	of	renewals,	the	unrealized	alternative arrangements	that	have	been	proposed,	and	the	history	of	national	policy	and corporate	influence	that	are	detailed	above.	Those	details	suggests	that,	for	some theorists	who	choose	to	articulate	ethics	through	principles,	something	other	than or	more	than	an	analysis	of	fairness,	consent,	and	government's	role	may	be required	for	ethical	appraisal	of	payday	lending.	The	details	of	the	case	may	suggest to	other	ethicists	–	virtue	and	relational	(care)	ethicists,	who	focus	either	upon	the case	itself	or	upon	the	relations	of	power	and	vulnerability	on	display	between agents	–	that	unethical	exploitation	of	both	non-defaulting	and	defaulting	borrowers generally	applies	in	all	current	payday	lending	arrangements.	14 Discussion 1.	Why	do	governments	enact	usury	laws?	Should	these	transactions	be	considered to	be	loans,	or	advance	check	cashing?	How	are	the	two	distinguished,	and	what	is the	importance	of	the	distinction? 2.	If	the	suggested	36%	annual	rate	caps	were	to	apply	to	payday	lending,	then	the option	may	well	disappear,	since	transaction	costs	and	default	rates	are	high	for these	loans.	Does	the	ethical	case	for	payday	loans,	in	your	opinion,	outweigh	the case	against	them? 3.	Credit	unions	in	USA	now	offer	payday	alternative	loans	(PAL),	as	detailed	above. Credit	unions	are	not-for-profit,	tax-exempt	member-owned	financial	cooperatives: 13 See writing of Mayer and Zwolinski in Further readings section. 14 Wertheimer's writing (see Further readings) is the current standard initial reference for contemporary philosophical analysis of exploitation. Discussion pp. 8-10 briefly notes the general concerns of case-based and relational approaches. The general terms for a theory of exploitation that might be adapted to a business ethics focus follow, pp. 10ff. Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 13 in	general	terms,	credit	union	account	holders	own	the	shop	and	they	don't	pay taxes	on	its	activity,	which	is	actually	arranged	to	serve	the	same	account	holders, and	so	is	arranged	to	maximize	value	for	them,	and	not	arranged	to	maximize	profit. Credit	unions	are	federally	insured	institutions,	and	their	business	model,	which includes	many	services	at	varied	scales,	does	not	strictly	demand	that	the	PAL arrangement	be	profitable,	since	other	activity	in	the	business	might	serve	to	make up	for	a	loss	on	PAL	loans.	None	of	these	claims	apply	to	payday	lenders. Credit	unions	that	offer	PAL	arrangements	target	very	much	the	same	market	as	the private	businesses	that	offer	payday	loans.	Is	this	a	just	arrangement?	What arguments	do	you	see	supporting	such	a	claim,	what	arguments	undermine	it,	and how	would	you	finally	accept,	qualify,	or	reject	the	claim	that	credit	unions	should be	allowed	to	offer	the	PAL	alternative? 4.	Mayer	and	Zwolinski	analyze	the	institution	of	payday	lending	in	terms	of voluntary	contractual	relations,	fairness,	coercion,	harm,	and	government's	role	in promoting	good	for	its	people.	Each	author	holds	that	one	or	another	arrangement that	is	currently	available	in	payday	lending	in	USA	is	appropriate. Is	one	correct	in	his	general	analysis?	If	so,	why?	If	neither	is	correct,	why	is	neither correct? 5.	Alan	Wertheimer,	himself	quoting	legal	scholar	Judith	Shklar,	suggests	that	ethics grounded	in	principles	may	have	its	limitations:	ethics	should	also	attend	to	forms of	wrongdoing	as	independent	phenomena	in	their	own	right,	since	'Common	sense and	history	surely	tell	us	that	these	are	primary	experiences	and	have	an	immediate claim	on	our	attention.' Are	the	conditions	of	payday	lending	a	wrong	that	should	be	addressed?	Have	you an	account	or	analysis	of	why	or	why	not?	How	might	that	wrong	be	effectively addressed	in	your	society?	Or,	if	the	institution	is	not	structurally	unjust,	but	it might	be	improved	anyway,	should	it	be	improved?	How	should	it	be	improved? Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 14 Further	readings Banerjee,	Abhijit	&	Esther	Duflo.	Poor	Economics.	Public	Affairs	Press,	2011.	(see especially	chapters	6	&	7) Consumer	Finance	Protection	Bureau.	"Executive	summary	of	the	Payday,	Vehicle Title,	and	Certain	High-Cost	installment	Loans	Rule,"	October	5,	2017. http://files.consumerfinance.gov/f/documents/201710_cfpb_executivesummary_payday-loans-rule.pdf Gabler,	Neal.	"The	Secret	Shame	of	Middle-Class	Americans,"	The	Atlantic,	May	2016. https://www.theatlantic.com/magazine/archive/2016/05/my-secretshame/476415/ Jackson,	David	Michael.	"Bentham	and	Payday	Lenders,"	in	H.M.	Stacy	and	W.-C.	Lee eds.,	Economic	Justice:	Philosophical	and	Legal	Perspectives.	Amintaphil, Springer,	2012.	29-36. Kiel,	Paul.	"To	Dodge	Law,	High-Cost	Lender	Offers	Cash	for	Free."	ProPublica, September	3,	2013.	https://www.propublica.org/article/high-cost-lenderoffers-cash-for-free-to-dodge-law Mayer,	Robert.	"When	and	why	usury	should	be	prohibited"	Journal	of	Business Ethics	116	(3):513-527	(2013) Mayer,	Robert.	"The	cost	of	usury."	Business	Ethics	Journal	Review	1(7)	(2013):	44– 49	(A	reply	to	Zwolinski	2013) https://www.pdcnet.org/collection/fshow?id=bejr_2013_0001_0007_0044_ 0049&file_type=pdf Pew	Charitable	Trusts,	"Fraud	and	abuse	online:	harmful	practices	in	internet payday	lending."	http://www.pewtrusts.org/en/research-andanalysis/reports/2014/10/fraud-and-abuse-online-harmful-practices-ininternet-payday-lending Press,	Daniel,	"How	the	Consumer	Financial	Protection	Bureau's	Payday	Loan	Rule Hurts	the	Working	Poor,"	January	17,	2018.	Competitive	Enterprise	Institute. https://cei.org/content/report-consumer-financial-protection-bureauspayday-loan-rule-hurts-working-poor Wertheimer,	Alan.	Exploitation.	Princeton	University	Press,	1999. Zwolinski,	Matt.	"Are	Usurious?	Another	New	Argument	For	the	Prohibition	of	High Interest	Loans?"	Business	Ethics	Journal	Review	1(4)	(2013):	22–27. https://bejreview.files.wordpress.com/2013/02/bejrv1n04zwolinski1.pdf (A	comment	on	Mayer,	2013) Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 15 Preliminary	exercise	–	Payday	lending	case	study	supplement Before	reading	the	payday	loan	case	study,	please	complete	the	following	exercise. Put	yourself	in	the	following	person's	shoes,	make	a	careful	decision,	and	explain	the basis	for	your	decision. It's	June	2019.	Jane	Doe	is	a	28	year	old	single	mother	of	two	children,	ages	7	and	9 who	lives	in	Meadville,	Pennsylvania.	She	has	worked	for	the	past	6	months	as	a machinist	at	Laser	Tool,	7	miles	northwest	of	town,	and	she	receives	sufficient shiftwork	to	cover	expenses	for	her	small	family.	She	has	managed	$300	savings	in that	time,	she	has	no	other	savings,	and	she	plans	to	use	that	much	for	a	trip	to Cedar	Point	Amusement	Park	with	her	children	in	August,	their	first	vacation	since 2017. On	Wednesday,	the	transmission	of	her	2012	Ford	Fiesta	car	failed	on	the	way	home from	work.	She	will	have	to	pay	$60	for	towing	to	the	garage,	where	mechanics	tell her	that	they	can	almost	certainly	fix	it	for	another	$640	by	Saturday.	She	can	rely on	others	to	get	her	to	and	from	work	through	Friday,	but	friends	can	only	be	asked for	so	much,	and	she	has	no	other	people	to	rely	on	in	town.	She	has	saved $50/month	recently,	so	she	knows	what	she	can	afford:	that	much,	and	not	much more	(perhaps	less	–	the	children	will	need	school	supplies	soon). She	has	no	credit cards.	She	has	asked	the	garage	for	a	loan;	they	have	offered	her	an	installment	plan for	payment	over	the	coming	6	months	at	$140/month. She	also	finds	the	https://www.mypaydayloan.com/	website	online.	They	will provide	her	with	a	loan	for	$500,	half	the	amount	of	her	bi-weekly	paycheck. Exercise:	Look	very	carefully	at	the	website.	Put	yourself	in	Jane's	shoes.	Try	to	be smart,	and	careful.	Would	you	take	the	installment	loan,	the	payday	loan,	or	try	to solve	the	problem	another	(legal)	way?	Explain	your	choice,	carefully	(take	at	least 150	words	to	do	so).	Your	answer	will	be	posted	for	others	in	the	class	to	read. Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 16 Payday	Lending:	Eric	Palmer's	thoughts	(post-class	handout) Jane	(single	mother,	under	$25K	income/year)	is	the	most	typical	payday	loan	recipient. She	can	actually	make	it,	if	she	is	smart,	lucky,	and	ready	to	disappoint	her	kids.	Even	a	$100 one	month	payday	loan	would	cost	$60/month,	so	would	leave	her	further	in	debt.	If	she can	save	$20	more	per	month,	and	uses	up	all	her	savings,	she	will	be	able	to	stay	afloat	for 4	of	the	6	months	it	takes	to	complete	the	auto	shop's	installment	loan	(at	about	20% interest	–	much	better	than	she	might	expect	from	informal	lending,	about	the	rate	of	the credit	cards	that	she	doesn't	qualify	for).	She	might	pawn	her	saxophone	to	get	$70	for	the fifth	month	and	sell	plasma	3	times	at	Biomat	in	Erie	Pennsylvania	for	the	sixth	(about	$2030	per	donation,	minus	travel	cost).	Or	there	may	be	some	turn	for	the	better	on	her horizon.	Or	a	turn	for	the	worse. Vulnerability	to	debt	and	lack	of	awareness	of	financial	implications	is	not	restricted	to recipients	of	payday	loans.	The	majority	of	Americans	say	they	simply	could	not	come	up with	$2000	if	an	emergency	struck.	James	Surowecki	observes	that	"A	study	by	economist	at the	Atlanta	Fed	found	that	thirty	per	cent	of	people	in	the	lowest	quartile	of	financial literacy	thought	they	had	a	fixed	rate	mortgage	when	in	fact	they	had	an	adjustable-rate one."	(See	Desjardins	195	for	ARM	explanation.)	It	should	be	unsurprising	that	failure	scales with	weakness	in	mathematics	skills	and	education.	Surowecki	adds: A	study	of	subprime	borrowers	in	the	northeast	found	that,	of	the	people	who	scored	on	the bottom	quartile	on	a	very	basic	test	of	calculation	skills,	a	full	twenty	percent	had	been foreclosed	on,	compared	with	just	five	percent	of	those	in	the	top	quartile. The	less	people	know,	the	more	overconfident	in	their	abilities	they	tend	to	be.	In	a	German study,	eighty	per	cent	of	those	surveyed	described	themselves	as	confident	in	their	answers on	a	questionnaire,	yet	only	forty-two	per	cent	got	even	half	the	questions	right.	This	is known	as	the	Dunning-Kruger	effect:	people	who	don't	know	much	tend	not	to	recognize their	ignorance,	and	so	fail	to	seek	better	information.	(James	Surowecki,	"Greater	Fools"	New Yorker	July	5	2010.) This	strongly	suggests	to	me	that,	in	the	USA,	we	desperately	need	a	lot	of	regulation	of lending,	and	of	all	financial	activity	for	most	individuals	who	have	not	demonstrated	their ability	to	understand	such	loans,	through	currently	non-existent	education	or	licensing programs. The	freedom	to	do	what	you	wish	with	your	money	is	obviously	valued	and	valuable;	but	it should	be	balanced	against	freedom	from	the	chains	of	debt.	Lending	schemes	that	routinely impoverish	individuals,	even	though	they	are	impoverishing	them	of	their	own	free	choice, are	neither	more	nor	less	antisocial	than	other	business	activities	that	lead	to	similar outcomes,	such	as	gambling	(gambling	is	legal	in	some	states,	which	also	do	particularly brisk	business	in	gambling	addiction	counseling,	bankruptcy	services	and	payday	loans). For	more,	see:	Pew	Charitable	Trusts,	"Fraud	and	abuse	online:	harmful	practices	in internet	payday	lending."	http://www.pewtrusts.org/ Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 17 TEACHING	NOTES 0.	Run	through	Jane's	scenarios. Jane	is	a	realistic	character,	at	24K	income	per	year,	2.5%	savings	rate. Payday	loan	is	impossible	to	pay	back,	even	if	the	minimum:	she	saves	$50	or reaches	for	$70/month,	but	the	fees	are	$240/month	on	a	$400	loan(!).	Auto	shop's loan	bleeds	her	slowly	enough	that	she	might	just	make	it,	with	creativity	and	some extra	income	(garage	sale,	blood	donation...).	The	interest	rate	is	20%	-much	more lenient	than	one	might	expect. 57%	of	Americans	"don't	have	enough	cash	to	cover	a	$500	unexpected	expense." They	might	turn	to	family,	credit	cards	or	payday	loans,	but	1/3	of	all	Americans claim	that	they	simply	would	not	be	able	to	come	up	with	$2000	within	a	month	for an	emergency.15 In	Eric	Palmer's	first	run	of	the	Jane	case,	only	one	of	14	undergraduate	students laid	out	a	solution	that	was	not	a	serious	financial	mistake.	Several	suggested	that Jane	should	save	half	of	her	income	for	several	months.	It's	worth	pointing	out	that no-one	in	Jane's	shoes	could	seriously	entertain	that	option. 1.	Page	195,	Desjardins	Business	Ethics	characterizes	"predatory	loans".	Are	payday loans	predatory?	Why/why	not?	Are	credit	cards	predatory?	Why	do	governments enact	usury	and	predatory	lending	laws? 2.	What	are	the	alternatives?	(If	the	suggested	36%	annual	rate	caps	were	to	apply to	payday	lending,	then	the	option	may	well	disappear,	since	transaction	costs	and default	rates	are	high	for	these	loans.	Does	the	ethical	case	for	payday	loans,	in	your opinion,	outweigh	the	case	against	them? 3.	Credit	unions	in	USA	now	offer	payday	alternative	loans	(PAL),	as	detailed	above. Credit	unions	are	not-for-profit,	tax-exempt	member-owned	financial	cooperatives: in	general	terms,	credit	union	account	holders	own	the	shop	and	they	don't	pay taxes	on	its	activity,	which	is	actually	arranged	to	serve	the	same	account	holders, and	so	is	arranged	to	maximize	value	for	them,	and	not	arranged	to	maximize	profit. Credit	unions	are	federally	insured	institutions,	and	their	business	model,	which includes	many	services	at	varied	scales,	does	not	strictly	demand	that	the	PAL arrangement	be	profitable,	since	other	activity	in	the	business	might	serve	to	make up	for	a	loss	on	PAL	loans.	None	of	these	claims	apply	to	payday	lenders. Credit	unions	that	offer	PAL	arrangements	target	very	much	the	same	market	as	the private	businesses	that	offer	payday	loans.	Is	this	a	just	arrangement?	What 15 2017: https://www.cbsnews.com/news/most-americans-cant-afford-a-500-emergencyexpense/ https://www.cnbc.com/2017/03/22/1-in-3-americans-could-not-come-up-with2000-in-an-emergency.html Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 18 arguments	do	you	see	supporting	such	a	claim,	what	arguments	undermine	it,	and how	would	you	finally	accept,	qualify,	or	reject	the	claim	that	credit	unions	should be	allowed	to	offer	the	PAL	alternative? Keep	in	mind	that	credit	unions	can	only	offer	a	very	limited	quantity	of	PAL	loans, subject	to	liquidity	and	the	tolerance	of	their	directors.	Unless	the	government provides	support	–	support	that	parallels	schemes	found	in	other	nations	(India: crop	loans	and	microbusiness	loans	are	provided	through	private	as	well	as	national banks,	service	by	private	banks	is	government	mandated	and	supported	against risk.).	USA	was	headed	in	the	direction	of	developing	such	support	until	reversal	in 2018. More Teaching notes (previous round): Put 1,2,3,4 on board, provide an overview at start of half-hour presentation 1. Check cashing: a check is a promise to pay... Last quarter of 20th century, there were two banking systems in the USA; familiar banking system and "Alternative financial services" -check-cashing for those without banking accounts. Payday loans started as re-labelling check cashing as "advance checkcashing" for post-dated checks. Repayable next payday. • Everyone clear on the loan structure? • What is right with this picture? What is wrong with this picture? • Why do we have usury laws? • 16 states have enacted limits as low as 17%, others 36% and others, higher or no limit. For US military personnel, there is a national cap of 36% per annum. Why do you suppose there is such a difference? Is this a benefit to military personnel, or paternalism on the part of the government? • Should states of the USA allow payday loans? Utility... I don't think so. There is also a problem of states undercutting other states – see further below.) Freedom, yes (and New Hampshire has apparently cut off all usury laws). Exploitation: "Predatory lending" and "usury" – what do you think? 2. Social impact Center for responsible lending authors, in Phantom Demand calculate that [fees including?] interest average 16.9% for the average sized loan ($350), for a term that averages 18 days.16 Since 3⁄4 of loans suggest the need for longer-term loans. This yields high annual interest (in these schemes, often about 400%). But they aren't loans ... are they? (They're "cash advance") 16 Phantom Demand, Appendix 3, 4. Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 19 • Center for Responsible Lending suggests that payday loans should fall under usury laws. Good argument? Is CRL argument about basis for change in legislation correct? I don't know. • If 36% rate caps apply, the option would disappear, as transaction/maintenance costs are high. Is that ok with you? (Note: lenders have sometimes produced much more return while remaining within such an interest rate... care to guess how?) • Note that the CRL is funded by Martin Eakes, who is central to a credit union referred to on the cite. Is this a conflict of interest? • Why did I include the closing paragraphs about state regulations? • What alternatives do you see? 4. Solutions? The simplest pretty-good solutions concern government intervention. (Some credit unions, because they are credit unions, have offered lesser versions of some of these ideas.) The first solution is to have government guarantee banks against losses for small unsecured loans at 36% or 28% interest rates. This provides access even to those who have been "unbanked." The government of India provides some such guaranteed loans and demands that all banks participate in the scheme. In USA, this scheme would not be popular among banks, as the loans would very expensive to administer, even with government guarantees. A second solution relies heavily on this empirical finding: "Consumer Federation of America researchers found that households with no savings earning $25,000 or less annually were eight times more likely to use a payday loan than similarly situated households with just $500 in emergency savings." http://www.responsiblelending.org/payday-lending/research-analysis/phantom-demandfinal.pdf (Page 18) --This suggests (to those who run credit unions especially) that incentivizing savings of small amounts for the poor will greatly reduce the problem. For example: a government scheme that matches savings dollar-for-dollar up to $250 contributed by the individual may greatly reduce this "phantom demand", and perhaps train people into saving still more. If US government incentivized first $500 savings, a lot of social good might result. Another possibility is prize-linked savings accounts, because people generally like lotteries: they see an incentive even in the slim chance that they will win a lottery payment. (http://bipartisanpolicy.org/blog/prize-linked-savings-accounts-arelotteries-no-losers/) [Extra for time-filling, if things run swiftly] Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 20 States undercutting other states There is diversity of views across states (Arkansas sets interest plus fees at prime +5%)17 Like Testor's safety move, there is a dilemma for states: banks will go to the least restrictive state. And with interstate banking and internet access, I believe that no state can effectively legislate more strictly than the least restrictive, but I am not perfectly sure of the law in this. Only those without access to internet are really protected by Arkansas' step. A prisoner's dilemma, of sorts: All states would better serve their people if they had restrictive banking laws; each state is better served in other respects (tax revenue, business employment) if they do not. Incentives run in both directions, 'defectors' from the norm of protecting their citizens win big as banks concentrate (Delaware, North Dakota, New Hampshire). All are caught within the defectors' system, in this era, since interstate banking laws are not practically enforced, even if enforceable, in this situation (if one can get an internet loan within New Hampshire, the claim is supported – I expect that it is not at all difficult to achieve this). 17 Arkansas Business: http://consumerist.com/2008/03/arkansas-attorney-general-to-payday-lenders-shutdown-or-ill-see-you-in-court.html A provision in the Arkansas state constitution limits the allowable interest rates on loans and consumer credit transactions. According to Article 19, Section 13, the maximum allowable amount for general loans "shall not exceed five percent (5%) per annum above the Federal Reserve Discount Rate at the time of the contract." Any contracts that charge higher interest will be void as the interest. The consumer loan provision is even better: "All contracts for consumer loans and credit sales having a greater rate of interest than seventeen percent (17%) per annum shall be void as to principal and interest and the General Assembly shall prohibit the same by law." Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 21 Handout:	Exploitation:	when	is	it	unethical? "Exploitation"	refers	to	a	variety	of	activities	that	may	be	deemed	appropriate. Exploitation	of	a	resource	for	personal	gain,	such	as	the	use	of	the	sunshine. Exploitation	of	another's	time	or	efforts	may	be	judged	both	ethically	appropriate and	mutually	beneficial:	the	housepainter	may	contract	with	the	homeowner. Exploitation	of	an	opponent's	weakness	in	a	sport	is	often	judged	appropriate, though	other	values	associated	with	being	a	good	sport	may	reverse	the	appraisal	in a	particular	case.	Exploitation	may	be	ethical,	but	still	be	disvalued	for	other reasons:	Social	norms	like	politeness	may	coincide	with	ethical	norms,	but	the	two may	be	appropriately	distinguished,	since	there	are	common	(socially	accepted,	or normative)	practices	that	ethicists	argue	should	be	negatively	valued,	and	that	they may	intend	to	address	and	alter. It	would	be	difficult	to	create	a	definition	of	unethical	exploitation,	then.	We may	try	considering	cases	instead.	Is	payday	lending	unethical?	If	so,	on	what grounds? 1.	If	it	is	taking	unfair	advantage,	causes	harm	or	abuse,	or	generates disproportionate	gain	for	one	party,	it	may	be	judged	unethical,	and	referred	to	as an	"unconscionable	contract"	in	law,	and	challenged.	Cornell's	Legal	Information Institute	provides	a	clear	checklist	for	unconscionability: Unconscionability:	A	defense	against	the	enforcement	of	a	contract	or	portion	of	a	contract. If	a	contract	is	unfair	or	oppressive	to	one	party	in	a	way	that	suggests	abuses	during	its formation,	a	court	may	find	it	unconscionable	and	refuse	to	enforce	it. A	contract	is	most likely	to	be	found	unconscionable	if	both	unfair	bargaining	and	unfair	substantive	terms	are shown. An	absence	of	meaningful	choice	by	the	disadvantaged	party	is	often	used	to	prove unfair	bargaining.	18 Debt	bondage,	corporate-owned	life	insurance	on	employees	(informally	called "dead	peasant	insurance"),	and	markets	in	human	organs	may	display	one	or	several of	these	aspects. 18 Cornell Law School Legal Information Institute. "Unconscionability," https://www.law.cornell.edu/wex/unconscionability . Copyright Eric Palmer 2018. Creative	Commons	Attribution-Non-Commercial-ShareAlike	4.0	International 22 Is	payday	lending	odious	for	another	reason,	perhaps	because	it	is	taking	unfair advantage	and	is	coercive,	regardless	of	whether	or	not	it	is	abusive	to	either party?	A	relevant	example	is	offering	lower	pay	rates	to	workers	who	are	evidently more	needy	and	lack	other	options	because	of	their	social	status	(e.g.,	because	of race,	in	a	particular	society).	It	is	important	to	see	that	this	basis	for	a	judgment	that payday	lending	is	unethical	is	different	than	the	unconscionable	contract	claim. Payday	lending	provides	a	needed	service	...	but,	given	the	alternatives	that	credit unions	could	create	if	supported	by	government	programs	that	were	rescinded shortly	before	they	were	to	take	effect	in	2017,	payday	lending	may	be	judged	an unethical	institution,	and	lenders	as	exploiters	of	an	unethical	practice. I	will	leave	you	to	make	your	judgment	regarding	payday	lending.	Generally, you	see	in	bold	on	this	page	a	number	of	criteria	that	have	been	used	to	judge	when exploitation	is	unethical.	And	you	may	see	a	reason	why	we	might	want	to	appeal	to cases	rather	than	principles,	when	judging	about	exploitation. Alan	Wertheimer, himself	quoting	legal	scholar	Judith	Shklar,	suggests	that	ethics	grounded	in principles	may	have	its	limitations:	ethics	should	also	attend	to	forms	of	wrongdoing as	independent	phenomena	in	their	own	right,	since	'Common	sense	and	history surely	tell	us	that	these	are	primary	experiences	and	have	an	immediate	claim	on our	attention.' 1.	We	probably	want	to	allow	for	some	forms	of	exploitation,	don't	we? 2.	Why	is	dead	peasant	insurance	generally	considered	unethical?	How	is	that different	than	organ	sales?	(vs.	Surrogate	motherhood?) 3.	How	would	you	begin	to	argue	whether	payday	lending	is	unethical? Further	readings Wertheimer,	Alan.	Exploitation.	Princeton	University	Press,	1999. Zwolinski,	Matt	and	Wertheimer,	Alan,	"Exploitation",	The	Stanford	Encyclopedia	of Philosophy	(Summer	2017	Edition),	Edward	N.	Zalta	(ed.), https://plato.stanford.edu/archives/sum2017/entries/exploitation/