A recent blog post by Liberty Street Economics, Reframing the Debate about Payday Lending, mischaracterizes the debate around payday lending and downplays the harms done to vulnerable consumers. Payday lenders and their allies have referenced the blog to justify their ongoing efforts to delay and weaken much needed regulation at both the state and federal level. The Center for Responsible Lending has taken a look at "Reframing" and issued a formal response.
The primary issue with payday lending, and the one from which most of its other harms flow, is the intentional structuring of the payday loan product as a debt trap for vulnerable borrowers. The Center for Responsible Lending (CRL) and many others have documented the built-in payday loan features that result in the rollover debt trap: lack of underwriting for ability to repay, high fees (typically 400% APR or higher), unaffordable principal payments, and first-in-line access to a borrower's checking account as collateral. The authors of Liberty Street Economics' Reframing the Debate about Payday Lending utilize a straw man approach in attempting to refute consumer harm in payday lending. This includes front and center attacks on a number of legitimate, but secondary objections to payday lending including excess profits, spiraling fees, neighborhood targeting, cognitive errors on the part of borrowers, and the like. Liberty Street's attacks are superficial and fail ultimately to robustly address any of the above listed objections. It's disappointing then, to wait until the very end of their piece for the "Reframing", only to find out that – "It's All about the Rollovers" – something that has been widely known for some time. The authors have in fact reiterated rather than reframed the prime driver of consumer harm from the payday product, and that is the payday lenders' debt trap by design.