Rollover, rollover: A behavioral law and economics analysis of the payday-loan industry

Texas Law Review

Volumn 88, Issue 3, 2010, Pages 611-638

  Francis, Karen E ^a  

^a NONE

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EID: 78649251485     PISSN: 00404411     EISSN: None     Source Type: Journal    
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References (245)

1. Though Jamie is a composite character, each day American borrowers like her engage in payday-loan transactions. For more information on the average payday borrower, see infra subpart I (A).
2. H. R. 1214, 111th Cong. (2009).
3. See The Payday Reform Loan Act of 2009: Hearing on H. R. 1214 Before the Subcomm. on Financial Institutions and Consumer Credit of the H. Comm. on Financial Services, 111th Cong. 1-2 (2009) [hereinafter Hearing] (statement of Rep. Luis V. Gutierrez, Chairman, Subcomm. on Financial Institutions and Consumer Credit) (outlining the current state of the payday-lending industry and introducing his proposed bill intended to increase consumer protection).
4. Id.
5. Ronald J. Mann & Jim Hawkins, Just Until Payday, 54 UCLA L. REV. 855, 857 (2007).
6. While most payday lenders have a physical store, there is a trend of payday lending over the Internet. See infra text accompanying notes 74-75.
7. See also Mark Flannery & Katherine Samolyk, Payday Lending: Do the Costs Justify the Price? 1 (FDIC Ctr. for Fin. Research, Working Paper No. 2005-09, 2005), available at http://www.fdic.gov/bank/analytical/cfr/2005/ wp2005/CFRWP-2005-09-Flannery-Samolyk.pdf (estimating the number of payday-lending stores as having grown from 10, 000 in 2000 to 22, 000 in 2004).
8. Mann & Hawkins, supra note 5, at 863;
9. Charles A. Bruch, Comment, Taking the Pay out of Payday Loans: Putting an End to the Usurious and Unconscionable Interest Rates Charged by Payday Lenders, 69 U. CIN. L. REV. 1257, 1258 (2001).
10. Mann & Hawkins, supra note 5, at 861-62 (citations omitted).
11. DONALD P. MORGAN, FED. RESERVE BANK OF N. Y., STAFF REPORT NO. 273, DEFINING AND DETECTING PREDATORY LENDING 5 (2007), available at http://www.newyorkfed.org/research/staff-reports/sr273.pdf.
12. See Michael S. Barr, Banking the Poor, 21 YALE J. ON REG. 121, 154 (2004) (noting that according to a 2001 survey of lenders the median APR was 390% and the average was 470%).
13. See Mann & Hawkins, supra note 5, at 880 (describing the importance of effective enforcement in preventing out-of-state payday lenders from moving in and circumventing a state's usury laws);
14. Flannery & Samolyk, supra note 6, at tbl.1 (giving the maximum APR allowed on a fourteen-day, $100 loan in all states that allowed payday lending as of 2004).
15. See JAMES H. CARR & JENNY SCHUETZ, PROGRESSIVE POLICY INST., FINANCIAL SERVICES IN DISTRESSED COMMUNITIES: FRAMING THE ISSUE, FINDING SOLUTIONS 8 (2001), available at http://www.ppionline.org/documents/bank-part2. pdf (defining balloon payments and including them within a larger group of potentially abusive predatory-lending practices);
16. Philip Bond et al., Predatory Lending in a Rational World 4 (Fed. Reserve Bank of Phila., Working Paper No. 06-2, 2006) ("Loan terms such as prepayment penalties and balloon payments engender predatory behavior."). This Note uses the term "rollover" generally to refer to any event that is the economic equivalent of renewing the loan-the borrower receives no new funds, incurs an additional finance charge, and extends the loan for an additional term at the end of which she still owes the entire principal amount of the initial loan. This rollover can be in the form of a true renewal or by getting a new loan that follows immediately upon payment of an existing loan. Another common pattern that customers use to avoid renewal limits is to use the funds from one lender to pay off another lender.
17. See Paul Chessin, Borrowing from Peter to Pay Paul: A Statistical Analysis of Colorado's Deferred Deposit Loan Act, 83 DENV. U. L. REV. 387, 411 (2005) (highlighting anecdotal evidence that consumers may have outstanding payday loans with more than one lender and inferring that this may be done to pay off an outstanding loan of one lender with a loan from another lender).
18. See infra subpart III (A).
19. See infra subpart III (A).
20. Hearing, supra note 3, at 54 (statement of Jean Ann Fox, Director of Financial Services, Consumer Federation of America).
21. Id.
22. Press Release, Ctr. for Responsible Lending, Public Favors 36% Cap on Consumer Loans, Survey Finds (Mar. 30, 2009), http://www.responsiblelending.org/ media-center/press-releases/archives/public-favors-36-cap-on-consumer-loans- survey-finds.html.
23. Mike Lillis, Gutierrez Proposes Weak Reform of Payday Lenders, WASH. INDEP., Apr. 8, 2009, http://washingtonindependent.com/37761/gutierrez-proposes- weak-reform-of-payday-lenders.
24. Robert De Young, Congress Takes Aim at Payday Loans, WALL ST. J., Apr. 14, 2009, at A13.
25. See Mann & Hawkins, supra note 5, at 857 (citing a number of articles proposing regulations ranging from outright bans to mandatory disclosures).
26. In fact, competition may actually reinforce the problem by compelling lenders to take advantage of consumers' weaknesses. See Oren Bar-Gill, Seduction by Plastic, 98 NW. U. L. REV. 1373, 1373-76 (2004) (developing a theory, specifically in the context of credit cards, that supports legal intervention even in the presence of perfect competition).
27. Aaron Huckstep, Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits?, 12 FORDHAM J. CORP. & FIN. L. 203, 207 (2007).
28. See infra Part I.
29. See infra Part II.
30. See Christine Jolls et al., A Behavioral Approach to Law and Economics, 50 STAN. L. REV. 1471, 1477 (1998) (noting that human rationality is bounded because humans have finite cognitive abilities, including limited computational skills and flawed memories). (Pubitemid 128421723)
31. Id. at 1476-77.
32. Bar-Gill, supra note 21, at 1375.
33. Oren Bar-Gill & Elizabeth Warren, Making Credit Safer, 157 U. PA. L. REV. 1, 44 (2008).
34. Bar-Gill, supra note 21, at 1395.
35. Id. at 1395-1401.
36. See Christine Jolls & Cass R. Sunstein, Debiasing Through Law, 35 J. LEGAL STUD. 199, 200 (2006) ("[L]egal policy may respond best to problems of bounded rationality not by insulating legal outcomes from its effects, but instead by operating directly on the boundedly rational behavior and attempting to help people either to reduce or to eliminate it.").
37. Id. Jolls and Sunstein suggested that debiasing strategies may play a role in many legal domains, from consumer-safety law to corporate law to property law.
38. Id. at 202.
39. Id. at 208.
40. Id.
41. The image of borrowers as Sisyphus, eternally pushing the rock up the hill only to have it roll back over them, seems particularly apt.
42. Huckstep, supra note 22, at 214.
43. Bruch, supra note 7, at 1258.
44. Since 2001, the administrator of the Colorado Uniform Consumer Credit Code has collected various data from lenders, including borrower demographics and statistics of loan terms and frequencies. Chessin, supra note 12, at 403-05. Michigan requires the commissioner of the Office of Financial and Insurance Regulation to maintain a database that allows lenders to verify whether a customer has another loan open at that time. MICH. COMP. LAWS ANN. § 487.2142 (West Supp. 2009).
45. Huckstep, supra note 22, at 214-15.
46. Id. at 215.
47. See, e.g., Erik Eckholm, Seductively Easy, 'Payday Loans' Often Snowball, N. Y. TIMES, Dec. 23, 2006, at A1 (describing three low-income individuals who have struggled with paydayloan fees). Whether payday loans are "better" than such common alternatives as pawn shops, rentto-own transactions, and bank overdraft fees is beyond the scope of this Note. This Note is simply arguing that some segment of borrowers do have less costly and risky alternatives than a payday loan, and that debiasing will help those borrowers accurately assess the cost of payday loans (including the likelihood of rollover fees) and make better credit decisions.
48. Huckstep, supra note 22, at 215.
49. Id. at 215-16
50. (citing GREGORY ELLIEHAUSEN & EDWARD C. LAWRENCE, CREDIT RESEARCH CTR., MONOGRAPH NO. 35, PAYDAY ADVANCE CREDIT IN AMERICA: AN ANALYSIS OF CUSTOMER DEMAND, at iii, 28, available at http://faculty.msb.edu/prog/CRC/pdf/ mono35.pdf).
51. ELLIEHAUSEN & LAWRENCE, supra note 43, at 41-43.
52. Id. at 51 tbl.5-23.
53. Bar-Gill & Warren, supra note 28, at 45 n. 117.
54. Creola Johnson, Payday Loans: Shrewd Business or Predatory Lending?, 87 MINN. L. REV. 1, 99 (2002).
55. Chessin, supra note 12, at 405.
56. Johnson, supra note 47, at 99.
57. Id.
58. Huckstep, supra note 22, at 217.
59. Chessin, supra note 12, at 410-11.
60. Huckstep, supra note 22, at 217-18.
61. KEITH ERNST ET AL., QUANTIFYING THE ECONOMIC COST OF PREDATORY PAYDAY LENDING: A REPORT FROM THE CENTER FOR RESPONSIBLE LENDING 2 (2004), available at http://www.responsiblelending.org/payday-lending/research-analysis/ CRLpaydaylendingstudy1218 03.pdf.
62. ELLIEHAUSEN & LAWRENCE, supra note 43, at 38-39.
63. See, e.g., Huckstep, supra note 22, at 207 (noting that lenders claim that payday loans are only intended to provide a cost-effective means to deal with unexpected short-run cash deficiencies).
64. Id. at 220;
65. Mann & Hawkins, supra note 5, at 859 n. 6.
66. Huckstep, supra note 22, at 220.
67. ELLIEHAUSEN & LAWRENCE, supra note 43, at 47.
68. In this context and for this Note, a borrower's "mistake" merely means that this decision was not in line with the long-term preferences of the borrower. If she had been perfectly informed and perfectly rational, then she would have made a different decision. If a person has a cash-flow emergency, then that person has no other choice, and therefore cannot be making a mistake. Of course, the decision to rollover the loan after the emergency has subsided is a separate choice subject to a possible mistake by the borrower.
69. Scott Andrew Schaaf, From Checks to Cash: The Regulation of the Payday Lending Industry, 5 N. C. BANKING INST. 339, 339-41 (2001).
70. Mann & Hawkins, supra note 5, at 861.
71. Christopher L. Peterson, Usury Law, Payday Loans, and Statutory Sleight of Hand: Salience Distortion in American Credit Pricing Limits, 92 MINN. L. REV. 1110, 1111 (2008).
72. Mann & Hawkins, supra note 5, at 861.
73. Id. at 865-71.
74. Id. at 866.
75. See id. at 866 (stating that large national providers have less than a quarter of the total stores).
76. Id. at 867.
77. Id.
78. Id. Though banks are not currently involved in the industry, they played a major role in the growth of the industry early in this decade.
79. Id. at 868.
80. See, e.g., id. at 863.
81. Huckstep, supra note 22, at 217.
82. Id.
83. Id. at 228-29.
84. Mann & Hawkins, supra note 5, at 870.
85. See Patrick L. Hayes, A Noose Around the Neck: Preventing Abusive Payday Lending Practices and Promoting Lower Cost Alternatives, 35 WM. MITCHELL L. REV. 1134, 1142-43 (2009) (noting that payday-industry officials claim rollovers rarely occur, but state-agency audits and an independent study show that a large majority of payday loans are made to customers with multiple loans per year and that repeat transactions make up a majority of payday lenders' revenue);
86. Huckstep, supra note 22, at 203 (recognizing that one assumption for regulating the payday-loan industry is that payday lenders make extraordinary profits and arguing that without hard data this assumption is unfounded).
87. Huckstep, supra note 22, at 204.
88. Id. at 227-28. The pure payday lenders had an average profit margin of 3.57%.
89. Id. at 227. When all seven of the payday lenders were analyzed, including the pawnshop operators who also made payday loans, the figure grew to 7.63%.
90. Id. Starbucks, which has a similar business model, had a profit margin of 9% during the study, while the comparison lenders had a profit margin of 13.04%.
91. Id. at 227-28.
92. Bar-Gill, supra note 21, at 1377.
93. Bar-Gill & Warren, supra note 28, at 70.
94. Id.
95. Peterson, supra note 63, at 1117-18.
96. Id. at 1116-19.
97. Id. at 1119-20.
98. Id. at 1119-21.
99. 439 U. S. 299, 318-19 (1978).
100. Id. at 312-13.
101. 12 U. S. C. § 1831d (a) (2006).
102. Peterson, supra note 63, at 1121-22.
103. Id. at 1122.
104. Id. at 1123.
105. See, e.g., JEAN ANN FOX & EDMUND MIERZWINSKI, CONSUMER FED'N OF AM. & U. S. PUB. INTEREST GROUP, RENT-A-BANK PAYDAY LENDING: HOW BANKS HELP PAYDAY LENDERS EVADE STATE CONSUMER PROTECTIONS 14 (2001), available at http://www.consumerfed.org/pdfs/paydayreport.pdf (identifying payday lenders that partnered with banks in order to evade interestrate caps);
106. Chad A. Cicconi, A Role for Payday Lenders, 123 BANKING L. J. 235, 239-40 (2006) (noting that around 1, 998 payday lenders developed a new business model by affiliating with banks to avoid state usury laws);
107. Mann & Hawkins, supra note 5, at 872.
108. Cicconi, supra note 92, at 239.
109. Id.
110. See supra text accompanying notes 61-64.
111. Cicconi, supra note 92, at 241.
112. Mann & Hawkins, supra note 5, at 872-73. For actions by the OCC with respect to national banks, see OFFICE OF THE COMPTROLLER OF THE CURRENCY, U. S. DEP'T OF THE TREASURY, ADVISORY LETTER 2000-10, PAYDAY LENDING (2000), available at http://www.occ. treas.gov/ftp/advisory/2000-10.doc;
113. OFFICE OF THE COMPTROLLER OF THE CURRENCY, U. S. DEP'T OF THE TREASURY, OCC BULLETIN NO. 2001-47, THIRD-PARTY RELATIONSHIPS (2001), available at http://www.occ.treas.gov/ftp/bulletin/2001-47.doc;
114. and OFFICE OF THE COMPTROLLER OF THE CURRENCY, U. S. DEP'T OF THE TREASURY, ADVISORY LETTER 2000-9, THIRD-PARTY RISK (2000), available at http://www.occ.treas.gov/ftp/advisory/2000-9.doc.
115. For actions by the FDIC with respect to state banks, see Fed. Deposit Ins. Corp., Guidelines for Payday Lending, http://www.fdic.gov/news/news/ financial/2005/fil1405a.html (last updated Feb. 25, 2005).
116. Peterson, supra note 63, at 1138.
117. See Mann & Hawkins, supra note 5, at 871-80 (explaining the range of regulations states have employed against payday lending).
118. Peterson, supra note 63, at 1139.
119. Id.
120. Id. at 1140-41.
121. Id. at 1141 tbl.2.
122. Mann & Hawkins, supra note 5, at 879-80.
123. Id. at 880.
124. See id. at 877-78 (noting that a lack of resources or effort makes formal prohibition ineffective); Peterson, supra note 63, at 1151 (decrying the state legislatures that have adopted fundamentally misleading statutory limits for credit prices).
125. Peterson, supra note 63, at 1152.
126. Id.
127. Id. at 1138. Delaware, Idaho, Nevada, New Hampshire, South Dakota, Utah, and Wisconsin have completely deregulated interest rates.
128. Id. at 1138 n. 139.
129. See MICH. COMP. LAWS ANN. § 487.2153 (1) (West Supp. 2009) (specifying that the service fee "is not interest").
130. Peterson, supra note 63, at 1139. The law allows original interest and fees for a payday loan up to 75% of the initial loan amount.
131. Id. "A $325 loan that grows 75% in 14 days carries an annual percentage rate of 1955.36%."
132. Id.
133. John Warner National Defense Authorization Act for Fiscal Year 2007, Pub. L. No. 109-364, § 670, 120 Stat. 2083, 2266-69 (2006) (codified at 10 U. S. C. § 987 (2006)).
134. See, e.g., Steven M. Graves & Christopher L. Peterson, Predatory Lending and the Military: The Law and Geography of "Payday" Loans in Military Towns, 66 OHIO ST. L. J. 653, 659 (2005) (finding "irrefutable geographic evidence" that payday lenders target military servicemembers).
135. Payday Loan Reform Act of 2009, H. R. 1214, 111th Cong., sec. 2 (a), § 129B (d) (1) (2009).
136. See Hearing, supra note 3, at 50 (statement of Jean Ann Fox, Director of Financial Services, Consumer Federation of America) ("The typical [payday] loan term is about two-weeks. The finance charge for a payday loan ranges from around $15 per $100 borrowed to $30, resulting in annual interest rates from 391 percent to 782 percent for a two-week extension of credit.").
137. Mann & Hawkins, supra note 5, at 874.
138. See, e.g., MICH. COMP. LAWS ANN. § 487.2153 (West Supp. 2009) (imposing a maximum cap for the equivalent of a payday loan at $600).
139. See, e.g., MODEL DEFERRED DEPOSIT LOAN ACT § 20 (Council of State Gov'ts, Suggested State Legislation 2002) (prohibiting threats of criminal prosecution as a collection tool).
140. See, e.g., MICH. COMP. LAWS ANN. § 487.2173 (creating a private cause of action for a person injured by a licensee's violation of the Deferred Presentment Service Transactions Act).
141. H. R. 1214, sec. 2 (a), § 129B (c).
142. Mann & Hawkins, supra note 5, at 897.
143. Id. at 898. Michigan is one state that prohibits payday lenders from extending funds if the state database indicates that the borrower has more than one transaction open with another lender. MICH. COMP. LAWS ANN. § 487.2154.
144. Chessin, supra note 12, at 391;
145. see also COLO. REV. STAT. ANN. § 5-3.1-108 (1) (West 2002 & Supp. 2009) (barring a lender from renewing a deferred-deposit loan more than once).
146. H. R. 1214, sec. 2 (a), § 129B (d) (11).
147. Id. § 129B (d) (12).
148. Id. § 129B (f) (4). Of course, this definition of "rollover" quite possibly leaves a loophole for a borrower who pays off the loan in full and then immediately receives another loan for that amount. Unlike the Michigan statute, there is no provision to limit alternating between lenders to continue deferring payment of the principal amount. See supra note 122.
149. See, e.g., MICH. COMP. LAWS ANN. § 487.2151 (1) (prescribing the notice to be posted "in an area to be seen by the customer").
150. See, e.g., id. § 487.2152 (n) (directing that the notice be included in the written agreement between the service and the customer).
151. Id. § 487.2151 (1).
152. Id.
153. See Johnson, supra note 47, at 14 nn. 63-64 (citing the Truth in Lending Act and Regulation Z to explain that the statutory language was broad enough to include payday lenders).
154. See Turner v. E-Z Check Cashing of Cookeville, TN, Inc., 35 F. Supp. 2d 1042, 1047 (M. D. Tenn. 1999) ("Courts that have addressed the issue have held, without exception, that deferred presentment transactions are extensions of 'credit' under TILA.");
155. Johnson, supra note 47, at 16 ("With one exception, courts addressing the issue have held that payday loans are extensions of credit under TILA.").
156. See 65 Fed. Reg. 17, 129 (Mar. 31, 2000) (adopting comment 2 (a) (14)-2 to clarify that payday loans are governed by TILA and thus subject to the disclosure requirements of Regulation Z);
157. see also 12 C. F. R. § 226.2 (a) (14) (2009) (defining credit for Regulation Z disclosure rules to include the right to defer payment of debt).
158. The Federal Reserve Board, which was given authority by Congress to issue regulations under TILA, 15 U. S. C. § 1607 (d) (2006), promulgated Regulation Z, which prescribes the form, content, and timing of the disclosures required by TILA.
159. C. F. R. §§ 226.1-226.33 (2009). The Federal Reserve Board has also issued official commentary on Regulation Z.
160. C. F. R. Pt. 226, supp. 1 (2009).
161. The requirements of Regulation Z are deemed requirements of TILA. 15 U. S. C. § 1602 (y);
162. London v. Chase Manhattan Bank USA, N. A., 150 F. Supp. 2d 1314, 1322 (S. D. Fla. 2001) ("[A]s is fully apparent from the text of § 1602 (y) of TILA, Congress intended that those regulations, which subsequently were promulgated as Regulation Z, would be authoritative respecting the implementation of TILA's disclosure provisions.").
163. See Elizabeth Renuart & Diane E. Thompson, The Truth, the Whole Truth, and Nothing but the Truth: Fulfilling the Promise of Truth in Lending, 25 YALE J. ON REG. 181, 187-88 (2008) (discussing the finance charge and APR defined at 15 U. S. C. §§ 1605-1606 (2000)).
164. Id. at 198.
165. Payday Loan Reform Act of 2009, H. R. 1214, 111th Cong.
166. sec. 2 (a), § 129B (a) (1) (A) (2009). Since TILA already requires disclosure of these terms, this requirement seems to serve as reinforcement of prior law rather than an additional regulation.
167. Id. § 129B (a) (1).
168. Id. § 129B (b).
169. Id. § 129B (a) (1) (C).
170. Bar-Gill, supra note 21, at 1375.
171. Id. at 1376.
172. Id. at 1395-1401.
173. Jolls et al., supra note 25, at 1479.
174. Angela Littwin, Beyond Usury: A Study of Credit-Card Use and Preference Among Low-Income Consumers, 86 TEXAS L. REV. 451, 469 (2008).
175. Bar-Gill, supra note 21, at 1395.
176. Id.
177. Id.
178. Id.
179. Id. at 1395-96.
180. See Johnson, supra note 47, at 64-69;
181. Mann & Hawkins, supra note 5, at 895-98 (both observing that existing statutes do not effectively prevent indefinite rollovers).
182. See QC Holdings, Inc., Annual Report (Form 10-K), at 8 (Mar. 31, 2005) ("Once the initial application and loan process is completed, future transactions can be processed in only a few minutes."). Moreover, some payday lenders offer rewards programs for repeat borrowers, creating an additional incentive to rollover their debt.
183. Johnson, supra note 47, at 73-74.
184. See, e.g., Alan M. White, Behavior and Contract, 27 LAW & INEQ. 135, 162 (2009) (reporting one borrower's decision to get a payday loan rather than a credit card because it seemed to preclude runaway debt).
185. Jolls et al., supra note 25, at 1524.
186. Jolls & Sunstein, supra note 31, at 204.
187. Christine Jolls, Behavioral Economics Analysis of Redistributive Legal Rules, 51 VAND. L. REV. 1653, 1659 (1998).
188. Id. at 1660-61.
189. Id. at 1660.
190. See Bar-Gill, supra note 21, at 1400 (noting that individuals tend to underestimate the probability of job loss and how long it will take to find a new job);
191. David Dunning et al., Flawed Self-Assessment: Implications for Health, Education, and the Workplace, 5 PSYCHOL. SCI. PUB. INT. 69, 79-80 (2004) (citing studies of unrealistic optimism about health risks);
192. Jolls, supra note 156, at 1659-61 (discussing the evidence of unrealistic optimism in many domains, including contracting diseases, auto accidents, and job loss).
193. N. C. Higgins et al., The Controllability of Negative Life Experiences Mediates Unrealistic Optimism, 42 SOC. INDICATORS RES. 299, 319 (1997).
194. Jolls et al., supra note 25, at 1539.
195. Shane Frederick et al., Time Discounting and Time Preference: A Critical Review, 40 J. ECON. LITERATURE 351, 360 (2002) ("[T]he implicit discount rate over longer time horizons is lower than the implicit discount rate over shorter time horizons.").
196. Littwin, supra note 145, at 468;
197. see also Bar-Gill, supra note 21, at 1396-99 (citing research of hyperbolic discounting in action);
198. Frederick et al., supra note 162, at 360-67 (reviewing the empirical evidence of the hyperbolic discounting pattern).
199. Stephan Meier & Charles Sprenger, Impatience and Credit Behavior: Evidence from a Field Experiment 3 (Research Ctr. for Behavioral Econ. and Decision-Making, Working Paper No. 07-3, 2007), available at http://www.bos.frb.org/economic/wp/wp2007/wp0703.pdf.
200. Bar-Gill, supra note 21, at 1396-99.
201. Frederick et al., supra note 162, at 361.
202. See supra notes 161-62 and accompanying text.
203. See Barr, supra note 10, at 154 (summarizing a 2001 survey revealing nearly all charged APRs in payday loans to be in excess of 300%).
204. See Bar-Gill, supra note 21, at 1377 (explaining that marginal-cost pricing, by aligning private incentives with the social objective of welfare maximization, creates a situation whereby goods and services are produced only when the benefit exceeds the cost, and thus an optimal allocation of resources is achieved).
205. Id. at 1373.
206. Id. at 1394-95.
207. Mann & Hawkins, supra note 5, at 865.
208. Id.
209. QC Holdings, Inc., supra note 152, at 8 (discussing the speed and efficiency of processing repeat transactions once the initial loan application has been processed).
210. Bar-Gill & Warren, supra note 28, at 44. The study that Bar-Gill and Warren cite reports that "91% of all payday loans are made to borrowers with five or more payday loans per year."
211. ERNST ET AL., supra note 54, at 5. Assuming their data are correct, the profit that was actually amassed from those loans should actually be more than 90% after taking into account the lower costs associated with repeat borrowers. Of course, the accuracy of any profit estimates depends on the accuracy of the underlying data, which is uncertain here.
212. See supra subpart I (A).
213. See Bar-Gill, supra note 21, at 1377 (arguing that these same welfare costs are generated by the underestimation bias in the credit-card market and provide a prima facie case for legal intervention).
214. Amos Tversky & Daniel Kahneman, The Framing of Decisions and the Psychology of Choice, 211 SCI. 453, 453 (1981).
215. Daniel Kahneman, Preface to CHOICES, VALUES, AND FRAMES, at ix, xv (Daniel Kahneman & Amos Tversky eds., 2000).
216. Mann & Hawkins, supra note 5, at 857.
217. See supra text accompanying notes 121-26 (discussing the potential loopholes in renewal bans).
218. See Mann & Hawkins, supra note 5, at 895 (mentioning a study that indicates profitability might depend on rollovers, suggesting that a ban on rollovers could eliminate the market).
219. Payday Loan Reform Act of 2009, H. R. 1214, 111th Cong., sec. 2 (a), §§ 129B (a) (1) (C) (i), (b) (1) (2009).
220. For a review of debiasing strategies and their effectiveness with respect to the overoptimism bias, see Sean Hannon Williams, Sticky Expectations: Responses to Persistent Overoptimism in Marriage, Employment Contracts, and Credit Card Use, 84 NOTRE DAME L. REV. 733, 748-53 (2009).
221. Jolls & Sunstein, supra note 31, at 209-11.
222. Id.
223. Williams, supra note 182, at 751.
224. Id.
225. Id. (citing D. Hammond et al., Impact of the Graphic Canadian Warning Labels on Adult Smoking Behaviour, 12 TOBACCO CONTROL 391, 391-92 (2003)).
226. See George Loewenstein et al., Statistical, Identifiable, and Iconic Victims, in BEHAVIORAL PUBLIC FINANCE 32, 33 (Edward J. McCaffery & Joel Slemrod eds., 2006) ("Several lines of research have shown that individual cases motivate people more powerfully than statistics, even when the latter are objectively more informative.").
227. Jolls & Sunstein, supra note 31, at 210.
228. Dilip Soman, Framing, Loss Aversion, and Mental Accounting, in BLACKWELL HANDBOOK OF JUDGMENT AND DECISION MAKING 379, 383 (Derek J. Koehler & Nigel Harvey eds., 2007).
229. Id.
230. Jolls & Sunstein, supra note 31, at 210.
231. Id. at 206.
232. Id.
233. Oren Bar-Gill, The Behavioral Economics of Consumer Contracts, 92 MINN. L. REV. 749, 798 (2008).
234. See id. at 798-800 (explaining that use-pattern disclosures provide consumers with information about use of the product, which is essential for an informed choice and efficient operation of the credit-card market).
235. Id. at 800 (explaining Ronald Mann's point-of-sale proposal to prevent inadvertent fees and proposing his own point-of-borrowing disclosure).
236. Id. at 799-800. "Credit card issuers often have more information about how a consumer will use the credit card than the consumer herself."
237. Id. at 799.
238. Payday Loan Reform Act of 2009, H. R. 1214, 111th Cong., sec. 2 (a), § 129B (a) (1) (C) (2009).
239. See supra notes 51-55 and accompanying text. According to the CFSA-funded study, the median number of renewals in a twelve-month period was less than four. ELLIEHAUSEN & LAWRENCE, supra note 43, at 38-39.
240. But other studies report average renewals much higher; an Indiana study, for example, revealed that, on average, borrowers had ten renewals in a twelvemonth period. Schaaf, supra note 61, at 346.
241. ERNST ET AL., supra note 54, at 2.
242. Renuart & Thompson, supra note 135, at 219.
243. Bar-Gill & Warren, supra note 28, at 27-32.
244. See supra notes 195-98 and accompanying text (discussing Bar-Gill's arguments favoring point-of-sale and point-of-borrowing disclosures that reveal consumers' use patterns).
245. Bar-Gill, supra note 21, at 1395-1401.