A. Legal Restraint in Regulating Lending

1. Classical Contract Assumptions

Classical contract law aims to preserve freedom of contract and ensure promise enforcement in a presumably competitive market. Furthermore, it is founded on objective theory, which presumes that purchasers, sellers, and decision-makers are rational actors with requisite information and bargaining power to make well-informed decisions. Classical law's theoretically neutral actors are somehow immune from perceptions and biases and, are therefore, blind to sexism, stereotypes, and behavioral propensities that defy what may appear objectively "rational" based on economic cost/benefit analyses. Classical law thus seeks to avoid interference with freedom of contract, even with respect to business-to-consumer, or "B2C" contracts, which businesses present to consumers on a take-it-or-leave-it basis. Most courts and legislators adhere to these classical notions.

Furthermore, economists who argue that the free market will promote efficiency have persuaded these courts and legislators. Law and economics theorists emphasize how strict enforcement of contracts and legislative restraint are necessary for optimal distribution of resources through market competition. They argue that legislative regulation of contract terms or other intrusions on freedom of contract increases costs for enterprises and harms consumers through higher prices and lower quality goods and services. Some scholars add that standardization of contracts benefits all consumers regardless of the contracts' adhesive nature because it lowers transaction costs and fosters production overall.

At the same time, many subscribe to the notion that consumers remain free to reject payday loans and bear responsibility for their failures to shop for or negotiate their loan contracts. Courts and commentators then downplay harm of discriminatory contractual behavior, and remain blind to context and subtle discrimination. "Free market" supporters propose that the market will cure any discriminatory contracting. They posit that sellers will remain blind to biases as they compete for customers, and this will eventually squeeze any discriminatory businesses out of the market. This again assumes that sellers and buyers are economically rational actors.

In reality, however, payday lenders seeking to maximize their profits have incentive to charge high fees and costs because the consumers purchasing these loans are desperate to obtain cash regardless of cost. They also usually lack the resources to "shop around," and thereby persuade lenders to compete for business and abide by fairness norms. Of course, courts should continue to primarily enforce voluntary agreements. However, courts should not overlook the importance of biases, stereotypes, societal norms, and behavioral propensities that may affect contracts in the real world. It remains true that the real world is marked with "messiness" that impacts all aspects of life--including contracting and debt.

2. Limited Regulation of Discriminatory Lending

The United States Constitution precludes state laws that discriminate against women and minorities, and constitutional equal protection constraints quash quotas or other state action that provides racial minorities or women with special rights. The Equal Credit Opportunity Act ("ECOA") prohibits creditors from discriminating against an applicant with respect to any aspect of a credit transaction on the basis of sex or marital status. Although the ECOA ostensibly does not apply to basic check cashing, it usually applies to payday loans offered by banks. It precludes these banks from offering substantially different interest rates or pricing structures for these products and aims to stop lenders from targeting or discouraging applications from protected groups. Specifically, lenders may not evaluate applications on a prohibited basis or discriminate against applicants because their income comes from a part-time job, alimony, child support, veterans' assistance, or other public assistance. Lenders must also notify applicants of adverse actions taken in connection with an application for credit in an accurate and timely manner.

Furthermore, Arkansas, California, Colorado, Connecticut, Georgia, Missouri, Nevada, New York, North Dakota, Ohio, and Oklahoma have state statutes prohibiting discrimination in consumer credit transactions on the basis of sex or marital status. California bars gender discrimination in credit contracts and letters of credit, as well as other documents. Kentucky has a general statute that prohibits gender discrimination in financial practices.

However, the ECOA and state discrimination laws are largely ineffective in addressing gender gaps in payday loan burdens because they generally target only clear disparate treatment and other overt and well-documented discrimination. For example, a plaintiff may survive a motion to dismiss where she proves that a creditor used gender-based epithets in threatening to increase a debt. However, even claimants who were disparately treated often face difficulty obtaining concrete evidence to prove their allegations. It is particularly difficult for claimants to overcome lenders' reliance on "discretionary pricing" as justification for more subtle discrimination. This is augmented by credit scoring to the extent that women and minorities may have lower scores due to the snowball effect from historical underrepresentation of these groups in the pool of past credit recipients.

Furthermore, disparate impact cases place a tough burden on claimants to: (1) establish that the defendant employed a specific policy or practice in order to discriminate and (2) demonstrate with statistical data that the policy or practice had a demonstrable adverse effect on the claimants. Borrowers have launched cases against lenders that improperly target racial minority communities in marketing overpriced loans, which is often referred to as "reverse redlining." However, these actions are difficult for plaintiffs and their attorneys to recognize or learn about because they do not easily have access to companies' internal documents or marketing strategies.

Moreover, it is an arduous uphill battle to prove that a payday lender is marketing to minorities, and even more so with respect to women. Lenders can easily explain away the statistics regarding minorities' or women's overrepresentation among payday loan borrowers. They may claim it is merely "coincidence" or simply due to consumers' purchasing choices.

Some have also argued that the disparate impact standard is not appropriate in these cases. With respect to Title VIII claims under the Fair Housing Act, for example, some refute disparate impact arguments because they do not require intent, and thus may punish well-meaning companies. Similarly, economist Paul Rubin stated:

It scares me because if this theory becomes widespread, if government looks intensely for disparate impact, looks for discrimination with no evidence of behavior, simply looks for cases where there are differences, then someone is going to put pressure on banks to relax their underwriting standards to make loans that they might not want to make in order to avoid being examined.

At the same time, general consumer lending protections like the Truth in Lending Act ("TILA") and the Real Estate Settlement Act ("RESPA") have been criticized for disproportionately burdening women by overloading consumers with disclosures. TILA requires lenders to disclose key information such as fees and interest rates, and Regulation Z implementing TILA mandates that disclosures be "clear and conspicuous." RESPA provides similar disclosure rules, which one commentator critiqued as further clouding women's borrowing decisions. Nonetheless, most commentators and policymakers support clear and understandable disclosures. Furthermore, some research suggests that women may pay more attention than men to disclosures in seeking to avoid risky behavior.

Concern for women's debt dilemmas has led some commentators to advocate direct gender consideration in financial reforms. For example, one commentator has proposed proactive regulations to account for women's disproportionate burdens from foreclosure, especially when they have families to support with no or low income. Nonetheless, outright regulation of financial markets must be tailored to address real hurdles women face in contracting. Instead, a better approach may be to augment financial education and invest in more serious consideration of gender as an important component of context when analyzing and enforcing loan contracts.

At the same time, anti-discrimination laws and policies promoting gender diversity must not cross constitutional lines by creating quotas or other special rights for any particular group. For example, Dodd-Frank requires each federal agency to create an Office of Minority and Women Inclusion ("OMWI") to promote "fair inclusion and utilization" of minorities and women in agency business. Furthermore, the CFPB is charged more generally with gathering data and creating regulations to address "abusive" tactics that financial service providers employ to take unreasonable advantage of consumers. Dodd-Frank also directs the CFPB to research "access to fair and affordable credit for traditionally underserved communities" as well as effective disclosures to address consumer propensities.

The government faces budgetary constraints and administrative concerns in creating education programs and lending initiatives. Government action requires allocation of limited public resources, and federal administration of programs within state boundaries is often plagued by inefficiencies and needless additional costs and confusion. Moreover, policymakers need more information through research regarding the existence and extent of gender discrimination and differences with respect to lending. There also are valid concerns about the design of any law or regulation that would address subtle gender biases and behavioral differences without reinforcing stereotypes. It would be counterproductive for the government to promulgate programs based on improper assumptions about women and men. Policymakers also should be careful to respect voluntary agreements.