Question – 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
Question – 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?
Content –
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.
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