Payday loans entangle consumers with few alternatives in catastrophically harmful cycles of borrowing. But because of their design, payday loans are vexingly difficult to regulate effectively.

This article explains how the structure of regulatory oversight of payday lending abets lenders’ evasion. In it, I focus on how dynamism, the financial sector’s ability to quickly evolve, frustrates attempts to regulate payday lending in two ways: first, lenders employ a strategy of regulatory arbitrage to escape exacting state laws. Second, lenders take advantage of product innovation—what I call “recharacterization” — to circumvent state regulations by modifying loan attributes.

To overcome this dynamism, I argue regulators should consider an experimentalist approach to regulation. A regulatory structure of this kind would have three components: first, regulators must adopt a broad “ability-to-pay” standard, which centers the borrower’s financial wellbeing. Second, regulators must find partners embedded in communities to license as lenders. Finally, regulators must conduct a holistic review of borrower financial health after receiving a loan.

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