NEW YORK — In a challenge to what has become conventional wisdom in many quarters, a research report prepared for the Federal Reserve Bank of New York argues payday lending is not necessarily predatory lending.

The report's author, Donald Morgan, begins the report by noting there is no agreed upon definition of predatory lending so he proposes one–and then detailed how payday lending does not meet the criteria. He argued that the question of whether lending is predatory or not should be judged by its effects.

"We define predatory lending as a welfare reducing provision of credit, and we show how a voluntary transaction can make borrowers worse off if lenders contrive to increase loan demand by exaggerating households' income prospects," Morgan wrote. "Predation in our model resembles advertising; advertisers accentuate how much pleasure their product brings, while predators attenuate how much a loan will cost (in terms of future well-being). We show that lenders will prey as long as the extra revenue from larger loans exceeds the cost of fooling households into overborrowing and any associated increase in default risk."