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1.3.2 Does Regulation Increase the Cost of Consumer Credit?

Creditors often argue against consumer credit regulation by alleging that an unregulated market increases competition that brings credit costs to a competitively low rate. They argue counter-intuitively that interest-rate ceilings actually increase the cost of credit.110

Yet competition among lenders does not appear to drive down rates as more players enter the fringe lending business.111

For example, in the area of payday loans, competition has resulted in excessive solicitation and overlending, but loan pricing has increased due to deregulation of small loan rates. In Colorado, where payday lenders operated without an interest rate cap for several years, the situation for consumers worsened substantially. The number of payday loan stores and loans per store increased, but the average APR did not fluctuate—competition did not drive down rates.112 In addition, a simple comparison of APRs pre- and post-regulation may not tell the full story. A recent report issued by the Consumer Financial Protection Bureau (CFPB) evaluating the effects of the Credit CARD Act found an overall increase in the average credit card APR over the first four years of the Act’s effectiveness.113 However, when the same report also took into account changes in credit card fees as facilitated by the Credit CARD Act, it found that the overall cost of credit to the consumer had declined over the same period.114 This overall decline in the total cost of credit is an indication that certain instances of regulation can eliminate practices that harm consumers without driving up the total cost of credit.


  • 110 {102} See, e.g., 1981 Ariz. St. L.J. 1 (entire issue devoted to discussion of usury law and usury deregulation in Arizona; the authors of these articles go to great length to demonstrate that usury statutes do not set interest rates in Arizona, but they ignore that usury laws are not intended to set market rates); T. Durkin, An Economic Perspective on Interest Rate Limitations, 9 Ga. St. U. L. Rev. 821 (1993); Robert Mayer, Loan Sharks, Interest-Rate Caps, and Deregulation, 69 Wash. & Lee L. Rev. 807 (2012) (dismantling the argument that price caps will create a market for extortionate lending, resulting in higher prices for low-income borrowers); H. Nathan, Economic Analysis of Usury Laws, 10 J. Bank Research 200 (1980); Note, Usury Legislation—Its Effects on the Economy and a Proposal for Reform, 33 Vand. L. Rev. 199 (1980); R. Shay, The Impact of State Rate Ceilings upon the Availability and Price of Credit, 4 National Commission on Finance Technical Studies (1973).

  • 111 {103} See, e.g., Robert DeYoung & Ronnie J. Phillips, Federal Reserve Bank of Chicago, Strategic Pricing of Payday Loans: Evidence from Colorado, 2000–2005, at 20, 22 (July 14, 2006), available at

  • 112 {104} Robert DeYoung & Ronnie J. Phillips, Strategic Pricing of Payday Loans: Evidence from Colorado, 2000–2005 (August 2006), available at, with more concise powerpoint presentation available at (finding, in preliminary results, that, after rate regulation by Colorado’s legislature, the price of payday lending was higher in markets more thoroughly saturated by payday lenders and by banks). See also Lynn Drysdale & Kathleen Keest, The Two-Tiered Consumer Financial Services Marketplace: The Fringe Banking System and Its Challenge to Current Thinking About the Socio-Economic Role of Usury Laws in Today’s Society, 51 S.C. L. Rev. 589 (2000). But cf. Richard Hynes, Payday Lending, Bankruptcy, and Insolvency, 69 Wash. & Lee L. Rev. 607, 614–624, 636–638 (2012) (compiling empirical data on both sides of the issue of whether payday lending is a debt trap; finding that evidence of correlation between the legalization of payday lending and various measures of financial hardship (bankruptcy, property crime rates, and landlord-tenant disputes) was inconclusive).

  • 113 {105} Consumer Fin. Prot. Bureau, Card Act Report 29–32 (Oct. 1, 2013), available at (finding an overall increase in credit card APRs over the life of the Credit CARD Act).

  • 114 {106} Id. at 20–29, 32–35 (finding that the total cost of credit declined by 190 basis points from Q4 2008 to Q4 2012, driven by a decline in late and over-the-limit fees, but noting that there may have been other causes, as “[T]he potential interaction of the CARD Act with other factors is complex and difficult to disentangle”).