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1.3.3 Does Regulation Limit the Supply of Credit?

Proponents of deregulation assert that regulation deprives needy borrowers of credit. This assumption, too, appears faulty. Dire predictions that over-regulation will deprive consumers of access to credit are not new. Virtually every existing consumer credit protection, when enacted, was criticized as limiting the supply of credit.118 These predictions almost invariably lack credible empirical support and fail to materialize once the legislation is adopted.119

Usury limits by definition restrict the supply of credit for loans carrying an interest rate above that usury limit. Thus the allegation that regulation limits the supply of credit in this context relates to those whose credit risk requires an interest rate above the usury limit. Nevertheless, it is a myth that high credit pricing is closely related to a consumer’s high credit risk. More often than not, limiting the cost of credit means that the consumer will obtain credit elsewhere at a lower cost. There are at least three reasons why those who pay interest rates above a proposed usury cap are not such bad risks as would require such a high rate, and instead would find credit at lower rates if such a cap is instituted.

First, the high price of credit is often a function not of the consumer’s high risk, but rather of the dynamics of reverse competition. In many consumer credit transactions, an auto dealer or other seller, a loan broker or some other party controls the consumer’s choice for credit and credit-related items such as credit insurance. Creditors, credit insurers, and others seeking to market these products will not do so by offering a competitively low price reflective of the consumer’s risk, but will instead compete to offer the greatest possible reward to the auto dealer, loan broker or other party controlling the consumer’s decision. Typically, they will compete as to who will offer the highest priced credit or credit product, so that there is the most amount of room above cost to reward the auto dealer, broker, or other third party. Where all creditors are subject to the same usury ceiling, creditors will compete just as aggressively for the dealer or broker’s business, but within that ceiling. Creditors will not make less profit—only the dealer or broker will receive lower profits.

Other times credit is sold by predatory lenders that take advantage of vulnerable consumers and charge exorbitant rates, irrespective of the consumer’s credit risk. Often underwriting is not even part of the credit transaction. The predatory lender does not offer a lower rate if it discovers the consumer in fact is a good credit risk.120 In a study of subprime lending in four cities in California, twenty-five percent of borrowers took out loans from a subsidiary or affiliate of a regulated financial institution, yet none were referred to the prime lender for lower-cost loans, even though most of the surveyed homeowners self-reported their credit as good or excellent.121 In another study in five large cities, payday lenders concentrated their high-cost loan business around elder housing because such individuals had such steady income—their Social Security checks—and thus were good credit risks.122

A Freddie Mac study found that 10% to 30% of homeowners in the subprime mortgage market would be eligible for prime-market mortgages.123 Fannie Mae opined that almost half of all subprime borrowers could qualify for lower-cost conventional financing.124 Studies have found borrowers in the subprime market had FICO scores between 600 and 700.125 Lenders describe the credit characteristics of their subprime borrowers as “excellent” with FICO scores above 700.126

Predatory lenders have a business plan of using aggressive sales tactics to offer credit at exorbitant rates even though many of their customers are good credit risks and could obtain credit at much lower rates elsewhere.127 In this context, instituting a usury cap will just reduce the extent of predatory lending, and not deprive consumers of access to credit.

Even when lenders purport to price loans based on risk, there is little evidence that consumers labeled as high risk are in fact high risk,128 and thus little evidence that lenders know who should only be offered high-rate credit. Use of a credit score is the most common method to evaluate risk for car loans, credit cards, and other supposed risk-based loans. But recent evidence suggests that credit scores have become less predictive of default risk, with a difference perhaps as small as ten points between borrowers who default and those who continue paying.129 Some studies find no correlation between low credit scores and subsequent risk of foreclosure.130

The linkage between price and risk is further weakened by the extensive evidence that, among those with the same credit risk, there is wide variation in price based upon race. African Americans, Latinos, and Native Americans pay more for all kinds of credit, including car loans,131 home mortgages,132 and credit cards.133 Where broker, dealer, or lender discretion exists, minority consumers are overcharged.134 The effect of a usury ceiling in this context then is to reduce the amount of racial discrimination in credit pricing.

High risk of default is frequently cited as the reason for high rates. Yet this can be a self-fulfilling prophecy. Borrowers for whom fairly priced products and market-rate credit are within their ability to pay may become unable to pay the “sucker surcharge.” Low-income consumers may be particularly unable to withstand the effect of increased pricing, and yet low-income consumers are particularly likely to be subjected to increased pricing.135 Thus usury ceilings can help to reduce credit losses.


  • 118 {107} For example, when the Federal Trade Commission proposed the elimination of the holder-in-due-course doctrine from consumer credit sales, the industry sounded widespread alarms. In the thirty-five years since, consumer credit has continued to grow. Luigi Guiso, Paola Sapienza & Luigi Zingales, Ctr. for Economic & Policy Research, The Cost of Banking Regulation (Feb. 2007).

  • 119 {108} George J. Benston, An Analysis of Maine’s 36-Month Limitation on Finance Company Small Loans, 33–41 (Dec. 1972), reprinted in the National Commission on Consumer Finance, Technical Studies, vol. II (Maine rate cap on refinanced loans resulted in many high-rate borrowers finding alternative and often lower-rate alternatives and others viewed themselves as better off not having high rate credit); Consumer Fin. Prot. Bureau, The Consumer Credit Card Market 123 (Dec. 2017), available at (“Following a drop associated with the recession, approval rates among mass market issuers have rebounded and remain fairly stable for consumers in all credit tiers ... . Some 28% of applications from consumers with lower credit scores were approved in 2016, which is slightly higher than the 27% recorded in 2007 ... . [C]onsumers in lower credit score tiers have maintained an across-the-board increase in approval rates since 2013. Even while consumers with deep subprime scores still experience very low approval rates in aggregate, they experienced the largest relative increase in approval rate between 2013 and 2016.”); id. at 143 (“The increase [in amount of credit lines] since 2010 has been steady and experienced by consumers in every credit score tier. Consumers with subprime and deep subprime scores, however, have seen their aggregate credit line increase at less than half the rate of every other tier. Also notable is that between mid-2010 and mid-2017, consumers without credit scores experienced a 99% increase in line. The distribution of total credit line across credit score tiers has been stable since 2010 ... with aggregate credit line for consumers with superprime and prime credit scores still comprising 95% of the total as of mid-2017.”); Consumer Fin. Prot. Bureau, Card Act Report 60–61 (Oct. 1, 2013), available at (finding that the tightening of credit supply in the credit card market was attributable to market cycles, not Credit CARD Act regulations); R. Peterson & G. Falls, Credit Research Center, Purdue Univ., Impact of a Ten Percent Usury Ceiling: Empirical Evidence (1981) (credit more available in Arkansas with 10% usury limit than in other states); Raphael W. Bostic et al., State and Local Anti-Predatory Lending Laws: The Effect of Legal Enforcement Mechanisms, 60 J. Econ. & Bus. 47 (2008); Robert Mayer, Loan Sharks, Interest-Rate Caps, and Deregulation, 69 Wash. & Lee L. Rev. 807, 824–825 (2012) (arguing that regulation of small loans by imposing usury caps that were moderately higher than existing usury caps but well below market rates for salary loans did not lead to a restriction of the credit market and the rise of black market loan sharking as predicted by opponents of regulation); Wei Li and Keith Ernst, The Best Value in the Subprime Market: State Predatory Lending Reform (Feb. 23, 2006), available at See also John Y. Campbell, Restoring Rational Choice: The Challenges of Consumer Financial Regulation 29–37 (Jan. 2016), available at (suggesting mathematical formulas to measure the tradeoff between the benefits of intervention and the costs of regulation; focusing on intervention to discourage purchase of a product and intervention that reduces mistakes).

  • 120 {109} Wall Street and the Financial Crisis: The Role of High Risk Home Loans: Hearing Before the Subcomm. on Investigations of S. Comm. on Homeland Security and Governmental Affairs, 111th Cong. 2d Sess. (2010) (memorandum by Sen. Carl Levin, Chair, & Sen. Tom Coburn, Ranking Minority Member).

  • 121 {110} Daniel Lindsey et al., National Consumer Law Center, Why Responsible Mortgage Lending Is a Fair Housing Issue 4–5 (2012); Kevin Stein & Margaret Libby, California Reinvestment Committee, Stolen Wealth: Inequities in California’s Subprime Mortgage Market 41, 47, 50 (Dec. 2001).

  • 122 {111} Ellen E. Schulz & Theo Francis, High-Interest Lenders Tap Elderly, Disabled, Wall St. J., Feb. 12, 2008.

  • 123 {112} Automated Underwriting: Making Mortgage Lending Simpler and Fairer for American Families (Freddie Mac Pub. No. 259 Sept. 1996).

  • 124 {113} Press Release, Fannie Mae (Mar. 2, 2000).

  • 125 {114} Marsha J. Courchane, The Pricing of Home Mortgage Loans to Minority Borrowers: How Much of the APR Differential Can We Explain?, 29 J. Real Est. Res. 399, 415, 417 (2007).

  • 126 {115} Paul Muolo, Subprime Lending Starting to Attract Interest Again, Am. Banker, July 14, 2010.

  • 127 {116} See, e.g., Richard R.W. Brooks, Credit Past Due, 106 Colum. L. Rev. 994, 1003–1006 (2006); Cassandra Jones Havard, Democratizing Credit: Examining the Structural Inequities of Subprime Lending, 56 Syracuse L. Rev. 233 (2006); Paul Heidhues & Botond Kőszegi, Exploiting Naïvete About Self-Control in the Credit Market, 100 Am. Econ. Rev. 2279 (2010); Elvin K. Wyly, Mona Atia, Holly Foxcroft, Daniel J. Hamme, Kelly Phillips-Watts, American Home: Predatory Mortgage Capital and Neighbourhood Spaces of Race and Class Exploitation in the United States, 88 Geografiska Annaler, Series B: Human Geography 105 (2006); Ronald J. Mann, “Contracting” for Credit, 104 Mich. L. Rev. 899, 914–915 (2005–2006); Ronald H. Silverman, Toward Curing Predatory Lending, 122 Banking L.J. 483, 531–544 (2005); Michelle A. Danis & Anthony Pennington-Cross, The Delinquency of Subprime Mortgages 7 (Fed. Res. Bank St. Louis, Working Paper 2005-022A Mar. 2005), available at; Kathleen C. Engel & Patricia A. McCoy, A Tale of Three Markets: The Law and Economics of Predatory Lending, 80 Tex. L. Rev. 1255, 1271–1283 (2002).

  • 128 {117} See, e.g., Howard Lax, Michael Manti, Paul Raca & Peter Zorn, Subprime Lending: An Investigation of Economic Efficiency, 15 Housing Pol’y Debate 533 (2004); Clifford V. Rossi, Mortgage Bankers’ Ass’n, Anatomy of Risk Management Practices in the Mortgage Industry: Lessons for the Future (2010), available at

  • 129 {118} Kurt Eggert, The Great Collapse: How Securitization Caused the Subprime Meltdown, 41 Conn. L. Rev. 1257, 1289–1291 (2009).

  • 130 {119} See, e.g., J. M. Collins & C.K. Reid, Who Receives a Loan Modification? Race and Income Differentials in Loan Workouts 11 (Jan. 2011), available at; Sumit Agarwal, John C. Driscoll, Xavier Gabaix, & David Laibson, The Age of Reason: Financial Decisions Over the Lifecycle 4, 16, 17 (Feb. 11, 2008), available at

  • 131 {120} See, e.g., Coleman v. General Motors Acceptance Corp., 196 F.R.D. 315 (M.D. Tenn. 2000), vacated and remanded on other grounds, 296 F.3d 443 (6th Cir. 2002) (reversing class certification); Mark A. Cohen, Imperfect Competition in Auto Lending: Subjective Markups, Racial Disparity, and Class Action Litigation (Jan. 14, 2007), available at; Consumer Fed’n of Am., African Americans Pay Higher Auto Loan Rates, but Can Take Steps to Reduce This Expense (Feb. 15, 2006), available at; Ian Ayers, Expert Report (June 2004), available at; Lauren Saunders, National Consumer Law Center, Racial Disparities in Auto Lending: A State-by-State Reminder Why Auto Dealers Must Be Subject to the Consumer Financial Protection Bureau (May 4, 2010).

  • 132 {121} See, e.g., Marsha J. Courchane, The Pricing of Home Mortgage Loans to Minority Borrowers: How Much of the APR Differential Can We Explain?, 29 J. Real Est. Res. 399, 415, 417 (2007); Thomas P. Boehm, Paul D. Thistle, Alan Schlottmann, Rates and Race: An Analysis of Racial Disparities in Mortgage Rates, 17 Housing Pol’y Debate 109, 126 (2006); Daniel Lindsey et al., National Consumer Law Center, Why Responsible Mortgage Lending Is a Fair Housing Issue 4–5 (2012); First Nations Dev. Inst., Borrowing Trouble: Predatory Lending in Native American Communities 14–16 (2008), available at; Carsey Institute, Subprime and Predatory Lending in Rural America: Mortgage Lending Practices That Can Trap Low-Income Rural People, Pol’y Brief No. 4 (2006), available at

  • 133 {122} Jose Garcia, Demos, The Color of Debt: Credit Card Debt by Race and Ethnicity (2010); José Garciá & Tamara Draut, The Plastic Safety Net: How Households Are Coping in a Fragile Economy: Findings from a 2008 National Household Survey of Credit Card Debt Among Low- and Middle-Income Households 5 (2009), available at; Ethan Cohen-Cole, Credit Card Redlining, Fed. Res. Bank of Boston WPS No. QAU08-1 (2008).

  • 134 {123} See Howell E. Jackson & Laurie Burlingame, Kickbacks or Compensation: The Case of Yield Spread Premiums, 12 Stan. J.L. Bus. & Fin. 289, 350 (2007); Susan Wharton Gates, Vanessa Gail Perry & Peter M. Zorn, Automated Underwriting in Mortgage Lending: Good News for the Underserved, 13 Housing Pol’y Debate 369, 380 (2002);Robert B. Avery, Kenneth P. Brevoort, & Glenn B. Canner, The 2007 HMDA Data, Fed. Reserve Bull. A107, A141 (2008), available at; Robert B. Avery & Glenn B. Canner, New Information Reported Under HMDA and Its Application in Fair Lending Enforcement, Fed. Reserve Bulletin 344, 380, 394 (Summer 2005), available at; Charlie Savage, Wells Fargo Will Settle Mortgage Bias Charges, N.Y. Times, July 12, 2012; Debbie Gruenstein Bocian, Keith S. Ernst & Wei Li, Ctr. for Responsible Lending, Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages 21–23 (May 31, 2006), available at; Press Release, Office of the New York State Attorney General, Countrywide Agrees to New Measures to Combat Racial and Ethnic Disparities in Mortgage Loan Pricing (Dec. 5, 2006), available at See also Rakesh Kochar, Ana Gonzalez-Barrera, Daniel Dockterman, Pew Hispanic Center, Through Boom and Bust: Minorities, Immigrants, and Homeownership, at v (May 12, 2009), available at; Paul S. Calem, Jonathan E. Hershaff & Susan M. Wachter, Neighborhood Patterns of Subprime Lending: Evidence from Disparate Cities, 15 Housing Pol’y Debate 603 (2004); William Apgar, Amal Bendimerad & Ren S. Essene, Joint Ctr. for Hous. Studies, Harvard Univ., Mortgage Market Channels and Fair Lending: An Analysis of the HMDA Data 9, 27, 37 (2007), available at; Jim Campen, Saara Nafici, Adam Rust, Geoff Smith, Kevin Stein & Barbara van Kerkhove, Neighborhood Econ. Dev. Advocacy Project, Paying More for the American Dream: A Multi-State Analysis of Higher Cost Home Purchase Lending 10 (2007), available at; Jim Campen, Mass. Community & Banking Council, Changing Patterns XIII: Mortgage Lending to Traditionally Underserved Borrowers & Neighborhoods in Boston, Greater Boston and Massachusetts, 1990–2005, at 7 (Nov. 2006), available at; Geoff Smith, Woodstock Institute, Key Trends in Chicago Area Mortgage Lending: Analysis of Data from the 2004 Chicago Area Community Lending Fact Book (2006); Geoff Smith, Woodstock Institute, Key Trends in Chicago Area Mortgage Lending: Analysis of Data from the 2004 Chicago Area Community Lending Fact Book (2006); Janis Bowdler, Nat’l Council of La Raza, Jeopardizing Hispanic Homeownership: Predatory Practices in the Homebuying Market 9 (May 2005), available at; Calvin Bradford, Center for Community Change, Risk or Race? Racial Disparities and the Subprime Refinance Market (May 2002); Ken Zimmerman, Elvin Wyly & Hilary Btein, N.J. Inst. for Social Justice, Predatory Lending in New Jersey: The Rising Threat to Low-Income Homeowners 5, 6 (Feb. 2002), available at; U.S. Dep’t of Housing and Urban Dev., Unequal Burden: Income and Racial Disparities in Subprime Lending in America (Apr. 2000).

  • 135 {124} See Robert B. Avery, Kenneth P. Brevoort, & Glenn B. Canner, The 2007 HMDA Data, Fed. Reserve Bull. A107, A111 (2008), available at (reporting that borrowers with high cost mortgages in 2007 had incomes 20% lower than borrowers whose mortgages were not high cost); Bob Hunter, Consumer Fed. of Am., Largest Auto Insurers Frequently Charge Higher Premiums to Safe Drivers Than to Those Responsible for Accidents: 12-City Survey Shows Rating Factors Rejected By Most Americans Cause Low-and Moderate-Income Drivers to Pay More (2013).