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1.3.4 Is Limiting the Supply of High-Priced Credit a Bad Thing?

As examined in § 1.3.3, supra, the industry claim that credit regulation limits the supply of consumer credit is dramatically overstated. Credit regulation has a more profound effect on the extent of reverse competition and predatory lending found in the marketplace. Moreover, even if consumer credit regulation does restrict the availability of very high-priced credit, this is not necessarily a bad thing.133 High-cost credit will not solve consumers’ financial problems, but will only make matters worse when the first payment is due.134 Some credit regulation can be seen as preventing debtors in desperate financial straits from making unwise credit decisions that will just make matters worse.135 High-risk borrowers, who are already up to their necks in debt, do not need the freedom to go in over their heads.136 It is, after all, not only those individual borrowers and their families who may end up drowning in debt, but the entire economic system.

Thus some credit restriction may be a good thing, particularly where it is high rate and often predatory lending.137 Usury caps may be a better way to combat predatory lending than directly suing the lenders for fraud or other law violations. If recent experience is any guide, government and private enforcement against widespread predatory lending is far from adequate to either stop the lending or to remedy defrauded consumers.

Footnotes

  • 133 {125} See, e.g., McGlawn v. Pa. Human Relations Comm’n, 891 A.2d 757 (Pa. Commw. Ct. 2006). See also Katherine Porter, The Damage of Debt, 69 Wash. & Lee L. Rev. 979, 983 (Spring 2012) (noting that debt is a proxy for the effects of financial distress and stating that, “when the law regulates credit on consumer-protection grounds, the intent is not to prevent borrowing itself, but rather to reduce or to eliminate the harms that can result from unmanageable debt. The problem to be solved is not overindebtedness, but rather the serious and real harms that accompany overindebtedness.”).

  • 134 {126} See, e.g., Jean Braucher, Theories of Overindebtedness: Interaction of Structure and Culture, 7 Theoretical Inquiries L. 323, 326 (2006); Jason J. Kilborn, Behavioral Economics, Overindebtedness Comparative Consumer Bankruptcy: Searching for Causes and Evaluating Solutions, 22 Bank. Dev. J. 13 (2005); Brian T. Melzer, The Real Costs of Credit Access: Evidence From the Payday Lending Market, Quarterly J. of Econ. 517 (2011). Cf. Angela Littwin, Beyond Usury: A Study of Credit Card Use and Preference Among Low-Income Consumers, 86 Tex. L. Rev. 451 (2008); Paige Marta Skiba & Jeremy Tobacman, Do Payday Loans Cause Bankruptcy? (Sept. 8, 2008), available at www.law.yale.edu.

  • 135 {127} See, e.g., Eric A. Posner, Contract Law in the Welfare State: A Defense of the Unconscionability Doctrine, Usury Laws, and Related Limitations on the Freedom to Contract, 24 J. Legal Stud. 283 (1995).

  • 136 {128} G. Wallace, The Uses of Usury: Low Rate Ceilings Reexamined, 56 B.U. L. Rev. 451 (1976). See also Diane Ellis, Bank Trends—The Effect of Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-Offs, and the Personal Bankruptcy Rate (1999), available at www.fdic.gov (attributing rise in personal bankruptcies to deregulation of credit card interest rates).

  • 137 {129} See, e.g., Robert Mayer, Loan Sharks, Interest-Rate Caps, and Deregulation, 69 Wash. & Lee L. Rev. 807, 835–839 (2012) (arguing that deregulation of payday lending has led to a rise in predatory practices); John D. Skees, The Resurrection of Historic Usury Principles for Consumption Loans in a Federal Banking System, 55 Cath. U. L. Rev. 1131 (2006); Roberto G. Quercia, Assessing the Impact of North Carolina’s Anti-Predatory Lending Law, 15 Hous. Policy Debate 546, 584–590 (2004) (decline in lending is largely confined to “predatory refinancing”); Vincent D. Rougeau, Rediscovering Usury: An Argument for Legal Controls on Credit Card Interest Rates, 67 U. Colo. L. Rev. 1 (1996); Lei Ding, et al., Ctr. for Community Capital, The Preemption Effect: The Impacts of State Anti-Predatory Lending Laws on the Foreclosure Crisis (2010), available at http://ccc.sites.unc.edu (finding that OCC preemption of state anti-predatory lending laws led to increased risky refinance lending by regulated lenders with increased defaults; “If anti-predatory lending laws have curbed so-called predatory practices while permitting non-abusive subprime lending to develop, the laws have done what they were intended to do.”).