Welfare Economics and Consumer Credit Paper

I have just posted a working paper on the welfare economics of microcredit and payday lending.  The paper tries to address some of the questions raised by, among others, Jim Hawkins, discussed in previous posts here and here.  Post-crisis consumer credit regulation, it seems to me, will have to proceed from norms other than revealed preferences utilitarianism.  Accepted criteria for judging the success or failure of  future regulation will be an essential first step in elaborating a fact-based regime of consumer credit rules.

Robosigning and Evidence

The robosigning issue brought to mind a Talmudic evidentiary rule that declares the testimony of certain types of people inadmissible:  

These are they who are ineligible (as witnesses): a dice-player, a usurer, pigeon-flyers, traffickers in Seventh Year produce, and slaves. This is the general rule; any evidence that a woman is not eligible to bring, these are not eligible to bring.  

Mishnah Rosh ha-Shanah 1:8.  

This is hardly the Federal Rules of Evidence, but I just thought it interesting.  

The Beginning of a Return to Consumer Protection?

Many years ago, in the mid 1970's, when I began my career as a legal services lawyer practicing consumer law, it seemed that we were on a roll. Congress and state legislatures were passing a bevy of laws to protect consumers (including the Bankruptcy Reform Act of 1978.)  The FTC was passing regulations and taking action against consumer scams. Innovative lawyers, often in legal services programs, were bringing class actions against a wide variety of illegal and unfair practices. These cases were received sympathetically by courts that, from a common sense perspective, could see that those practices took advantage of consumer ignorance or confusion.  Little did we know that we were at the peak of the consumer protection movement and it would be almost all downhill from there.

Rigbi on Usury on Prosper

When Credit Slips started, we intended to feature new scholarly papers by the bloggers and others. I am going to attempt to revive that tradition by featuring a paper by Oren Rigbi, an assistant professor in the Department of Economics at Ben-Gurion University of the Negev. Rigbi’s paper, “The Effects of Usury Laws: Evidence from the Online Loan Market,” exploits a change in the lending rules that apply to Prosper.com to examine the effects of interest rate caps. Prosper.com is an online lending web site, as Katie Porter explained just after it launched. In April 2008, a change in the way Prosper is organized meant that the interest rate cap was raised to 36% where previously some borrowers had a lower cap (depending on the state where the borrower lived). Thus, Rigbi was able to explore the effects of raising an interest rate cap on the ability to borrow, the amount borrowed, the interest rate for the loan, and repayments.

There are certainly differences across borrowers, time, and states, but Rigbi uses careful empirical analysis to control for these differences. What’s left is a measurement just of the effect of the changing in the interest rate cap. Rigbi summarizes his findings as follows: “I find that higher interest rate caps increase the probability that a loan is funded, especially if the borrower is risky and previously been just ‘outside the money.’ I do not find that borrowers change the loan amounts they request or that their probability of default rises. The interest rate paid for all loans, however, rises slightly probably because online lending is imperfectly integrated with credit markets.” Rigbi concludes his paper by saying, “The main takeaway point from this inquiry is that interest rate restrictions do not seem to deliver the outcomes for which they were intended.” My description of the methodology and findings glosses over a great deal of detail. Rigbi was kind enough to indulge me in an e-mail exchange and even kinder to allow me to reproduce it here: