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From 20% to 2000% in One Generation

posted by Elizabeth Warren

Usury laws have been the workhorse of consumer protection, a tradition that intertwines both moral and economic principles.  The laws reach back to Colonial times in the US and centuries before in Europe.  Now Chris Peterson offers an empirical study of what has happened to usury laws in a single generation.

Instead of spending more time lamenting credit card companies' escape from usury regulation via Marquette, he focuses on what has happened to usury laws within the states.  After all, the multi-billion dollar payday lending industry now operates at the state level.  Peterson compares the state of usury laws in 1965 with what they look like today.  In one generation, in many states, this historic form of consumer protection has gone to hell. 

Peterson's findings are shocking--and depressing.  Peterson not only finds that state usury laws have become far more lax, he also finds that they have become far more deceptive.  He argues that the laws exploit consumer biases in processing information, so that they frequently appear one way (20% usury rate) when the complex calculations yield effective rates that are far, far higher.  He has developed an index he calls "salience distortion" to reflect how far the real cap deviates from the apparent cap. 

The implications of this paper echo through lots of other scholarship, including the work (like my own) that sometimes portrays usury regulation as a strong curative for a very sick market.  Some states have held on to meaningful usury caps, but Peterson serves a strong reminder that industry capture has occurred at the local as well as national level.  Usury laws, like any other, can be perverted.

Working out a method to measure the deceptiveness of the loans is very clever.  It expands the relevance of the paper from the commercial and consumer law world to other academic inquiries, including those that focus on the legislative process. 

All in all, great summer reading.  But keep the aspirin (or bourbon) nearby as you read.


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