Monday, September 17, 2007
One of the more interesting philosophical questions in commercial law is why there are so few restrictions on allowing people to buy things, while there are so many apparent restrictions on loaning money to those same people to finance that same purchase. When, for example, a high-risk debtor borrows money from a subprime lender to buy a home theater system from Best Buy, the retailer reaps a nice profit on the deal while our attention (and disapprobation) seems to be focused on the lender, not the seller. Why?
A new paper by Christopher Peterson (Florida) doesn’t purport to answer that question, but it does suggest that the reasons for usury law lie in some deeply felt moral sense than in any practical reality. The reality, he suggests in Usury Law, Payday Loans, and Statutory Slight of Hand: An Empirical Analysis of American Credit Pricing Limits, is that usury laws are not doing the kind of heavy lifting many of us expect them to. He finds that they are rooted in "an ancient moral tradition" which -- like so many ancient moral traditions today -- seems to have been overridden by market forces even as the rhetoric continues. Here's the abstract:
In the Western intellectual tradition usury law has historically been the foremost bulwark shielding consumers from harsh credit practices. Historically, the United States commitment to usury law has been deep and consistent. However, the recent rapid growth of the "payday" loan industry belies this longstanding American tradition. In order to understand the evolution of American usury law, this paper presents a systemic empirical analysis of all fifty state usury laws in two time periods: 1965 and the present. The highest permissible price of a typical payday loan authorized under each state's usury law was calculated. These prices were then translated into Annual Percentage Rate (APR) format following the federal Truth-in-Lending Act price disclosure regulations. Moreover, this Article also compares how each state legislature describes its most expensive permissible payday loan, with how that loan is characterized under federal price disclosure law. It does so by suggesting a new financial concept which I label: salience distortion. This analysis produces three findings: (1) usury law has become more lax; (2) usury law has become more polarized; and, (3) usury law has become more misleading. These findings suggest that the numeric language in current state usury statutes is not chosen because it helpfully describes some expectation of commercial behavior. Rather, legislatures have chosen the language of most current credit price caps because it sounds in an ancient moral tradition - a mythology of sorts - that roughly delineates popular perception of moral and immoral interest rates. Exploiting this normative tradition as well as common behavioral economic heuristics, many state legislatures use small, innocuous numbers in usury law because they are attempting to minimize the public and media outcry over their decision to legalize triple digit interest rate consumer loans.