How Does Legal Enforceability Affect Consumer Lending? Evidence from a Natural Experiment

Colleen Honigsberg, Robert J. Jackson and Richard Squire

Journal of Law and Economics, 2017, vol. 60, issue 4, 673 - 712

Abstract: We use a natural experiment--an unexpected judicial decision--to study how the enforceability of debt contracts affects consumer lending. In May 2015, a federal court unexpectedly held that the usury statutes of three states--Connecticut, New York, and Vermont--applied to certain loans that market participants had assumed were exempt from those statutes. The case introduced substantial uncertainty about whether borrowers affected by the decision were under any legal obligation to repay principal or interest on their loans. Using proprietary data from three marketplace-lending platforms, we use a difference-in-differences design to study the decision's effects. We find no evidence that borrowers defaulted strategically as a result of the decision. However, the decision reduced credit availability for higher-risk borrowers in affected states. Secondary-market data indicate that the price of notes backed by above-usury loans issued to borrowers in affected states declined, particularly when those borrowers were late on their payments.

Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://dx.doi.org/10.1086/695808 (application/pdf)
http://dx.doi.org/10.1086/695808 (text/html)
Access to the online full text or PDF requires a subscription.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jlawec:doi:10.1086/695808

Access Statistics for this article

More articles in Journal of Law and Economics from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().