What Happens When Loans Become Legally Void? Evidence from a Natural Experiment

49 Pages Posted: 19 May 2016 Last revised: 29 Jun 2017

Colleen Honigsberg

Stanford Law School

Robert J. Jackson Jr.

Columbia Law School

Richard Squire

Fordham University School of Law

Date Written: December 2, 2016


We use a natural experiment — an unexpected judicial decision — to study how the legal enforceability of consumer loans affects borrower behavior. In May 2015, a federal court ruled that the usury laws of three states — New York, Connecticut, and Vermont — were enforceable with respect to a subset of consumer loans that market participants had previously assumed were exempt from those laws. The decision was important because, in New York and Connecticut, borrowers on usurious loans have no obligation to repay any interest or principal. Using proprietary data from three marketplace lenders, we use a difference-in-differences design to study the decision’s effects. We find no evidence that consumers engaged in strategic default. However, upon examination of secondary market trading, we find that delinquent loans issued above usury caps trade at a discount. We also show that the decision reduced credit availability for riskier borrowers, who are more likely to borrow at rates above usury limits.

Keywords: usury law, strategic default, consumer lending, marketplace lending, Madden v. Midland

JEL Classification: D12, G18, G21, G38, D18

Suggested Citation

Honigsberg, Colleen and Jackson, Robert J. and Squire, Richard, What Happens When Loans Become Legally Void? Evidence from a Natural Experiment (December 2, 2016). Columbia Business School Research Paper No. 16-38. Available at SSRN: https://ssrn.com/abstract=2780215 or http://dx.doi.org/10.2139/ssrn.2780215

Colleen Honigsberg

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305
United States

Robert J. Jackson Jr. (Contact Author)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Richard C. Squire

Fordham University School of Law ( email )

150 West 62nd Street
New York, NY 10023
United States
212-964-1584 (Phone)

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