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

54 Pages Posted: 19 May 2016 Last revised: 16 Aug 2017

Colleen Honigsberg

Stanford Law School

Robert J. Jackson Jr.

Columbia Law School

Richard Squire

Fordham University School of Law

Date Written: August 2, 2017

Abstract

We use a natural experiment — an unexpected judicial decision — to study how the legal enforceability of debt contracts affects consumer lending. In May 2015, a federal court unexpectedly held that the usury laws of three states — New York, Connecticut, 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. And 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.

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, How Does Legal Enforceability Affect Consumer Lending? Evidence from a Natural Experiment (August 2, 2017). 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 Jackson (Contact Author)

Columbia Law School ( email )

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

Richard 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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