The Intended and Unintended Consequences of Consumer Protection Laws: An Analysis of Wage Garnishment and Usury Limits in Auto Lending

Abstract

We use novel auto financing data to examine the relation between consumer protection laws and vehicle prices, loan terms, and outcomes for subprime borrowers. After accounting for borrower creditworthiness, purchase timing, and vehicle quality, we find that state laws prohibiting post-default wage garnishment are associated with higher prices, higher initial principal balances, and higher default rates. We find no evidence that usury laws, which cap interest rates for high-risk borrowers, are associated with higher prices or default rates. We summarize our findings in terms of the distributional consequences of consumer protection laws.

Keywords: Consumer protection, usury, lending, regulation, household finance, wage garnishment

JEL Classification: D14, D82, G28, H31, L14