Copyright (c) 2003 Florida Law Review
Florida Law Review

July, 2003

55 Fla. L. Rev. 807

LENGTH: 55123 words

ARTICLE: TRUTH, UNDERSTANDING, AND HIGH-COST CONSUMER CREDIT: THE HISTORICAL CONTEXT OF THE TRUTH IN LENDING ACT



NAME: Christopher L. Peterson *

BIO:

* Assistant Professor, The University of Florida Fredric G. Levin College of Law; J.D. 2001, University of Utah College of Law; University of Utah. Portions of the preliminary research for this Article were generously supported by a Mariner S. Eccles Research Fellowship in Political Economy. The author wishes to thank the following for helpful conversations, comments, and suggestions: Judge Wade Brorby, John Flynn, Leslie Francis, Tera Peterson, and Linda Smith.



SUMMARY:
... Consumer credit is older than money. ... If you cannot pay at the Time, you will be ashamed to see your Creditor; you will be in Fear when you speak to him; you will make poor pitiful sneaking Excuses, and by Degrees come to lose your Veracity, and sink into base downright lying; for, as Poor Richard says, The second Vice is Lying, the first is running in Debt. . . . Poverty often deprives a Man of all Spirit and Virtue: Tis hard for an empty Bag to stand upright . . . . The Borrower is a Slave to the Lender, and the Debtor to the Creditor, disdain the Chain, preserve your Freedom; and maintain your independency: Be industrious and free; be frugal and free. ... These lenders aggressively worked to distance themselves from the salary lending "loan sharks" which dominated turn-of-the century consumer financing. ... Additional substantive proposals included a national interest rate cap of eighteen percent prohibition of all wage garnishments and confessions of judgment in consumer credit cases, the establishment of a national commission on consumer finance, and creation of new, presidential power to control consumer credit rules during economic crises. ...

TEXT:
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I. Introduction



Consumer credit is older than money. 1 The practice of exchanging things of value in return for the obligation of future repayment is, paradoxically, one of humanity's most useful and dangerous social inventions. The earliest form of credit was probably a version of "you scratch my back and I'll scratch yours." The creditor was "in effect a gift giver who merely expect[ed] a 'delayed' reciprocal gift from the recipient." 2 Historians and archeologists speculate that interest itself probably originated some time during the late Paleolithic or early Mesolithic ages between, about 8000 and 5000 B.C.E. 3 With farming, the accumulation of capital in the form of livestock, tools, and seed took on an [*809] importance likely unfamiliar to the nomadic hunter-gatherers of earlier eras. 4 This desire to collect capital probably gave impetus to more clearly define the terms of previously ambiguous credit. 5 Loans were usually payable in either grain, animals, or metal. 6 The earliest historic interest rates ranged from 20-50% per annum, later stabilizing at 33% for loans on grain, and 20-25% for loans of silver. 7 Loans were made to invest in future production as well as for "nonproductive" purposes, the latter being accurately characterized as consumer credit. 8 There is, of course, no reason to suspect that greed, or, more charitably, the desire to successfully compete in a world of scarce resources, was any less a motive at the dawn of civilization than it is today. 9 Because creditors often lent to those in desperate need of food or shelter, the relative bargaining position of debtors often placed them at a significant disadvantage. 10 Also, in the absence of standard currencies, ambiguity over what constituted acceptable payment of a debt left wide latitude for abuse. 11 Thus, "[h]uman nature being what it is, trouble must have developed quickly. The rich extracted [*810] hard bargains and grew richer; the poor fell into perpetual debt and forfeited their meager possessions." 12 Consumer credit was one of the earliest tools of forced poverty, social oppression, and enslavement. 13



Thousands of years later consumer credit has played a similar role in United States history. With credit taking the form of indentured servitude, many of the earliest European colonizers borrowed their way to America using their bodies as security and often paying with their lives. 14 After a constitutional crisis and civil war won freedom for African-American slaves, the landed white Southern gentry turned to the high-cost credit system of share cropping as the next best substitute for whips and chains. 15 At the beginning of the twentieth century, entire generations of the working poor in large Eastern cities sacrificed their chances of joining the middle class to salary lenders. 16 At the beginning of the twenty-first century, "payday" lenders in almost every state have partnered with banks to avoid regulation and sold the same credit products as salary- lending loan sharks did a hundred years earlier. 17 These and other lenders- variously called [*811] predatory lenders, sub-prime lenders, fringe bankers, but more conveniently and equitably termed "high-cost" lenders-continue to extract the same hard bargains from the ignorant and desperate poor as their progenitors did five thousand years ago. 18



Today a debate claiming such notable expositors as Hammurabi, Moses, Plato, Dante, Shakespeare, Hai Jui, and Benjamin Franklin has been forged anew. From the late 1970s through the mid-1980s, many states eliminated or relaxed their regulation of consumer credit. 19 This was in response to factors such as the high market equilibrium interest rates of the [*812] period (which raised depository lender's costs of funds to the point that profitable lending was difficult within interest rate caps) 20 and the Supreme Court's decision allowing banks to export their home state's usury law to consumers in other states. 21 Since then the relatively low-priced consumer credit supplied to the middle class has continued to grow, financing consumer spending. In the wake of deregulation, however, markets for much higher priced loans extended to the financially vulnerable lower middle class, the working poor, and the desperate have seen comparably enormous growth. 22 Sensing widespread abuse, the nation's newsprint media has complained vitriolically, touching off a timely national discussion of an ancient topic. 23 For our society, like civilizations before [*813] it, the central quandary in high-cost credit policy has been balancing the need to protect the vulnerable with the need to facilitate economically and socially useful trade in credit.



This Article does not purport to resolve so dense an impasse. Instead it hopes to serve two more modest but related goals. The first is to provide a new conceptual tool for organizing discussions of consumer credit in general, and high-cost consumer credit in particular. The world's past civilizations have employed only relatively few types of strategies for addressing this fundamental dilemma. Unfortunately, historians-and in turn policymakers and legal practitioners-have not recognized the similarities between these strategies because most historical treatments focus either on one culture or on one strategy. When we step back and paint with the broader brush strokes of historical case studies, patterns of common social responses to consumer credit problems emerge. These patterns are important both because they provide a new way of organizing discussions about consumer credit policy and because they shed contextual light on the limitations of our current strategies. Sadly, most of our current consumer credit policies have histories of failure dating back hundreds or [*814] even thousands of years. Policymakers must be re-apprised of these failures.



The second insight of this Article is that, from a historical perspective, consumer credit price disclosure rules, such as the Truth in Lending Act (TILA), 24 are a unique and relatively recent strategy for protecting vulnerable consumers from abuse by predatory lenders. In the mid-1950s policymakers and scholars came to realize that the middle class, which was borrowing in greater numbers than ever before, was unable to compare the prices of credit. 25 Because creditors calculated interest rates in many different ways, quoted prices bore no meaningful relation to each other. 26 Following Massachusetts, 27 Congress passed the Truth in Lending Act in 1968 28 which required lenders to use uniform annual percentage rate (APR) terminology, as well as disclose many other aspects of credit contracts. 29 The hope was that with uniformly disclosed prices, consumers would be able to shop for the best deal, thus better protecting themselves and forcing creditors to offer lower prices. 30 Despite these hopes, in recent years credit disclosure rules have fallen from the favor of consumer advocates, legal service attorneys, and scholars bent on protecting working and lower middle class consumers. Where thirty years ago critics of disclosure were likely to be banking industry lobbyists, today's critics are more likely to be non-profit consumer activists. These activists complain that watered down disclosure laws are too complex, come too late in negotiations, and are not accurate enough. 31 Even worse, consumer activists complain the industry [*815] uses meaningless disclosure rules to deflect legislative pressure for more substantive consumer protections such as interest rate caps and generous bankruptcy discharge provisions. 32 While not denying these and other arguments, this Article suggests the problems of Truth in Lending may be those of a troubled adolescence rather than inherent limitations of the strategy itself. Unlike virtually all other consumer credit policies, disclosure is relatively untried. Having used disclosure regulations in earnest for only less than half a century, we may not have yet learned how to exploit their full potential. With aggressive and practical reform, Truth in Lending may blossom into a much more effective strategy than those which predate it by hundreds or even thousands of years.



Part II presents a new method of organizing consumer credit policy based on six traditional policy strategies and relying on examples from world history. Part III gives a chronological overview of consumer credit history in the United States. Part IV deals with the innovation and theoretical advantages of price disclosure as a seventh strategy. Lastly, conclusions are drawn for policymakers, scholars, and law practitioners.



II. Organizing the Problem: A Survey of Significant Debtor Protection Strategies in World History



American consumer credit law is preposterously unorganized. "Upon first exposure to the subject of credit regulation, the impression of the average attorney might be that the field is a maze, if not a mess, and probably both." 33 One recent commentator, smelling something more sinister, suggests the confusing character of consumer credit law remains entrenched because it provides a mirage of debtor protection which subverts more aggressive reform. 34 Requiring some conceptual method of organizing credit policy, legislatures, courts, attorneys, and scholars have fumbled, seemingly at random, for a system of categorization to begin thinking about credit law and policy. Thus, a wide variety of artificial categories have developed which break up credit policy into conceptual parts. For example, the Truth in Lending Act divides rules between open- [*816] and closed-end credit. 35 Some classify policies as either market- controlling or market-perfecting. 36 Others rely on the classic distinction between procedural and substantive rules. 37 Sometimes statutes and courts classify based on the distinction between retail and non-retail lenders. 38 The bankruptcy code makes much of whether credit is secured or unsecured. 39 Some creditors are depository institutions while others are not. 40 Finally, some statutes are "general" usury laws, while others are "special" usury laws. 41 Different rules, and in turn exceptions to those rules, exist for each of these different categories in each different conceptual scheme. When combined with simultaneous federal, state, and local regulation, these intersecting vertices create an impossibly complex jumble of meaningless distinctions. The result is not only that beginners have difficulty understanding the law, but also that legislatures and courts have difficulty designing rules which promote justice because these rules are based on arbitrary classifications.



This Part suggests a more natural way of approaching consumer credit policy based on the conceptual similarities between historical strategies. While many scholars have provided a rich history of consumer credit, none appear to have categorized the basic policy responses employed in history. 42 There have been six basic strategies for addressing the social [*817] problems endemic to consumer credit (plus one more recent addition) that retain significant relevance for contemporary American policymakers. 43 An exposition relying on historical examples sheds light on these strategies.



A. Debtor Amnesty: The Deceptively Simple Solution



Humanity's first conceptually distinct and enduring strategy designed to protect vulnerable debtors from creditor abuse was to issue government decrees forgiving, or at least ameliorating, debts. The Sumerians, generally considered the world's first civilization, occupied the southernmost segment of Mesopotamia between the Tigris and Euphrates rivers stretching roughly from modern Baghdad to the Persian Gulf. 44 Eventually supplanted by the Babylonians, Sumerian civilization is credited with developing the world's first wheeled vehicles, the first ox-drawn plows, the first city-states, and the first system of writing. 45 Alongside other trade practices, including pottery, weaving, metalwork, and masonry, was trade in credit. 46 Many documents dealing with credit have survived showing a system which carefully recorded and commonly extended loans. 47



Nevertheless, even in these first civilizations the harmful social side effects to otherwise beneficial lending developed early on. The principal [*818] problem then, as now, was how to deal with those debtors who could not or would not repay their obligations. The normal penalties for default were severe. 48 Free males, as the heads of households, were entitled to send their wives, servants, or children into forced servitude to pay off debts. 49 If the head of the household could not produce a working dependant, he was often enslaved or imprisoned. 50 Creditors who seized the human assets of a debtor were essentially free to do with the slave whatever the creditor chose. 51 The treatment of debt slaves was harsh indeed, often including gouging out the slave's eyes to prevent escape, and only providing enough food to sustain life. 52 Creditors sold a significant portion of the Sumerian population into debt slavery to live alongside prisoners of war. 53



This treatment, at times apparently offending even the ancient sense of social decency, led many Sumerian and Babylonian kings to "make justice." 54 This claim, coming down in the form of aristocratic boasting, "referred to the cancellation by royal decree of certain debts, such as any which had forced free people to sell themselves or their families into slavery." 55 For example, one of the earliest recorded legal codes, dating from about 2350 B.C.E., includes relief aimed at controlling abuses [*819] associated with debt. 56 Urukagina, a Sumerian King who promulgated the rules, included in his reforms amnesty for all persons imprisoned for failure to repay debts. 57 Similarly, Ammisaduqa (1646-1626 B.C.E.), a later Babylonian King, also canceled the debts of enslaved former citizens. 58



Although the details of these royal decrees of amnesty are sparse, they begin to sketch the outlines of problems that have plagued similar strategies ever since. Initially, forgiving some debts did not solve the real problem, only treating its symptoms after the fact. Debtors would still borrow, creditors would still lend, and in the absence of state intervention, default and its attendant problems still developed. Moreover, each decree was a limited one-time treatment rather than a permanent systemic reform. Executive pardons did nothing for those not lucky enough to fall under their limited jurisdiction. The conundrum of whether a creditor or debtor should bear the losses associated with default still existed. All that amnesty decrees could do was temporarily reverse fortunes of those who managed to capture the attention of fickle authority.



Nevertheless, as a social strategy, granting debtors amnesty from their obligations persisted. Then, as now, creditors tended to advocate harsh penalties to deter default on loans. In 1531, during his reign of Holland, Charles V of Spain passed a characteristic edict later described as the first specific bankruptcy statute in the Netherlands. 59 In its preamble, the law justified itself as attempting to remedy the expense connected with lawsuits and to provide for a pure administration of justice which would deal equally with the rich and poor. 60 Hoping to deter debtor default, the law provided that "all persons who absented themselves from their ordinary residences with the object of defrauding their creditors were to be regarded as common thieves, and if caught might be summarily dealt with and publicly hanged." 61 Ironically, the Spanish Crown consistently defaulted on its own debts, finding itself bankrupt on six subsequent occasions during the sixteenth century alone. 62

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Similar to Sumerian and Babylonian kings, Europe's princes also issued decrees canceling debts. The crucial difference, however, was that European princes usually canceled only their own loans or the loans of their closest allies and associates. For example,



Philip the Fair (IV) of France, 1285-1314, borrowed heavily at unstated rates, but instead of repaying his bankers he banished them, canceled his own debts and decreed that the principal of all other debts must be paid to the Crown. His principal creditor, the Order of Knights Templar, which had become largely a banking organization, was utterly destroyed. Edward III of England, 1312-1377, likewise repudiated his debts . . . and ruined his Florentine bankers. 63



Nobles were also known to orchestrate the cancellation of their debts by availing themselves to lingering church doctrines prohibiting interest, especially against foreigners. 64 While consumer and commercial debtors alike faced severe punishments such as summary public hangings, the deliberate and fraudulent default of royalty "could be punished only by the sanction of a future denial of credit." 65 Such royal "amnesty" was common enough to have market effect. Interest rates offered to nobility were much higher than those to towns and commercial ventures since repayment by nobles was relatively uncertain. 66 This aristocratic abuse of power demonstrates a central limitation of forgiving debt as a policy strategy: it is difficult to devise fair and efficient rules determining who deserves amnesty. Too often, those who receive discharge of their debts are those who least merit it. As we shall see, it is precisely this difficulty which more than any other afflicts the contemporary United States bankruptcy system.



B. Separating "Good" Credit from "Bad" Credit: Interest Rate Caps and Other Loan Contract Restrictions



Mesopotamian societies were not content with market anarchy and occasional capricious amnesty of their kings. The next great innovation in consumer credit policy is best exemplified in the famous Babylonian Code [*821] of Hammurabi written in 1750 B.C.E. 67 Legend tells us the Babylonian King Hammurabi ascended a mountain where Shamash, the God of Justice, gave him a divinely inspired code of law. 68 Under the rule of Hammurabi, Babylon developed from an insignificant city to the national capital of probably the most complex society of its time. 69 Following Hammurabi, Babylon remained the capital of the entire region for around 1500 years. 70 The Code set out over two hundred laws addressing social problems ranging from divorce to theft. 71 Audaciously, it attempted to create a comprehensive and timeless set of laws to govern Babylonian society. Hammurabi's laws included several distinct controls on the lending market designed to protect debtors. 72 Foremost was the world's first recorded maximum allowable interest rate cap, which limited rates to about 20% per annum for loans on silver and 33% on loans of grain. 73 The text of the code bears a remarkable similarity to interest rate caps adopted thousands of years later and which are still in force in many areas. The Code states: "If a merchant has given corn on loan, he may take 100 SILA of corn as interest on 1 GUR; if he has given silver on loan, he may take 1/6 shekel 6 grains interest on 1 shekel of silver." 74



A central insight behind interest rate caps is the recognition that while some loans are useful social agreements, others cause more harm than good. For early Babylonians, the central difference between acceptable and unacceptable loans was price. Thus, loans at interest rates in excess of the statutory caps were banned. However, the Code also prohibited dangerous loan characteristics not directly related to price. For instance, recognizing loans may have dangerous consequences not only for individuals but for whole families, the Code required both a husband and a wife to sign loan contracts encumbering joint property. 75 Other rules included a maximum allowable three years that a wife, servant, or child of a debtor could spend in slavery to pay off a man's debt. 76 Creditors could not take payments by force without the consent of the debtor. 77 Debts of either a woman or a man incurred before marriage were not binding on the other spouse after marriage. 78 Moreover, to prevent violations, Hammurabi's Code required [*822] creditors and debtors make their loan contracts in the presence of an official and witnesses. 79



Hammurabi's interest rate cap, along with its other lending format restrictions proved remarkably durable. The rate cap remained intact as law for 1200 years-well over an entire millennium. In 2000 years the only significant change was to equalize the maximum allowable rate of grain to match that of silver. 80 It is nonetheless unlikely the interest rate cap and other provisions were consistently enforced. 81 Records still exist documenting loans at 400% per annum during the period. 82 Still, the enduring legacy of this approach testifies to the success of the law as compared to what must have come before. Nevertheless, for a closer look at potential cracks in the construction of this impressive regulatory feat, we must turn to later civilizations with a more complete historical record.



Ancient Rome also set maximum allowable interest rate caps. High-cost debt played a crucial and volatile role in Roman politics from the earliest stages. 83 In the fifth century B.C.E., Romans were only one of several ethnic groups present in Italy, and were still far away from domination of the Mediterranean. 84 Class struggle, which would reemerge in centuries to come, manifested itself dramatically. 85 In 494 B.C.E., a violent civil revolt took place. 86 A large number of poor plebeians withdrew from the city and gathered on a hill overlooking the Tiber River where they preceded to elect their own shadow legislature, officials, and tribunes, essentially seceding from the Roman republic. 87 The revolt has since come to be known as the first secession. 88 The outcome of this revolt and many others like it during the period is historically unclear. However, [*823] the cause of the revolt is not: "[b]y all accounts the principal cause of the first secession was a debt crisis." 89



The situation facing poor Romans of the period should by now come as no surprise to readers. 90 Many historians, both modern and ancient, have focused on one uncannily familiar story which may have lit the fire. 91 Apparently, a war veteran's farm was destroyed during a battle with a rival tribe. 92 The loss of his farm, combined with government tax demands, forced the veteran to borrow money at dangerously high rates. 93 When he was unable to pay, his creditor imprisoned and tortured him. 94 Eventually, the veteran appeared in the city Forum where those who heard his story were so enraged they took to the streets rioting. 95



The first major codification of Roman law, called the Twelve Tables, was in part a response to the debt crisis of the first secession. 96 For reasons undoubtedly similar to those the Babylonians relied upon, the Twelve Tables included an interest rate cap and some basic provisions to enforce it. 97 Under the Twelve Tables the legal maximum interest rate was set by weight at one ounce per pound per year, which amounts to 8 1/3% per annum. 98 Creditors found contracting for greater rates were liable in Roman courts for fourfold damages. 99 This basic legislative approach [*824] remained intact for the duration of the Roman Republic and the Empire, although the legal maximum varied with political tides. During the third century B.C.E. the maximum legal rate was lowered for a short time to 4 1/6%. 100 In 88 B.C.E., Sulla raised the interest rate cap to 12% per annum. 101 This rate remained the legal limit for centuries and was adopted by the later Empire and the Byzantine Empire. 102



Although interest rate caps provided some protection for Romans, they were poorly enforced throughout Roman history. 103 Pawn shops and other lenders that catered to the higher-risk poor consistently charged three to ten times the legal maximum. 104 The rate caps also proved too inflexible in comparison to the volatile Roman economy. In particular, the availability of gold and silver from mining and foreign conquest dramatically affected market prices for the use of money. 105 Moreover, both the Republic and the Empire faced the persistent problem of rich currency hoarders, who would hide away vast fortunes in coins, thus decreasing the available supply of cash and raising prices for the use of money. 106 When the supply of money was low, interest rate caps were probably all but ignored, thus affording almost no protection to debtors.



The problems with interest rate caps were not limited to Rome. Around 2000 years later on the other side of the globe, fundamentally analogous problems plagued China during the late Ming dynasty. Following a hundred years of foreign domination by Mongolians with the clan of Ghengis Kahn at their head, the famous Chinese leader Chu Yuan-chang (later referred to as the Hung-wu emperor) solidified control over many competing factions and succeeded in driving the Mongolians out of Northern China. 107 In 1368, Chu Yuan-chang founded the Ming dynasty, which would last for the terms of fifteen succeeding emperors until its overthrow by Manchurian invaders in 1644. 108 By the late sixteenth century, the Chinese government suffered from inept administration of rural agrarian masses by a literary bureaucracy. 109 Prevailing Chinese law [*825] fixed a maximum allowable interest rate for loans at 36% per annum. 110 The statutes also forbade the collection of interest at amounts greater than the original principal. 111 Hoarding of coin wealth, supply limitations, and failed attempts to introduce paper currency made cash a rare and expensive commodity. 112 Nevertheless, lending for consumption purposes appears to have been widespread. 113 In 1587, over 20,000 pawn shops operated in China. 114 Once again, the interest rate cap was poorly enforced. Wealthy families commonly lent money to poor farmers at illegal interest rates. 115 Foreclosures on the homes of poor rural farmers undercut, on an enormous scale, the ability of the poor to survive. 116 As one historian explains:



Agrarian exploitation of the poor . . . was far from limited to . . . isolated incidents. It affected all walks of life and was carried out on a large and small scale without surcease generation after generation. Essentially, such exploitation was the economic basis of the bureaucracy as an institution. Official families, who collected rents from landholdings and interest from the moneylending business, were an integral part of the rural economy. 117



When subsistence farmers fell behind on payments, wealthy creditors hired local "roughnecks" to collect. 118



The story of one eccentric civil servant explicitly shows the entrenched role of high-cost lending at this time in China. 119 Hai Jui was a civil servant who worked his way up the Chinese bureaucracy with a maverick attitude extremely rare in the Confucian ordered civil service. 120 Hai Jui achieved notoriety with the Chinese masses early in his career by remonstrating the son of a powerful dignitary for financially abusing his position. 121 Having attained fame for an unostentatious lifestyle, Hai Jui did the unthinkable by openly criticizing the emperor Chia-ching. 122 Hai Jui wrote the emperor [*826] a letter describing him as "vain, cruel, selfish, suspicious, and foolish." 123 Reportedly, Hai Jui purchased a coffin and said goodbye to his family before sending the letter. 124 Chia-ching was deeply disturbed by the reproach, and sentenced Hai Jui to death for insolence. 125 Before the sentence was carried out, Chia-ching passed away and Lung-ch'ing ascended to the throne in 1567. 126 Lung-ch'ing commuted the sentence, and Hai Jui emerged from prison more prestigious than ever. 127 Eventually, Hai Jui attained the rank of governor over the richest and most developed prefecture in the entire empire. 128



But for Hai Jui, challenging endemic high-cost lending proved more politically dangerous than even challenging an emperor. As governor, Hai Jui attempted to enforce previously ignored credit laws and stretched procedural rules in order to prevent poor farmers from losing their homes. 129 In doing so he confronted the richest landowners in the province who profited from money lending, and thereby created enemies who would eventually erode his power. 130 When the poor learned the governor had personally heard the complaints of dispossessed landowners, his offices were flooded with as many as three to four thousand petitions a day. 131 Other civil servants, possibly linked to lending interests, accused Hai Jui of "encourag[ing] hoards of riffraff to make false charges against men of substance." 132 These accusations, fueled by otherwise impotent claims of personal impropriety, cost Hai Jui his post and forced him into early retirement from which he never politically recovered. 133 All this was in spite of Hai Jui's formidable contribution of organizing the dredging of two commercially important rivers. 134



Perhaps Ming society would have done well to incorporate the lending reforms Hai Jui attempted to establish. Within fifty years Ming society entered a period of peasant rebellions hastening the overthrow of the dynasty by Manchurian invaders from the North. 135 Hai Jui probably would [*827] not be surprised by the incident which one Chinese source attributes as the cause of the first rebellions:



The incident involved four soldiers and an oppressive moneylender, appropriately named Ch'ien (money). The moneylender bribed the commander of the garrison to join him in a plot to force the soldiers to repay much more money than they had actually borrowed. This piece of chicanery prompted the soldiers to mutiny and organize local famine victims to ally with them in rebellion. 136



This story should not surprise us, given its remarkable similarity to the war veteran thought to have provoked the first secession in Rome.



There can be little doubt that interest rate caps were a significant improvement over the violent and chaotic markets of our earliest civilizations. As a social policymaking strategy, interest rate caps combined with other lending format restrictions have endured at least since the Code of Hammurabi and are still in effect throughout much of the United States and the modern world. Nevertheless, the experiences of Rome and China begin to show the limitations of the policy. Interest rate caps and other lending format restrictions presume to prevent mutually agreeable contracts. Effective policing of these rules requires more resources than most societies are willing to spend. Although extremely different societies have chosen the "oldest continuous form of commercial regulation[,]" interest rate caps and similar format restrictions have traditionally garnered limited success in curbing harmful consequences of high cost lending. 137 The policy has also cultivated black-market cultures which have come to threaten the very foundations of otherwise successful dynasties.



C. Separating "Us" from "Them": Selective Protection Strategies



While some societies have attempted to separate harmful loans from beneficial credit, others have attempted to separate individuals "deserving" of protection from those who are not. This strategy of selective protection is as old as that of interest rate caps. The best example of its evolution is [*828] found not far from Babylon in ancient Israel. Unlike Babylon to the East, which had a long tradition of monarchy, the Hebrew culture was tribally organized prior to roughly the first millennium B.C.E. 138 The Hebrew people were seminomadic in small ranges near towns, relying on herding domesticated animals and occasional farming. 139 They lived both in tents and in houses. 140 Having settled on the land bridge between Africa and Asia, the Hebrew culture was subject to invasion from many directions and by many peoples. 141 From early on, Hebrew culture developed a strong sense of tribal unity and cooperation in order to compete with outside threats. 142



The early Hebrew laws concerning high-cost lending reflect this sense of tribal unity, by extending legal protection only to other Hebrews. Deuteronomy, which describes Yahweh's laws as delivered by Moses (probably around the 13th century B.C.E.), states:



You shall not charge interest on anything you lend to a fellow-country-man [l'ahika], money or food or anything else on which interest can be charged. You may charge interest on a loan to a foreigner [nokri] but not on a loan to a fellow- country-man, for then the Lord your God will bless you in all you undertake in the land which you are entering to occupy. 143





Thus, the Hebrews took action to prevent corrosion of community bonds and to provide at least some outlet for the wealthy to lend excess capital. Protection against the dangers of owing interest to rival outsiders was probably an added benefit in the competitive inter-tribal anarchy which characterized the ancient East Mediterranean coast. Moreover, by simply banning interest within the Hebrew community, the rule probably had lower administrative costs than those legal systems forced to distinguish between legal and illegal loans on the basis of interest rate caps. Recently two economists described the likely role of the Hebrew [*829] rules as trying "to make sure that individuals did not reduce themselves to a level of poverty, where they would be burdens on the community." 144



Not surprisingly, the Hebrew injunction against charging any interest to other Hebrews was followed infrequently. 145 The story of Nehemiah is enlightening in this regard. By the 5th century B.C.E. the Persian empire dominated Israel. 146 During the reign of Artaxerxes I (464- 424 B.C.E.), Nehemiah, a Jewish cup bearer to the King, was appointed governor of Jerusalem. 147 Nehemiah tells his own story in his rare, first person dictated book in the Old Testament. 148 Apparently arriving in 445 B.C.E. from the Persian capital of Susa, Nehemiah organized the rebuilding of the walls around Jerusalem. 149 Nehemiah instituted a number of reforms directed at high- cost lending: 150



There came a time when the common people, both men and women, raised a great outcry against their fellow-Jews. Some complained that they were giving their sons and daughters as pledges for food to keep themselves alive; others that they were mortgaging their fields, vineyards, and houses to buy corn in famine; others again that they were borrowing money on their fields and vineyards to pay the king's tax. "But," they said, "our bodily needs are the same as other people's, our children are as good as theirs; yet here we are, forcing our sons and daughters to become slaves. . . ." I was very angry when I heard their outcry and the story they told. I mastered my feelings and reasoned with the nobles and the magistrates. I said to them, "You are holding your fellow-Jews as pledges for debt." I rebuked them severely and said, "As far as we have been able, we have brought back our fellow-Jews who had been sold to other nations; but you are now selling your own fellow-countrymen, and they will have to be bought back by us!" . . . "What you are doing is wrong . . . . Let us give up this taking of persons as pledges for debt. Give back today to your debtors their fields and vineyards, their olive-groves and houses, as well as the income in money, and in corn, new wine and oil." "We will give them back," they promised, "and exact nothing more. We will do what you say." So, [*830] summoning the priests, I put the offenders on oath to do as they promised. . . . And they did as they had promised. 151



There is no independently corroborating evidence of Nehemiah's actions. 152 One historian interprets Nehemiah's credit reforms as similar to earlier acts of Sumerian and Babylonian Kings who granted amnesty to those sold into slavery for debt. 153 Although Nehemiah's reforms did not fundamentally change the Hebrew rule in Deuteronomy, they do shed light on its social operation. It would seem that, without strong leadership, early Hebrews lent and borrowed from one another with serious social consequences in spite of the injunction in Deuteronomy. 154 Moreover, from a contemporary American perspective, the racial orientation of the strategy is unadaptable to a democratic society committed to equal protection. Historically, it is unclear whether the moneylenders' new-found filial charity derived from Nehemiah's exhortations had any enduring effect. Most scholars doubt that the situation facing Hebrew debtors significantly changed for at least another three hundred years. 155 Their lot probably only improved when the Hebrew Hasmonean state expanded, making foreign poor people a suitable substitute for religiously protected Hebrews. 156



Many other cultures have used formal and informal mechanisms to protect favored groups from the consequences of high-cost debt. For instance, the Indian Dharmasastras provides for different interest rates varying with the caste of the debtor. 157 Under the rule, lenders provide much lower rates to Brahmins than other caste members, without regard to the personal credit history of the individual. 158 While selective protection strategies may have some success for protected group members, they also [*831] probably encourage class division and racism. Despite egalitarian pretensions of the United States, as we shall see, this strategy too was later imported to the new world.



D. Everyone for Themselves: Self-Help Free Markets



While the earliest high-cost credit policy strategies attempted to prevent or remedy undesirable credit outcomes through government or religious rules, later strategies began, in one way or another, to harness market forces. While microeconomic theory as we currently recognize it did not begin to develop until the eighteenth century, social and governmental strategies for mitigating the problems associated with high-cost debt began to recognize the benefits of relying on market forces much earlier. Reforms adopted in the surprisingly liberal society of ancient Athens are illustrative. At the zenith of its power and cultural sophistication, ancient Athens had "no law restricting the rate of interest." 159 Foreshadowing the economic arguments of thinkers such as Adam Smith, Jeremy Bentham, and David Ricardo, Athenian culture focused on individualism, personal responsibility, and balance in determining economic outcomes. 160



The story of how Athenians arrived at this approach probably starts around the beginning of the 6th century B.C.E. At this time, Athenian society had intensely polarized. Recent advances in trading throughout the Mediterranean, the growing use of coined money, and competition from free slave labor had put pressure on subsistence farmers around Athens. 161 Credit was already common and took on many different forms: some credit was secured by land, but often it was secured by the freedom of the debtor where, similar to other early civilizations, default meant slavery. 162 The gap between rich and poor became so wide that revolution threatened. 163 Although this situation was complex, early writers are universal in their agreement that the primary cause of the crisis was high-cost debt. 164 One historian summarizes the situation thus:



Solon tells us plainly of the overt abuses in his own day. A large part of the soil of Attica had come into the possession or at least under the control of the rich; many Athenians were [*832] suffering under a load of debt; some of these debtors, helpless to relieve themselves, had been forced into exile and had been living so long abroad that they had forgotten the good Attic speech; others, free-born though they were, had become slaves; and of these many had been sold into slavery abroad and so were in the worst case of all. Broadly speaking, the land and the greatest part of its products belonged to the rich; and the poor were constrained to toil for them as their slaves without mercy or redress. Here were causes enough for bitterness and discontent. While the rich enjoyed their ease and all the luxuries and comforts that the times afforded, the poor were condemned to a life of hopeless drudgery at home or the worst of evils in the ancient world, exile in a foreign land. 165



To stave off collapse of the city-state, the community appointed the poet and orator Solon, later called the father of Athenian law, to unilaterally rehabilitate its government. 166 The situation must have been very grave judging by the radical character of Solon's reforms and their acceptance. 167 Solon took several one-time measures to stabilize the situation including canceling or reducing many debts, freeing all enslaved for debt, and repurchasing those sold abroad for debt at state expense. 168 Solon also permanently outlawed enslaving defaulting debtors. 169 But this relief came at a price, for Solon is attributed to the law, "[m]oney is to be placed out at whatever rate the lender may want." 170



Solon's deregulation encouraged Athenians to rely on their own judgment. 171 Unregulated interest rates reflected Athenian commercially- oriented values. 172 Historians speculate it was this deregulation which helped creditors accept Solon's reforms. 173 In any case, the changes appear to have had a lasting and generally positive effect on the Athenian society. Unregulated credit prices proved effective in encouraging the finance of maritime trade. 174 "Bottomry loans," where a creditor advanced maritime traders the value of the ship's cargo before a voyage and assumed the risk [*833] of shipwreck, played a vital role in Athenian trade. 175 Lenders could invest in shipping loans at whatever price the risks of the voyage demanded. 176 Merchants engaging in risky, long distance trade could shop for high-priced loans from respectable law abiding creditors, rather than black market money lenders. 177 One scholar emphasizes that in Athens, credit was more often used to the mutual benefit of people in similar economic situations, as opposed to lending by the rich to the poor-common in most of the ancient world. 178 Athens developed a banking system which "changed money, received deposits, made loans to individuals and states, made foreign remittances, collected revenues, issued letters of credit and money orders, honored checks, and kept complete books." 179 Although lending did not develop to modern standards of complexity, it nevertheless had its own kind of sophistication which was fundamental to sustaining the ancient Athenian lifestyle. 180



But, for the poor and unwary, the historical record tells a different story indeed. Unregulated credit prices allowed unscrupulous lenders to charge the highest rates to those in extreme need. 181 In this period we find some of the most expensive loans in recorded history-as high as 9,000% per annum. 182 Borrowers probably intended these loans, like most high-cost loans, to be short term, but they were nevertheless often compounded over long periods of time. 183 Creditors were free to calculate interest in whatever way they chose, probably charging interest compounded at frequent intervals. 184 Because high-cost lending was so profitable, a class of creditors catering to the vulnerable poor and ignorant grew and thrived. 185 High-cost lenders became prevalent enough to create a deep and lasting influence on Greek drama and literature and an ancient variety of modern loan sharks became a typical character in Athenian plays. 186 Perhaps it was the dramatic social pain associated with expensive debt which induced contempt for lending by two of the world's greatest philosophers. We should not underestimate that both Plato and Aristotle, observing the effect of unregulated interest rates on their society, concluded that all interest [*834] should be banned. 187 Plato, for example, condemns lenders for "'planting their own stings into any fresh victim who offers them an opening to inject the poison of their money; and while they multiply their capital by usury, they are also multiplying . . . the paupers.'" 188



The Athenian credit market is emblematic of the free market strategy for controlling the harmful consequences associated with high-cost lending. Moreover, it mirrors much of the debate concerning credit regulation today. Athens stands as an example that since ancient times unregulated interest rates (with basic limitations such as the elimination of debt slavery) could be socially and economically productive. Yet, modern advocates of free market lending should also stand warned that unrestricted interest rates left sophisticated lenders free to exact ruinous contracts on those in vulnerable bargaining positions.



E. Give Them What They Want: Charitable Lending



Even societies deeply committed to controlling credit markets have come to realize the benefits of harnessing market forces in designing social policy. A fifth strategy, still often used in contemporary America, looks to undercut high-cost lenders by offering cheaper, less dangerous loans subsidized by the charitable impulses of powerful social or government institutions. An early example of the use of this strategy to control the harmful consequences of high-cost debt evolved in late fifteenth-century Italy. Influenced by Aristotelian contempt for credit as well as the ancient Hebrew impulse to protect vulnerable group members, medieval Roman Catholic religious doctrine strongly condemned taking any interest. 189 Most historians agree that the prejudice fundamentally retarded commerce. 190 Merchants had difficulty devising strategies to finance business ventures. 191 Throughout the middle ages the poor were afflicted by extreme poverty, due in no small part to the lack of strong international and domestic trade. 192



But toward the end of the fifteenth century, things began to change. The threat from the black death improved considerably. 193 Increased international and domestic trade invigorated the economy. 194 The printing press was invented. 195 Eventually the ideological grip of medieval [*835] scholasticism finally began to loosen. 196 Questioning the wisdom of their outright interest ban, Italian religious and secular authorities began to search for new ways to alleviate the suffering of the poor. Black market money lenders and pawnshops catering to the desperate poor had long existed in spite of religious condemnation. 197 In this period many Italian leaders came to agree that small loans to the poor were inevitable and even necessary to save those in extreme need. 198



As a result, religious leaders established charitable pawnshops which intended to charge only enough to cover costs of operation. 199 Called mons pietatis, such pawnshops met much controversy, but nevertheless found Papal approval at the Fifth Lateran Council in 1515. 200 The term translates literally as "mountain of piety." 201 Appropriately, the Latin word for mountain often carries a loose proverbial reference to making large promises followed by small performances. 202 Papal authorities reasoned that where the montes pietatum charged more than the original principal they were not receiving usury but, rather, contributions to defray operation costs. 203



The montes pietatum offered key theoretical advantages which may explain their acceptance in the face of strong opposition from many Catholic thinkers. Rather than simply prohibiting certain types of loans, the montes required no one to do anything against their will, thereby eliminating the risk of motivating a black market. 204 By offering cheaper credit to the poor, the montes harnessed the market force of demand to put [*836] private lenders out of business. 205 Debtors had no reason to pay the high prices of traditional pawnshops, since they could obtain money from a more trustworthy source at a lower price. 206 It is probably exactly these reasons which have fed charitable attempts to undercut private lending throughout history.



Harnessing these market forces, the montes pietatum did find some success. By 1509, eighty-seven of these pawnshops had been set up in the Italian peninsula. 207 Over the next two centuries the idea spread throughout the continent under sponsorship of the church, municipalities, and independent charities. 208 As the Catholic church lost influence, many of the montes failed, but others were taken over by municipal governments. 209 A few of the largest and strongest still exist today. 210



Unfortunately, the montes pietatum and strategies like them have faced several drawbacks in spite of their visionary appeal. First, charitable attempts to undercut private lenders such as the montes pietatum are subject to the tides of ideological fashion, whereas private lending is supported by the inexorable and constant desire for profit. For instance, the most vocal advocates of the montes at their outset were the Franciscan Observant Order of Friars. 211 Their charitable motives where at least supplemented and possibly dominated by their demagogic antisemitism. 212 "Paced by Bernardino da Feltre (d. 1494), the Observantine preachers regurgitated the oft-discredited charges of ritual murder, incited mobs to attacks on Jewish life and property, and harangued the people and their magistrates to destroy the Jews . . . ." 213 The noble intentions of early administrators of the montes were polluted by the desire to drive Jewish pawnbrokers from business and from Italy itself. 214 Whether the montes would ever have grown from infancy without the fuel of racial hatred is unclear.

[*837]

Charity is also easily corrupted on a much smaller level, and often with spoiling consequences. English attempts to institute charitable pawnshops in the early 1700s are illustrative. The first major charitable pawnshop to appear in England, the Charitable Corporation, was founded in 1699, and chartered in 1707. 215 It operated without incident for about thirty years "until rumors that huge amounts of money were being embezzled on the basis of fictitious pledges began to gain credence." 216 After Charitable Corporation officials fled the country, an enormous scandal ensued creating a long standing public mistrust against charitable alternatives to pawnbrokering in England. 217 Lamentably, in consumer credit as elsewhere, the motivation of charity is rarely more contagious than hate or greed.



A separate drawback to charitable attempts to displace private lenders derives from private lenders' desires not to be displaced. Obviously pawnbrokers resent attempts by government or charitable institutions to drive them out of business. This resentment may be more acute where the social reformers engage private lenders in subsidized competition, rather than instituting uniform command and control style rules such as interest rate caps. The former attack private lending at the root of its business-the demand for credit-whereas the latter merely regulates the way business may be conducted. Such private opposition to charitable lending often stifles charitable lending institutions in their infancy. A hundred years after the Charitable Corporation debacle, British reformers again tried to organize a charitable pawnshop, which again met with failure. 218 This time private lenders organized a strong resistance aimed at government, investment, and customer levels. 219 The opposition proved so effective as to convince one disgruntled ex-pawnbroker to state:



A little more mature reflection convinced us that a few individuals with a limited fund could not hope to withstand for more than a very short period the opposition of a body so powerful their in number, their riches, and their union as the pawnbrokers of the Metropolis, and that if a successful competition should ever be established against them it must be by a body as numerous, as rich, and as united as themselves. 220

[*838]

This opposition was not merely for the purpose of mobilizing support and resources for charitable lending projects. It is easy to imagine private pawnbrokers strategically engaging in marketing and price campaigns to drive vulnerable charitable lenders, who still required customers to pay overhead, out of business. But even where private lenders do not intentionally besiege charity credit, benevolent lenders usually advocate thrift and are unwilling to encourage indebtedness, thus carrying a much lower profile and in turn a smaller base of customers. Charitable lending strategies have historically lacked the profit-driven zeal to successfully compete with private lenders.



However, the most formidable obstacle faced by charitable lending regimes is mobilizing sufficient capital resources. This problem is also doubtlessly engendered by the opposition of private lenders, but is still a menacing limitation to the strategy in its own right. Even the earliest of the montes pietatum, founded at the headwaters of the social current creating the most successful of Europe's charitable pawnshops, often found accumulation of capital reserves for their non-profit venture prohibitive. 221 Wealthy Christians, despite the considerable religious pressure towards charity exerted by the fourteenth-century Italian Catholic church, were simply unlikely to invest in the montes. 222 Although some of the montes survived past infancy, quite simply, "many suffered or failed from undercapitalization." 223 Without profit there is little or no incentive to supply the necessary assets to conduct charitable lending on any meaningful scale.



Advocates of this strategy often turn to government to help mobilize the capital when they realize the support of private beneficiaries is inadequate. A noted British scholar has concluded, based on failed British attempts to establish charitable lending, that governmental support is a virtual prerequisite to any meaningful success. 224 However, successful governmental rent-seeking behavior is costly, inconsistent, and unpredictable, especially when opposed by powerful, organized private lobbies. While the supply of expensive capital for consumer lending has continued unabated for millennia, the supply of governmental subsidies for low- cost loans to the poor has been meager and sporadic. 225 Governments, almost always controlled by the society's power elite, face the same absence of incentive to provide charitable lending to the poor as private [*839] citizens. 226 Additionally, government strategies are burdened in stimulating lower-priced loans by the costs of immobile bureaucracy and tax collection. 227



The limitations of charitable attempts to undersell private lenders aside, this strategy nevertheless has retained advocates and limited successes for centuries-and for good reason. The strategy harnesses the demand for lower-price loans to extend protection to vulnerable debtors. Unfortunately, as the montes pietatum demonstrated, these successes are limited by serious structural problems, particularly supply problems, which have come to afflict similar American strategies in the twentieth century.



F. Strength in Numbers: Cooperative Lending



For thousands of years, families have extended low-cost and non-interest bearing loans to family members to insulate the family from the dangers of high-cost debt. 228 This informal cooperation can be an effective method of pooling a small and trusted group's resources to overcome short term deprivation and income shocks. However, the potency of this familial cooperation is limited by the size of the family's resource pool, as well as by the strength of the familial bonds tying the group together. In eighteenth- and nineteenth-century Europe, some groups began to expand and organize this cooperative lending strategy. The earliest formally organized cooperative lending groups were probably the British building societies. In the late eighteenth and early nineteenth century, Great Britain was in the nascent stages of industrialization and undergoing a revolution in financial markets. 229 A new class of urban salaried industrial workers was emerging. 230 Demographic shifts from rural agricultural work to urban industrial work contributed to widespread housing shortages. 231 The enlightenment fostered a new focus on self-help and entrepreneurialism. 232



Seeking to cope with the industrial revolution, a small group in Birmingham innovated a new way of pooling resources to purchase homes. 233 In 1775, a small club, Ketley's Building Society, formed with the [*840] purpose of pooling resources to purchase homes for members of the club. 234 None of the members alone were able to gather enough cash to cover the cost of building a new house. 235 In the newly formed club, members could contribute a specified amount each week into a common building fund. 236 As soon as enough resources were gathered, the club would purchase land and build a home for one of the members as determined by lot. 237 Members who had received their home were obligated to continue making their weekly contributions. 238 When the club had purchased a home for every member, the society was terminated. 239 Although the first Birmingham building society and the others which followed were limited to providing purchase money for home building, they nevertheless furnished their members with the ability to permanently acquire relatively inexpensive credit. 240 After a group member acquired a home, the member would have significant real property upon which to secure relatively low-cost loans to overcome short term needs or income shocks. 241 By establishing a building society, a group could insulate member families, and in turn entire neighborhoods, against financial predators. 242



As Germany began to experience the same structural precedents which spurred British building societies, it too developed organized cooperative lending institutions. Unlike British building societies, German institutions did not limit themselves to financing homes. 243 Modern credit unions trace their genealogy to two upper-middle class German financial innovators. 244



Herman Schulze, mayor of the town of Delitzsch, sought to create an institution which could lend capital to mechanics, tradesmen, and other local merchants. 245 After unsuccessfully pursuing charitable investments from wealthy benefactors, in 1850 Schulze turned to organizing cooperative societies which would pool resources. 246 These early Schulze-Delitzsch credit cooperatives sold shares, then lent the proceeds to [*841] members who could demonstrate efficient operation and a likelihood of profit for their small businesses. 247 Members bought their share in the union on an installment plan, similar to British building societies' weekly investment requirement. 248 Because every member of the union shared equally in the risk that a borrowing member might default, Schulze-Delitzsch organizations excluded all but relatively stable small merchants from membership. 249



Frederick William Raiffeisen, mayor of the village of Flammersfeld, organized similar cooperatives hoping to focus not on merchants, but on impoverished families. 250 After many failed ventures, Raffeisen forswore all charitable efforts and instead focused on self-sufficiency and mutual benefit. 251 Thereafter, he limited membership to individuals with unimpeachable character, widely vouched-for moral responsibility, and steady incomes, with successful results. 252 With careful management, both men organized credit unions which successfully loaned money not based on collateral, but upon the character of the borrower as judged by all other members of the union. 253 With widespread and growing demand for these basic financial services, the early German credit unions grew quickly. 254 By 1882, Germany boasted over 3,000 Schulze-Delitszch credit cooperatives. 255 By 1888, there were 425 Raffeisen credit unions. 256 Taking cue from British and German predecessors, cooperative credit organizations spread to Italy, Austria, France, Belgium, and then throughout Europe. 257 Organized cooperative lending spread across the Atlantic first into Quebec, Canada and then into the United States. 258 In the latter half of the nineteenth century and throughout the twentieth century, cooperative lending institutions grew rapidly both in variety and in number throughout the western world. 259

[*842]

Nevertheless, when viewed as a strategy for providing protection against the dangers of high-cost debt, cooperative credit organizations have, like other social strategies, encountered significant structural limitations. For instance, vulnerability to fraud and incompetence tends to make cooperative lending institutions unstable. Cooperative credit organizations have a strong incentive to add more members, and thus pool more resources. More members mean each member suffers less loss upon loan default. But as the union's membership grows, losses may become more likely, since members are less capable of judging the credit worthiness of individual members applying for loans. Moreover, the larger the group, the more conflicting perspectives to accommodate.



Thus, as cooperative lending groups became larger, they were forced to adopt democratic ideals and management checks and balances in order to safeguard the common pool of funds. For instance, the New World's first credit union, the Caisse Populare in Quebec, organized trustees into different committees to oversee the operation of their credit union. 260 Some members were assigned to a conseil d'administration which watched over the day-to-day affairs of the union, while the commission de surveillance was responsible for guaranteeing the books were properly kept. 261 The spirit of cooperation was essential because those with oversight responsibilities were ineligible to receive loans in order to avoid conflicts of interest. 262 And, unlike commercial banks, trustees received no compensation. 263 While these policies and their natural outgrowths, such as salaried professional management, have made large-scale cooperative lending possible, they have not succeeded in eliminating the risks. As the 1980 savings and loan scandal made clear, cooperative lending may be as vulnerable to fraud and mismanagement today as it was two centuries ago.



But, perhaps more importantly, cooperative lending by its nature tends to exclude those who are in most desperate need of its advantages. From the beginning, organized cooperative lenders have rigorously limited their membership to those with common bonds and relatively stable financial backgrounds. The first British building societies confined membership to groups of no more than twenty close neighbors and friends. 264 Many German cooperatives required costly entrance fees which functionally excluded undesirable members. 265 Early Quebec credit unions excluded all but respected French speaking Catholics and garnered community support [*843] with anti-Semitic hate speech. 266 Moreover, many potential members who met the racial, religious, and character prerequisites of cooperative credit did not meet formal and informal financial requirements. 267 It took little time for cooperative lenders to recognize that impoverished applicants had nothing to offer other members in the way of mutual benefit. 268 These applicants sought not cooperation but charity, and were therefore excluded.



III. Echoes of the Past: High-Cost Consumer Credit Policy in the United States



The United States has permutated variations of each of these major high-cost consumer credit policy strategies. Debtor amnesty, interest rate caps and other contract restrictions, selective protection, deregulated free markets, charitable lending, and organized cooperative lending have all been used by American policymakers for at least a century. However, American high-cost consumer credit policy has materialized obedient to no logical pattern, instead tracking the twists and turns of history and cultural change. This Part briefly surveys this evolution by focusing on the recurrent strategic limitations which have plagued our imported high- cost credit policy strategies. This Part also discusses the radical cultural revolution in middle-class American values with respect to consumer credit.



A. High-Cost Consumer Credit Policy Prior to 1900



European colonies in North America established their first laws dealing with high-cost credit following the English system of the time. 269 The basis for most modern state usury laws comes from imported English interest rate cap statutes. In particular, the colonies applied the Statute of Anne, which set a maximum allowable interest rate of five percent per annum. 270 The Statute of Anne, passed in 1713, was deeply influenced by receding but still influential medieval predispositions against the taking of interest: "[t]he statute[] . . . bear[s] witness to the Church's continued prejudice against the practice of usury in any form." 271 Specifically, the statute forbade charging interest "above the value of five pounds for the [*844] forbearance of one hundred pounds for a year." 272 The statute attempted to send a strong message of deterrence by including a damages provision establishing a fine which was triple the amount lent for charging above the five percent cap.



[A]ll and every person . . . which shall . . . receive . . . payment for one whole year, of and for their money or other thing, above the sum of five pounds for the forbearing of one hundred pounds for a year . . . shall forfeit . . . the treble value of the monies, wares, merchandizes, and other things so lent. 273



The basic interest rate caps of the colonies and (after independence) the States, modeled on the Statute of Anne, formed the backbone of attempts to control harmful consequences of high-cost lending in the United States. The caps set interest rate ceilings at different levels ranging between four percent and ten percent. 274 After independence, most states set their maximum interest rates at six percent. 275 Many of these interest rate caps, now called "general usury laws," have survived in one form or another until today. 276 The colonies also fashioned debt enforcement laws in the English pattern, which strongly favored creditors. 277 States at times would raise or lower their ceilings. 278 In 1867, Massachusetts followed the lead of England and other European countries in abolishing its interest rate cap. 279 A few states in turn followed Massachusetts. 280 Nevertheless, the legislative approach of low interest rate caps was relatively stable, normally encountering only mild tampering. "With very few exceptions, general usury laws were the only statutes regulating credit costs in the United States prior to the twentieth century." 281 The simplicity and durability of the early State interest rate caps echos many historical precedents. Thus, the American "combination of rigorous enforcement of debt and legal maximum rates of interest comes down from Hammurabi [*845] through Rome, through seventeenth-century England, to the modern United States." 282



1. The American Thrift Ethic



Culturally, Americans viewed debt supporting commerce as necessary and enterprising, but conversely placed a large social stigma on borrowing for personal consumption purposes. 283 One author in 1838 explained widespread American comfort with commercial lending in terms of personal trust:



As the credit system is the offspring of confidence, and as no man reposes confidence where he deems it likely to be abused, the existence of this extensive and universal system of credit may be taken as evidence of a general belief among those who have commodities for sale, that those who desire to obtain them, have the disposition, and will have the means of paying for them, in such manner and at such times as may be agreed upon. 284



This focus on confidence is enlightening in regard to the reluctance of mainstream commercial lenders to extend credit for consumption purposes. Quite simply, unlike commercial debtors, consumption borrowers were not trusted. 285 The papers of Benjamin Franklin reveal popular thinking about individuals who borrowed for consumption purposes:



Think what you do when you run in Debt; You give to another Power over your Liberty. If you cannot pay at the Time, you will be ashamed to see your Creditor; you will be in Fear when you speak to him; you will make poor pitiful sneaking Excuses, and by Degrees come to lose your Veracity, and sink into base downright lying; for, as Poor Richard says, The second Vice is Lying, the first is running in Debt. . . . Poverty often deprives a Man of all Spirit and Virtue: Tis hard for an empty Bag to stand upright . . . . The Borrower is a Slave to the Lender, and the Debtor to the Creditor, disdain the Chain, preserve your Freedom; and maintain your independency: Be industrious and free; be frugal and free. 286

[*846]

But in spite of strong social messages against personal debt, especially debt at high prices, "[h]igh rates no doubt existed in commercial and personal transactions. But high interest rates were vigorously opposed by colonial law and custom and were therefore negotiated secretly . . . ." 287 Low interest rate caps reflected this cultural norm. 288 It was not possible for lenders to make a profit from short term loans of small amounts without charging rates in excess of the legal limits. 289 Accordingly, normal citizens generally could not purchase the use of money from legal lenders. 290 In this way, the law acted as an agent of socialization against all borrowing for consumptive purposes.



The American thrift ethic stifled development of debtor amnesty policies. Defaulting debtors, particularly consumer debtors, found little public sympathy. 291 In addition to interest rate caps, colonists also imported English debtor prisons. 292 Imprisonment for debt was surprisingly common in the eighteenth and early nineteenth centuries:



Thus, in 1830, there were in Massachusetts, Maryland, New York, and Pennsylvania three to five times as many persons imprisoned for debt as for crime. The Suffolk County Jail in Boston alone for the decade 1820-1830 contained 11,818 imprisoned debtors from a total population ranging from 43,000 to 63,000. 293



Although some states pushed for reform in the 1830s, debt peonage was not federally outlawed until after the Civil War. 294 Northern states only felt compelled to outlaw debtor prisons when Southern whites began circum-venting emancipation with debt peonage. 295



Gradually, the bankruptcy system evolved to become the primary mechanism of providing American debtor amnesty. Throughout Europe, the earliest bankruptcy rules were exclusively creditor collection remedies which provided virtually no protection for debtors. 296 It was not until 1706 [*847] that short-lived English bankruptcy law included discharge of a limited number of debts for a limited number of debtors. 297 Nearly a century later in 1800, the United States adopted its first bankruptcy law. 298 Like early American interest rate caps, debtor amnesty provisions included in early American bankruptcy laws bear a surprising resemblance to their ancient Mesopotamian predecessors. Like the occasional Sumerian and Babylonian royal decrees forgiving debts for favored subjects, nineteenth century American bankruptcy debtor amnesty rules responded to financial crises, were short lived, and were capriciously limited in scope. 299 For example, a financial panic spurred the 1800 Bankruptcy Act, which was repealed in only three years. 300 While the act included narrow provisions providing for discharge of some debts, only merchants were eligible. 301 And, while the law allowed release from debtor prison for those obtaining discharge, there is some evidence that only the relatively influential consistently acquired this amnesty. 302 For instance, Robert Morris, a member of the Constitutional Convention and a prominent financier, managed to liberate himself from a Pennsylvania debtor prison. 303 Those without such prominence were not so lucky. 304



Our second and third bankruptcy rules were similarly inconsistent in providing amnesty for imprisoned and defaulting debtors. The Bankruptcy Act of 1841, which became effective in 1842, was promptly repealed in 1843. 305 Perhaps contributing to its short life was the controversial innovation of extending limited debt discharge rights to non-merchant debtors. 306 The post-Civil War economic crisis spawned the relatively enduring Bankruptcy Act of 1867. 307 It also provided limited debt discharge rights, but survived for less than a decade. 308

[*848]

2. The Origin of American Selective Protection: Our Tradition of Credit Discrimination



The American credit culture prior to the twentieth century only can be understood against a backdrop of formal and informal discrimination against non- European races and women. This fact is easily overlooked given the stark absence of treatment of race and gender in most financial and credit histories. For example, a discussion about credit for African-Americans prior to the Civil War can only be dominated by the institution of slavery. Rather than asking whether credit was available to slaves, scholarship often focuses on how slaves were used to secure credit for their European captors. 309 It is naive to suspect that after emancipation equal access to inexpensive credit became easily available for African- Americans. At the end of the Civil War, over ninety percent of blacks lived in the South, where the white elite was determined to preserve as many of the economic aspects of slavery as possible. 310 African-Americans usually had no resource to provide for themselves besides their own labor. 311 High-cost credit played an important role in perpetuating the power of white elites. A large portion of the black population found sustenance in sharecropping, which relied on a cycle of poverty and debt to enforce the subordination of black workers. 312 Sharecroppers received no pay for their work until the sale of the crop at harvest time. 313 With no available cash source, black agricultural workers were forced to turn to high-cost credit to survive. 314 Interest rates on supplies and money loaned to Southern blacks were high, often exceeding fifty percent. 315 When the farming season ended and black workers sold their share of the crop, there were rarely enough proceeds to cover debts from the previous season. 316 Thus, sharecroppers were forced to borrow again year after year, each time [*849] hoping that the next crop would allow them to pay off their debt and perhaps save a little extra money. Moreover, white landowners and creditors often cheated black workers. In Texas, for example, the widespread practice of shutting out black workers without compensation immediately before harvest, after they had farmed the entire agricultural season, found judicial sanction in the courts. 317 Very few African-Americans were resourceful enough to gather enough cash and credit to purchase their own farms, hence almost all black agricultural workers faced lives of gripping poverty exacerbated and entrenched by high-cost lending. 318



Similarly, it is somewhat futile to speak of access to credit when women had neither governmentally recognized, protected property rights, nor the right to vote. In American history, access to credit for women was often a function of their relationships to men. 319 The ability to borrow requires a creditor's trust that the debtor will be able to raise and turn over the amount loaned plus interest. Because women were excluded from the basic mechanisms of the market economy, they could not consistently guarantee repayment without enlisting in some way the cooperation of a male. Where women did try to borrow, their exclusion from lower- priced lenders forced them to turn to pawnbrokers or other high-cost lenders, often with "devastating effects upon a family's real income." 320 The story of one New York single mother is illustrative:



Mrs. Zulinsky . . . one day found that her entire life's savings of six hundred dollars had been stolen from her mattress. Charity could not support three children, so Mrs. Zulinsky was forced to become, in the slang of the day, "a furniture dealer." Her table, her two beds, all her chairs, and "even the marble clock surmounted by a bronze horseman armed with a spear" were hauled down to the pawnshop and "put up the spout." When night fell, Mrs. Zulinsky's family was "sitting on boxes and sleeping on the floor," but the immediate emergency had been bridged. 321



Throughout the nineteenth century approximately three quarters of pawnbroker customers were women, usually borrowing at rates around 300% per annum. 322

[*850]

3. The Rise of Salary Lending



High-cost consumer debt was by no means limited to ethnic minorities and women. By the latter half of the nineteenth century, there was an upsurge in lenders catering to a clientele of married, working class, white men with steady jobs. 323 These creditors, known as salary lenders, 324 were the precursor to today's payday lenders. Their borrowers "were frequently regular employees of large organizations: government civil servants, railroad workers, streetcar motormen, and clerks in firms such as insurance companies." 325 Such workers, often recent immigrants or former agricultural laborers, formed the foundation of the emerging lower middle class of urban American society. 326 For the lender, they represented good credit risks. These men usually borrowed to meet unexpected needs such as family illness or moving expenses. 327 Nevertheless, they held steady jobs and had family obligations which prevented them from skipping town. 328 High-cost lenders targeted such workers because they had a steady supply of disposable income which made them likely to repay. 329 Moreover, frequent minor income shocks made the workers likely to borrow. 330



It was these high-cost lenders whom working class people in the Eastern U.S. cities first came to describe as "loan sharks." 331 Although the term was new, the tactics of the lenders were not. Initially, these loan sharks charged very high interest rates. 332 In fact, rates in excess of one thousand percent annually were common. 333 Reminiscent of high-cost loans in ancient Athens, principal amounts were generally small, and due in a short period of time. 334 But, very often the loans would end up compounding over great periods of time. 335 The records of one salary lender in New York City showed that out of approximately 400 debtors, 163 had been making payments on the loans for over two years. 336 Nor was the length of these loans merely a result of the debtor's unwillingness or [*851] inability to pay. The most essential characteristic of these early salary lenders, and perhaps all loan sharks in general, was the tendency to manipulate loans into "chain debt." 337 This was accomplished by a broad variety of means. The first and perhaps most important were late fees, which were often assessed even where the creditor was only minutes or hours late. 338 Commonly, creditors "deliberately maneuvered a borrower into a late payment, by falsely suggesting that a late payment would be overlooked or by claiming that a payment sent by mail arrived after the payment deadline." 339 It is easy to imagine the incentive a salary lender might have in closing shop early on a Friday afternoon when working customers might rush in to make a last minute payment. Sometimes, individual late fees were nearly as much as the principal itself. 340 We can expect that other tactics reflected those used throughout history, including "creative" calculations of the interest, a broad assortment of other fees (such as origination fees, collection fees, broker fees, pledge storage fees, and insurance fees), and refinancing induced by balloon payments. The key in chain debt is for the lender to collect the most money while reducing the amount owed to as little as possible. 341



In a typical transaction, a debtor would borrow five dollars on Monday, and repay six on Friday. 342 This 20% per week loan translates into a 1040% per annum rate. 343 African-Americans borrowing in the South were often charged rates twice as high in the same type of transaction, where a loan of five dollars was repaid with seven at the end of the week. 344 The charge of one or two dollars itself seems fairly innocuous for any one given week. But, when a debtor lost a job, was not paid for his work, became ill, had a family member become ill, or was prevented from paying for any other reason, the simple transaction rapidly swelled into an enormous drain on an already strained budget.



Profits from extended-term salary lending fueled the late nineteenth-century upsurge in high-cost lending. 345 As the industry grew, so too did the horror stories, often the only circulated evidence of what was becoming a crisis. Moreover, the surge in high-cost lending would significantly contribute to a transformation in American culture:

[*852]

There was, for example, the employee of a New York publishing house who supported a large family on a salary of $ 22.50 per week and had been paying $ 5 per week to a salary lender for several years, until he had paid more than ten times the original loan. Or the case of a Chicagoan who borrowed $ 15, paid back $ 1.50 per month for three years before fleeing the city to escape the debt. Or the case of a streetcar motorman who, in 1912, had seventeen Chicago loan companies attempting to collect $ 307 on an original loan of $ 50 after he had already paid $ 360. Or the claim of another Chicago borrower that he had borrowed $ 15, ten years later had repaid $ 2,153 and still owed the original $ 15. 346



In this period, pawnbrokers also grew quickly alongside salary lenders. In 1812, New York City had ten licensed pawnbrokers, but by 1897 the number had grown more than ten times to 134 licensed pawnbrokers. 347 Similarly, San Francisco, where there were no state usury laws, was home to 243 pawnshops by 1897. 348 Moreover, credible turn of the century studies estimated one in five American workers owed money to salary lenders. 349 Although individuals indebted to salary lenders and pawnbrokers could not have known it, their stories bore remarkable similarity to those told for thousands of years.



Unfortunately, as in Babylon, Rome, and Ming China, government interest rate caps provided little or no protection for those in the grips of such high-cost lending. 350 First, many lenders evaded usury caps by phrasing the contract as a purchase or assignment of future wages, rather than a loan. 351 Second, lenders could easily take advantage of the time-price doctrine to avoid interest rate caps. 352 Under this doctrine, where a physical good was purchased over time on installments, it was not considered a loan under English law for purposes of a statutory interest rate cap. 353 Because American general usury laws were modeled on their English predecessors, U.S. courts almost invariably considered purchases of physical products over time as exempt from usury laws. 354 This led some [*853] lenders to avoid interest rate caps by, for example, requiring the debtor to "purchase" a worthless oil painting at the time the loan contract was signed. 355 The debtor would owe the same amount of money, and could immediately throw the painting away, but the transaction would be at least superficially legal. 356 Third, statutes indicating the interest rate cap often did not clearly describe how interest was to be calculated under the cap, leaving wide ambiguity over the actual amount legally chargeable. 357 Some lenders would engage in "note shaving," where a loan would be offered at a legal rate, but additional mandatory fees would create a true price well above that contemplated by legislators. 358 Other lenders would charge interest on money already repaid by the debtor, thus dramatically increasing the overall amount the debtor would have to repay. 359 Fourth, lenders would also require debtors to sign forms when taking out the loan which granted the creditor power of attorney long before any payment dispute arose. 360 When and if the debtor tried to challenge the contract in the judicial system, he might find out he had already waived his right to do so. 361 Whether or not this was in fact legal, power of attorney forms no doubt deterred many debtors from trying to contest the contract. 362 Even if the debtor was not dissuaded, the creditor could, without the debtor's knowledge, appear before a court and confess judgment on an unpaid debt, thus enlisting the power of the state to help in collection. 363 Fifth, some state court systems were structured such that the income of lower justices of the peace and magistrates was provided for through court fees. 364 Thus, "[j]ustices who found for salary lenders could often attract a good deal of business and thus earn tidy sums, so that it was in the economic interest of justices to look with favor upon suits by lenders." 365 Sixth, even where there was no economic incentive, lenders still retained the formidable advantage of initiating suits. 366 Pleadings, choice of venue, and choice of jurisdiction could all offer litigation savvy lenders the ability to shape [*854] lawsuits to their advantage. 367 For example, we can expect lenders would know when to bluff and when to sue simply because they had inside information about the personal views of various judges. Seventh, loans made above interest rate caps prior to the turn of the century must have made their way to the courts for adjudication relatively infrequently. 368 This is not to say that there were no cases where courts found loans above the statutory limit. 369 But, compared to the number of illegal loans that were made, we can expect only a very few of these cases ever made it to court. After all, anyone who had the money to hire an attorney to sort through salary lenders' complex legal contracts would use that money to pay off the debt. Eighth, public prosecutors would very rarely take the initiative to seek out those lending in excess of legal limits. 370 Outside of New York, there was not one state officer specifically charged with enforcement of usury laws. 371 This meant that the complex and time consuming business of enforcing interest rate caps was easy for officials to ignore. In this way, generations of lenders offered and collected upon loans which violated certainly the spirit, if not the letter, of general usury laws. Moreover, high-cost lenders' legal ingenuity helped them to maintain at least a thin veil of legality throughout much of the nineteenth century.



Even without resorting to the judicial system, creditors could place enormous pressure on debtors. A nineteenth-century creditor was free to confront the friends and family of a debtor who had already paid the principal of a loan thrice over, subjecting the borrower to terrible social embarrassment. 372 A common tactic was



to employ a "bawler-out"-usually a woman with a stentorian voice and rich vocabulary. The bawler-out went to the borrower's place of work or neighborhood and, in a loud voice, denounced him for his dishonesty in refusing to repay the loan. To avoid further embarrassment or the possibility of being fired, the borrower might well seek a settlement. 373

[*855]

The lender could also threaten to garnish the wages of the debtor, which in the social climate of the time was tantamount to threatening the debtor with unemployment. 374



Lingering Victorian condemnation of personal debt created a culture of silence which masked the increasingly pervasive indebtedness of the working and lower-middle class. 375 With debtor prisons only recently outlawed, debtors kept their obligations private. Although there are a number of surviving records of commercial lending at legal or nearly legal rates, there is very little surviving documentation of higher-priced illegal loans. 376 In the late 1880s, Congress became concerned enough to direct the census of 1890 to estimate the total amount of private debt. 377



Robert Porter, the census superintendent, "feared that the people regarded their debt . . . as a part of their private affairs, and that they would resent any inquiries in regard to it." The image was not a pleasant one: unarmed census workers thrown out of the homes of angry debtors resentful of governmental prying into their personal affairs. Porter concluded that any attempt to ask the people about their debts would cause collateral damage to the rest of the survey, enough to wreck the entire 1890 census. 378



Realizing the citizenry would never reveal the extent of their personal debts, census officials relented and instead tried to estimate private debts on the basis of public records. 379



4. Policy Responses to the Late Nineteenth Century High-Cost Credit Boom



The social havoc associated with late nineteenth-century salary lenders and pawnbrokers forced American credit policy into a period of dramatic evolution. Elites, as well as the working and still vulnerable middle class, united to adopt a variety of policies new to America, but not to world [*856] history. For instance, many Americans searched for redress in the philanthropy of the rich. 380 Social elites founded several charitable lending institutions in the late 1800s. 381 Following the European mons pietatis and later municipal pawnshops, a group of wealthy Boston citizens organized a philanthropic pawnshop called the Collateral Loan Company in 1859. 382 Like its European predecessors, the Collateral Loan Company aimed to provide relatively inexpensive pawn loans to poor clients in need of emergency credit. 383 If loans were not repaid, the pawned security was sold at public auction. 384 A board of directors chosen by shareholders who had invested capital in the company, as well as the mayor of Boston and the governor of Massachusetts, led the company. 385 Shareholders would receive limited dividends on their capital investment, but the real appeal of the business was almost certainly charitable. 386



Other institutions, both in Boston and elsewhere, emulated the Collateral Loan Company. 387 In 1888, Massachusetts expanded charitable lending beyond philanthropic pawn loans by incorporating the Workingmen's Loan Association in Boston. 388 The Massachusetts state legislature acted to create a business "for the purpose of loaning money upon pledge or mortgage of goods and chattels or of safe securities of every kind or upon mortgage of real estate." 389 The most prominent example of a charitable lending company in the United States is the Provident Loan Society of New York, founded in 1894. 390 Key charitable investors included J. Pierpont Morgan, Percy Rockefeller, and Cornelius Vanderbilt. 391 Similar to the Italian mons pietatis, the charitable pawnshop charged rates that were low compared to commercial pawn shops, but still "high enough to cover all costs of operation . . . and to allow an accumulation of a surplus-which could be used only for expansion of the business or for gifts to charitable organizations, not to increase the return to contributors of capital." 392 The society's founders feared that personal financial problems exacerbated by high unemployment rates following the [*857] recession of the early 1890s were causing "deterioration in the social conditions of the working class." 393



Widespread high-cost lending also spurred the middle class to more aggressively organize cooperative lending associations in order to insulate themselves from the risks of high-cost debt. The first American building society, modeled after earlier British counterparts, was formed in 1831, and by the late nineteenth century savings and loan associations became entrenched. 394 By 1893, thirteen states- California, Illinois, Indiana, Iowa, Kansas, Maryland, Massachusetts, Missouri, New Jersey, New York, Ohio, Pennsylvania, and Tennessee-boasted more than 100 savings and loan associations. 395 While the first credit unions modeled on German and then Canadian institutions did not appear in the Untied States until 1909, they thereafter quickly followed on the heels of British modeled societies. 396



Finally, the rise of the loan sharks along with the financial panic of 1893, created momentum to once again attempt to pass a federal bankruptcy law. 397 Opposition to a federal bankruptcy law by Western and Southern representatives fearing Northern bias stalled the law until 1898, when numerous amendments favorable to debtors secured its passage. 398 Growing middle class access to credit, as well as increasing sympathy for the plight of non- commercial debtors who had been preyed upon by unscrupulous lenders, brought about a fundamental change in the purpose of American bankruptcy law. 399 While previous laws were primarily creditor collection devices with parsimonious discharge provisions meant only to ease temporary financial crises, the 1898 Act aimed to give bankrupts a "fresh start." 400 Although the focus of Congressional debates was still upon commercial transactions, 401 under the new law, consumers and merchants alike were free to voluntarily enter bankruptcy. 402 Discharge was no longer contingent upon creditor consent. 403 The list of restrictions on the right of discharge was significantly narrowed and, in fact, only a few debts were exempted from discharge. 404 And, perhaps to limit the use of bankruptcy as a salary loan collection device, creditors could no longer [*858] force wage earners into involuntary bankruptcy proceedings. 405 Thus, the 1898 law was not only a device to secure an equitable division of property among creditors, but also a device to deal out discharge of debts to deserving debtors. 406



With more generous discharge provisions came increasingly complex and costly procedural rules for administering bankrupt estates. "At least seventy percent of the [1898] Bankruptcy Act, if not more, was procedural." 407 The process soon became so complex that a specialized sub-discipline of law practice emerged. 408 Creditors elected a trustee, and organized into a creditors' committee. 409 Although venue was in federal district courts, it was necessary to appoint "referees in bankruptcy." 410 Federal district court judges delegated almost all of the judicial and administrative duties to referees, who eventually evolved into today's bankruptcy judges. 411 The subject of bankruptcy policy debate switched from whether to grant discharge to the best way to grant it, thus charging the courts with a whole new system of commercial administration. 412 After 1898, bankruptcy debates became contests between efficient formalistic rules versus justice-oriented discretionary standards. 413 Despite these complexities, the law became America's first non-transitory bankruptcy law, and although it was often amended, it remained in force for eighty years. 414



B. High-Cost Consumer Credit Policy from 1900 to the End of World War II



The progressive new bankruptcy law, combined with interest rate caps and fledgling charitable and cooperative lending efforts, proved incapable of stemming the growing and dangerous tide of late nineteenth century high-cost credit. As the twentieth century began, the number of high-cost [*859] creditors and debtors continued to grow. 415 By 1907, 90% of the employees of New York's largest transportation company made weekly payments to salary lenders. 416 An influential study estimated one in five American workers owed money to a salary lender. 417 Others have argued, based on analysis of data from Pittsburgh, that this ratio actually underestimated the number of debtors obligated to turn-of-the-century "loan sharks." 418 While rates ranging from 20% to 300% were normal, rates well in excess of 1,000% were also still common. 419 The situation of many of the nation's poor was becoming so acute that socially sensitive elites could no longer ignore it. 420 Newspapers around the country ran exposes and aggressive editorial campaigns on the evils of loan sharks, with headlines indistinguishable from those found today. 421 Even the slow-to-change judiciary began to respond with a smattering of harshly worded opinions. 422 One federal judge characterized a high-cost lender as having "brought on conditions which were yearly reducing hundreds of laborers and other small wage-earners to a condition of serfdom in all but name." 423



For the first time in American history, significant numbers of wage earning consumer debtors began to seek amnesty from their creditors by declaring bankruptcy under the 1898 law. But salary lending and other forms of high-cost credit persisted. Prior to becoming Attorney General, Charles D. Thatcher noted many consumer debtors only declared bankruptcy after a struggle to pay off their debts, which often included turning to salary lenders as a last resort. 424 Borrowers would often attempt to negotiate a repayment plan to satisfy their obligations. 425 Using aggressive collection tactics, salary lenders would undermine the effectiveness of these informal work-out plans by crowding out other [*860] creditors. 426 Salary lenders often served as a final weight breaking a wage earner's back and forcing him into bankruptcy. 427



Charitable and cooperative lending societies grew in response to wider perception of high-cost lending problems. In 1909, fifteen philanthropic lending societies existed throughout the United States. 428 By 1915, this number more than doubled to thirty-eight. 429 Moreover, cooperative lending institutions also grew quickly between the turn of the century and the stock market crash of 1928. 430 While these charitable and cooperative endeavors helped many people, they were not nearly large enough to deal with the magnitude of problems associated with high-cost lending. 431 Much like their European predecessors, inadequate capital and staying power bedeviled United States charitable lenders. 432 Of the early charitable lending societies, almost all failed due to years of operating losses, either falling to the wayside of history or reverting to regular commercial pawnshop operations. 433 Early twentieth- century scholars explained:



Important as the service has been which these remedial loan societies have rendered, their facilities are not adequate to the need and cannot be used by the poorer type of borrower. It must be remembered that these societies were organized as, and for the most part remain, semi-philanthropic in purpose. Though their capital has grown, it has not kept pace with the needs of the borrowers. 434



The notable exception was the Provident Loan Society of New York. It survived by commanding greater charitable capital from its fabulously wealthy benefactors, deriving a unique advantage from New York City's unusual population density, more than doubling its original interest rate of twelve percent, and by highly underestimating the value of security in comparison to normal pawnbrokers. 435 But, even this most rare charitable organization failed to displace traditional commercial pawnbrokers in New [*861] York City. 436 Ultimately, charitable lenders suffering from haphazard management and undercapitalization "were no more effective in solving the problem of illegal lending than the publicity campaigns run by the newspapers . . . their loans amounted to a drop in the bucket." 437



Although cooperative lenders were becoming more important for the upper-middle class, the vulnerable working and lower-middle class were still excluded. Almost a full century after the first American building societies appeared, a scholar complained:



Not even the savings institutions, which are commonly thought of as workingmen's banks, have served the masses with credit. While the average savings banks have accepted deposits from people of small means, they have not, except in the rarest instances, been willing to make them loans. Unlike the commercial banks, they have offered only a small part of the traditional banking services to their customers. 438



Like their British counterparts, cooperative lenders could only function by limiting cooperation to relatively small, homogeneous, and stable groups. Those who most needed the benefits of cooperation were precisely those who were excluded.



1. The Small Loan Laws



The failure of non-governmental responses to the problems of high-cost loans contributed to a growing dissatisfaction with state general usury laws. Before the Great Depression, Americans, distrustful of government, were not yet ready to ask it to help provide credit for the disadvantaged. Instead, reformers hoped to raise interest rate caps in order to attract legal private capital to markets for consumer loans. 439 The intellectual roots of this position were not new. Classical economists consistently argued that legislating interest rates only forces the high- risk loan market underground, thus requiring the borrower to pay a premium to the lender against the risk of being caught. 440 By making a special exception to general usury laws [*862] allowing higher rates for small loans, reformers hoped to make consumer lending profitable to banks and other commercial creditors. 441 Honest, respectable private lenders would flow into the market for costly consumer loans, creating healthy competition and driving the dishonest loan sharks out of business. 442 Thus was born the first of what are now commonly called "special usury statutes." Special usury laws provided certain specified lenders licenses to lend at rates in excess of a state's general interest rate cap. 443 At the time, these first special usury laws were commonly called small loan laws. The new statutes allowed lenders-who would agree to licensing, bookkeeping, security interest, and collection practice rules-to lend less than $ 300 at between thirty-six and forty-two percent per year. 444



The primary advocates of the small loan special usury laws were scholars and business persons associated with the Russell Sage Foundation, a charity fund established by the wife of a railroad tycoon. 445 The foundation sponsored several groundbreaking studies and organized lobbying efforts to raise interest rates for small personal loans. 446 Most importantly, the foundation drafted uniform small loan laws, which many states relied on in passing their own legislation. 447 Many small loan lenders saw themselves as performing an important social service in lending at reasonable terms to disadvantaged people in need. 448



The passage of the small loan laws was a watershed event in both the law and culture of American high-cost credit. The small loan laws opened the door for states to amend the hitherto untouched general usury laws that descended from the Statute of Anne. A wide variety of different creditor organizations began lobbying for their own exceptions to state general usury laws. One state legislature and one interest group at a time, a simple and common body of law transformed into an obscure and arcane patchwork of legal exceptions, restrictions, fees, limitations, and [*863] definitions. State legislatures passed a hodgepodge of industrial loan laws, installment loan laws, retail installment sales acts, insurance premium finance regulations, and home equity loan laws. 449 Each state cultivated its own unique regulatory environment.



Culturally, the act of governmental approval of licensed high-cost lenders dramatically changed the social symbols and discourse Americans had used to refer to high-cost lenders for over two centuries. After passage of the small loan laws, high- cost creditors began a steady march toward legitimization. Small loan legislation, along with the Bankruptcy Act of 1898, began a process of erasing the government- sponsored line of stigma which had separated commercial and consumer lending in Western culture for centuries. These were the first steps in what has since been described as a "credit revolution." 450



2. The Credit Revolution: Financing the Middle Class



From the 1920s through the Great Depression, the business of lending under the small loan laws boomed. 451 The ranks of lenders seeking to earn a profit lending at rates below the special usury interest rate caps of between thirty-six and forty-two percent swelled. 452 These lenders aggressively worked to distance themselves from the salary lending "loan sharks" which dominated turn-of-the century consumer financing. 453 Many small loan lenders called themselves "personal finance" companies, hoping to call up images of respected commercial banks rather than neighborhood pawnshops. 454 Reflecting the optimistic expansion of the industry, one personal finance executive went so far as to say, "I think I can confidently predict that within a very brief period of time we will no longer be thought of as 'moneylenders' but as financial physicians to the American family." 455 Nevertheless, an increasingly overshadowed class of illegal or marginally-legal lenders persisted, borrowing and collecting from the most desperate debtors. While the numbers of debtors increased in the Great Depression (probably due to cautious lending based on fear of default), indebtedness was less severe than one might expect.



Of more lasting influence was the new era of accepted middle class durable consumer good financing. Many commentators have pointed to this era as a turning point when the culture of thrift and rugged [*864] individualism of early America gave way to one of consumerism and personal debt. 456 Beginning roughly in the 1920s, businesses began to realize the advantages of not merely advertising products, but promoting new ideas and ways of life. 457 "Through newspapers, magazines, billboards, radios, and motion pictures, advertising invaded the countryside as well as the city-pushing new ideas, habits and tastes." 458 Led by automobile dealers looking to expand their market, installment lenders charged rates in excess of the old general usury laws, but still far below what turn-of-the-century salary lenders expected. This new class of creditor used installment loans to finance home furnishings, sewing machines, pianos, washing machines, vacuum cleaners, phonographs, and jewelry. 459 Unlike the shady, back door, fly-by-night loan sharks, these lenders included many of the nation's most respected businesses. Although the older, more dangerous high-cost lenders were still around, they were more than happy to let the new, brash, and well- capitalized middle class corporate financiers take the spotlight. High-cost lenders had always preferred relative anonymity. It was in this era that names like General Motors, Sears, Singer, Montgomery Ward, and Steinway & Sons changed forever the way middle class America viewed debt. 460



C. High-Cost Consumer Credit Policy after World War II



By the time America hit the economic boom following the Second World War, consumer credit had already become a culturally and morally accepted part of life. However, the depth of the "credit revolution" had only just begun. A leading cultural historian on the subject of consumer credit summarized the entire postwar period with one word: "more." 461 More installment lending, more lending from cooperative lenders such as credit unions and mutual saving banks, more lending from retailers, and even more lending from the biggest and last player to embrace consumer credit-large banks. 462 A movement to the suburbs created demand for [*865] housing, automobiles, and household furnishings. The cultural trend away from early American thrift became even more pronounced as themes like "be the first on your block to own" were pushed by advertisers and accepted by millions. 463 Middle-class Americans took on previously unheard of levels of debt and gradually paid it back without unmanageable difficulties. 464



The social acceptance of consumer debt in America became unbreakable with the coming of the credit card. Retailers as early as 1914 had issued charge cards specific to their stores to encourage loyalty in their most wealthy customers. 465 Gasoline suppliers and airlines made similar efforts beginning in the 1930s. 466 The first "third-party universal" card which has become the contemporary norm was issued by Diner's Club in 1949. 467 The credit issuer acted as broker between customers and firms (usually restaurants). Customers gained the convenience of not carrying cash, and the ability to borrow money over a short term. Sellers gained access to market share by catering to a card carrying clientele. In spite of early growing pains, credit cards steadily gained in popularity, growing into the currently recognizable industry by the late 1960s. 468 Eventually backed by the capital of the nation's largest banks, the credit card industry solicited business through advertisements to consumers in every media. In 1971, half of all American families used at least one credit card. 469 In subsequent years, by sending out billions upon billions of mailed solicitations, credit card companies succeeded in making third party consumer credit almost a medium of currency unto itself. 470 By 1995, credit cards had "outstripped coins and folding money as the payment of choice for consumer transactions." 471



1. Echoes: Modern Credit Policy with Ancient Mistakes



American credit policymakers have scrambled to keep up with sweeping cultural change. Late twentieth-century consumer credit policy has become an astonishingly complex patchwork of federal, state, and local [*866] laws. While our policy directed at controlling the excesses of the credit market has evolved to accommodate millions of new middle class borrowers, its underlying nature echoes the strategies of the past.



Debtor amnesty rules, best exemplified by debt discharge in bankruptcy, have continued to provide an important safety valve, but have been unable to prevent the latest upsurge in high-cost lending. While bankruptcy laws retained the underlying structure of the 1893 Act until 1978, the protection afforded to consumer debtors lurched back and forth often depending on little more than the mood of Congress, the influence of creditor lobbyists, and the economic circumstances of the day. 472 For instance, Depression era legislation focused on debtor rehabilitation and placed significant restraints on the ability of creditors to seize collateral. 473 The Chandler Act in 1938 presumed to make the administration of bankruptcies more fair and efficient. 474 It included a revision of Chapter 13 which dealt with wage earner reorganization plans. 475 In 1946, Congress changed the compensation of Bankruptcy referees from hourly fees to a full time salary. 476 In 1960, Congress created a committee on bankruptcy rules to explore ways to simplify the complex and inefficient system of sorting through bankrupt estates. 477 During the pro- consumer Johnson era, bankruptcy reform efforts culminated in amendments that made discharge self-executing rather than an affirmative defense. 478 In 1973, bankruptcy referees were renamed bankruptcy judges. 479 After a decade of study, Congress adopted a new bankruptcy code in 1973 which substantially expanded the jurisdiction of bankruptcy judges. 480 A 1978 Act created a pilot program, later adopted throughout the country, dividing labor between bankruptcy judges and newly created bankruptcy trustees. 481 Trustees handled the administrative work, allowing judges to focus on adjudication. 482 Soon after the new code was in operation, Congress, at the instigation of creditors, passed a series of laws making many different types of debt unsusceptible to discharge. In 1984, the United States Supreme Court forced Congress to clarify the constitutional status of [*867] bankruptcy judges, which created an opportunity for the credit industry to once again significantly narrow available consumer credit protections. 483



All these changes occurred against the backdrop of growing personal bankruptcy filings. Diagnosing the cause of increased filings has been a subject of much dispute. The credit industry and its patrons have consistently complained of the decreasing stigma associated with personal bankruptcy. 484 For nearly a hundred years, they have attributed growth in bankruptcy rates to this "loss of shame." 485 Others argue bankruptcy filings have simply tracked the rapid increases in consumer borrowing. 486 By all accounts, mainstream credit card debt has become the type of credit most likely to send consumers into bankruptcy. 487 Yet, in the last two decades the growth of high-cost second-tier fringe debt has played a more important role, concurrent with a sharp decline in the median income of bankrupt families. Because bankruptcy only provides an after-the-fact safety valve, it has not, and cannot, prevent problematic high-cost debt situations before they arise. Obviously, an amnesty law so widespread as to cure the debt ills of all troubled debtors would ruin the credit industry to everyone's detriment. The discharge provisions of our costly and complex bankruptcy system have doubtlessly improved on the capriciousness of Mesopotamian royal decrees of amnesty. But like their ancient Mespotamian forbears, bankruptcy discharge only provides a lucky and sometimes undeserving few relief at the expense of their creditors-and by driving up interest rates at the expense of fellow debtors. In at least one respect, Mesopotamian amnesty decrees may have been better than our current system. The Sumerians and Babylonians did not sponsor bankruptcy professionals and services with costly taxpayer investments.



In the Post-War Era, Americans also experimented with laws and programs that explicitly selected white Europeans for protection unavailable to other ethnic groups. An important example of such a selective protection strategy had its roots in Roosevelt's New Deal. In 1933, Congress created the Home Owners Loan Corporation (HOLC), a federal agency which sought to stimulate economic growth through home building and to provide financial assistance for those who might not otherwise be able to purchase a home. 488 The agency innovated long-term, [*868] self-amortizing mortgage loans with uniform payments over the duration of the loan. 489 However, the agency also took the lead in developing racially discriminatory appraisal practices. 490 For the agency, "[r]acial homogeneity was explicitly identified as a criterion for evaluating properties; but it was clear that not all homogeneous neighborhoods were equally valued." 491 For example, the agency appraised a St. Louis County neighborhood as having "little or no value today, having suffered a tremendous decline in values due to the colored element now controlling the district." 492 Perhaps more importantly, in 1934 Congress and FDR created the Federal Housing Administration, which facilitated inexpensive home purchase financing by offering federal insurance for mortgage loans. 493 By insuring lenders against the risk of default, creditors could offer a greater number of lower- priced home loans. 494 Unfortunately, this valuable federal program was reserved almost exclusively for the use of white Americans with European ancestry. 495 The FHA's underwriting manual stated:



Areas surrounding a location are to be investigated to determine whether incompatible racial and social groups are present, for the purpose of making a prediction regarding the probability of the location being invaded by such groups. If a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes. A change in social or racial occupancy generally contributes to instability and a decline in values. 496



These policies created a legacy of discriminatory home financing which extended well past the Second World War and, many argue, continues today. For example, although from 1934 to 1959 the FHA financed sixty percent of home purchases in the United States, from the mid-40s through the mid-50s, less than two percent of the FHA's loans went to African-Americans. 497 For middle-class Americans in the twentieth century, family [*869] homes have been the most important source of security for purchasing inexpensive credit. 498 The difficulty black families had in finding cheap financing for home purchases was an important factor preventing their migration to the suburbs along with white Americans. 499 Relegated to the decaying inner cities, a disproportionate number of black families rented their homes instead of buying them. 500 Because home equity is the most important security by which middle and lower income families can obtain long term inexpensive credit, discriminatory mortgage insurance policies in the mid-twentieth century may well have significantly contributed to a greater African-American vulnerability to high-cost lenders in the latter twentieth century. By selectively protecting only European Americans, early federal home financing policies helped create a tradition of excluding racial minorities from access to the means to procure cheap credit. 501



Charitable lending efforts also have continued to suffer from their historic limitations despite later twentieth century attempts to morph them. For instance, in 1977 Congress tried to reinvent charitable lending as community reinvestment. The Community Reinvestment Act (CRA) is premised upon the notion that financial institutions should have a duty to provide for the credit needs of members in their local community. 502 The law requires banks to identify their service area and indicate how they are meeting the credit needs of low and moderate income groups within their area. 503 If a lender does not adequately extend credit to its low and moderate income customers, then federal regulatory agencies are authorized to deny applications of the lender for deposit insurance, charters, establishment of branch offices, or other similar transactions. 504



Although the law has helped some low-income communities, especially where activist and community watchdog groups have vocally sought enforcement of the law, the CRA's impact has generally been limited. Unfortunately, "federal regulatory agencies have rarely initiated any action on the basis of a CRA evaluation." 505 While some fair lending advocates insist the approach holds promise, community reinvestment suffers from the same problems as earlier charitable lending efforts. The motivation for creditors to lend to low-income neighborhoods is based on the fear of enforcement efforts of federal regulators. The motivation of federal [*870] regulators is based on the charitable ambitions of Congress. Despite Congressional goodwill, lenders have little incentive to lend and regulators have little incentive to find violations. 506 In 1989, one befuddled Senator questioned the lack of regulatory enforcement:



I think it to be somewhat incredible that the substance of the testimony is mostly that you haven't found any violations when the evidence is pretty clear out there that a lot of violations have to be taking place . . . . [W]e have incredible testimony . . . . I'm not trying to pick on anybody, but I want to suggest that I find it pretty close to remarkable that we never find any violations. 507



Another Congressman went even further saying "[t]he Community Reinvestment Act . . . has become monument to regulatory inaction." 508



The incentive structure behind community reinvestment does not harness the profit motives of lenders. The result is chronic under-capitalization. Morever, where community reinvestment lending does occur, it tends to devolve into simple profit- seeking behavior. For instance, in recent years consumer watchdog groups have complained that banks have turned to purchasing predatory mortgage loans from shady brokers in order to satisfy their reinvestment requirements. Recalling the supply problems of the mons pietatis as well as late nineteenth-century American cooperative lending societies, the recent comments of a community reinvestment advocate would have been as applicable centuries ago as they are today: "[t]he present state of access to capital in low-income communities is improving but nevertheless very inadequate. Although there have been major improvements with new institutions and instruments, there are still huge gaps." 509 Community reinvestment has not provided enough low-cost funds to displace aggressive profit seeking high-cost lenders in significant numbers. Although today the federal government has filled in where the captains of industry left off, whether community [*871] reinvestment will succeed in the future depends on the ability of regulators and advocates to overcome competitive market forces in a way charitable lenders of previous centuries could not.



In the Post-War Era, credit unions became the prototypical American cooperative lending institutions. Drawing on war and depression-hardened leaders, as well as responsible yet credit hungry consumers, in the two decades after 1945 the number of credit unions grew 155.2% and the number of credit union members grew 489.4%. 510 Government and employer sponsorship facilitated the gains. 511 Credit unions retained the significant advantage of freedom from taxation. 512 The groups that provided the common bond for credit union membership also tended to provide free or subsidized management assistance, overhead, and a ready pool of potential members. 513 In 1970, Congress created the Federal Credit Union Administration and insured credit union deposits with federal funds, further stabilizing the industry. 514 In terms of credit sales, credit unions have used their production cost advantages to generally offer below market interest rates for similar credit products. During the Post-War Era, the staple loan for most credit unions became automobile financing. 515 In the late 1970s and early 1980s, almost half of all credit union loans financed car purchases, and these loans in turn constituted a little less than twenty percent of all car loans nationwide. 516 For millions of Americans, there can be no doubt credit union membership has provided an invaluable and socially constructive source of financial services and inexpensive credit. 517



However, as in past ages, credit unions and other cooperative lenders have not significantly altered the financial destinies of the most vulnerable debtors. Despite the originating spirit of cooperative idealism, two noted credit union scholars conceded



credit union leaders had to confront the fact that the nature of the movement had changed greatly and that they were serving members with different patterns of employment and needs. Adequate savings could not be derived from the lower income groups and the very poor were not good credit risks. The ultimate effect was that the credit union movement developed more of a middle income orientation than one devoted to lower-income groups. Thus, . . . the main thrust of [*872] management became one of establishing sound management practices designed to stabilize the individual units while permitting steady growth. 518



Although the common bond requirements for credit union membership loosened around the country, management practices and economies of scale pushed the credit union industry toward a smaller number of larger credit unions. 519 Beginning in the 1970s, large credit unions focusing on economies of scale came to overshadow smaller unions that focused on responding to the needs of a core common bond group. Many credit unions merged. 520 In 1965, credit unions with over five billion in assets held only 27.5% of total industry assets. 521 By 1980, credit unions with over five billion in assets accounted for 77.2% of all industry assets. 522 When the boom in second-tier lending hit during the early 1980s, credit unions were focused on providing costly services such as automatic teller machines, credit cards, trust services, and automated telephone services to middle and upper income members, rather than moderately priced credit to high-risk borrowers. 523



2. Deregulation and the Illusion of Current Interest Rate Caps



In the 1970s, government expenditures on the Vietnam War overheated the economy, leading to inflationary pressures which made it harder for banks to gather funds to lend. 524 By the late 1970s, growing unemployment exacerbated the impact of still rampant inflation. 525 Federal monetary policy sought to slow the rapidly diminishing value of currency by allowing high interest rates. 526 As a result, short-term commercial market interest rates rose to above twenty percent. 527 Although constant creditor lobbying had reduced many state interest rate caps to a confusing patchwork, most states still had some upper interest rate limit. 528 But as rising market equilibrium rates forced depository institutions' cost of funds higher, it became difficult for banks and others to profitably lend within [*873] these legal usury limits. 529 "There was a fear that creditors would be understandably reluctant to lend money at rates below their cost of funds and that mortgage loans and other kinds of consumer credit would dry up." 530 State legislatures responded with a variety of actions, almost all of which significantly decreased regulation of chargeable rates.



Many states repealed general usury ceilings completely, allowing parties who were not regulated by special usury statutes to contract for the payment of any agreed rate. Other states modified their general usury laws so that the ceilings would fluctuate with some published market interest rate. For example, several states set their ceilings to five or six percentage points above the federal discount rate. Most states simply raised their interest ceilings to a point not binding on traditional lenders. 531



Congress also joined in. Among other interest rate deregulatory actions, Congress banned any state interest rate caps on home or mobile home first mortgages. 532



These temporary economic pressures have proven less enduring than the United States Supreme Court's effort at deregulation in the landmark decision of Marquette National Bank v. First of Omaha Service Corp. 533 Interpreting Section 85 of the National Bank Act of 1863, the Court held that in the Civil War Era, Congress had intended to preempt state interest rates to the extent they conflicted with the rates charged by out of state lenders. 534 The Marquette Court held that the interest rate caps of a card issuer's home state trumped the interest rate caps of the card holder's home state. 535 This set off two races: first for credit card lenders to move their operations to states with no interest rate caps, and second for state legislatures to remove their usury laws in order to attract or hold onto rapidly expanding credit card companies. 536 By the early 1980s, states around the union including Delaware, South Carolina, South Dakota, and [*874] Utah had abolished all interest rate controls. 537 Even though bastions of interest rate regulation like Minnesota soon followed along by raising interest rate caps, the damage was already done. In theory, if every state legislature in the union but one passed low interest rate caps, then lenders could simply set up operations (either in fact or on paper) within that one state. Lenders could export that state's unregulated interest rates to every other state, regardless of objections of the other forty-nine democratically elected state legislatures. In practice, nine Supreme Court justices eliminated two hundred years of democratic state interest rate regulation of bank loans. 538



Although the Marquette case involved credit cards, the doctrine subsequently spread to other types of lending. In the 1990s, the best example was payday lending. Because payday lenders typically charge between 391 and 600 percent, their services do not fit within any of the state usury laws which survived through the 1980s. Many of the states which retained interest rate caps, however, such as Georgia, Pennsylvania, and Virginia, have markets of impoverished potential debtors too tempting for payday lenders to resist. In order to circumvent these caps, payday lenders now broker payday loans on behalf of federally insured banks. 539 By exploiting the Supreme Court's constitutionalization of perceived Civil War Era Congressional intentions, payday lenders have managed to capture the legal authority of the United States Constitution to justify loans with interest rates more than twice as high as those typically offered by mafia loan sharks. 540 One scholar explained that these developments have

[*875]

been hidden from the public and state legislators by the camouflage of usury laws on the books of almost all states that appear to cover loans to that state's debtors. Day by day these local laws have become a more exaggerated illusion; under the Marquette doctrine, the sternest state laws are the first to be undermined and the quickest to fall. 541



For thousands of years social and government leaders have socialized their people with strong messages condemning high-cost personal debt. 542 American government, by gradually removing or at least muddling the old general usury interest rate caps, has abdicated this leadership role. This resignation combined with the sweeping cultural changes wrought by an explosion in mainstream moderately priced consumer credit has eroded a once unified moral stance towards high-cost debt. Today's high-cost debtors are in at least one sense worse off than those of a century ago. Back then, almost all debtors would have had a lifetime of socialization regarding the "evil" of personal debt. Today's high-cost debtors, however, sign credit contracts with the same prices as a century ago, but do so with none of the same moral condemnation to warn them of the risks. In a very real sense, America's culture has become one of reckless borrowing. For many who can afford such carelessness, the consequences are not severe and are perhaps in some ways even beneficial: monthly payments, overtime, mild anxiety about bills, and perhaps less time with the kids, all offset by the fiscal disciplining of credit contracts and the genuine value of consumer products. But for those who cannot afford imprudent credit decisions, the consequences have become as grave as they were more than a century ago when the first "loan sharks" appeared.



IV. The Modern Innovation and Unfulfilled Promise of Disclosure Regulation



Throughout history there has been no common terminology used in credit contracts. After the explosion of mainstream moderately priced consumer credit use following World War II, the different meanings that [*876] lenders ascribed to terms became more noticeable than at any other time in human history. Even the most basic contractual terms such as interest rates had no commonly shared definition. The result was that consumers neither shopped for cheap credit nor even understood how much they were actually paying for the credit to which they agreed. A 1964 study asked families to estimate the average interest rate on their consumer debt. 543 The average response was 8%-a third of the true cost of 24%. 544 The complexity of quoted credit prices was causing the manifold confusion. For example, there are a wide variety of methods for computing interest, which can produce a wide variety of actual costs. Lenders might calculate rates through the discount method, the discount-plus-fee method, the add-on method, the actuarial method, or perhaps others. 545 Some lenders would quote yearly interest rates, while others might quote monthly or even weekly rates. 546 Moreover, on many monthly loans "the interest was computed not on the declining balance actually owed by the borrower, but instead on the original amount borrowed." 547 Thus, these creditors charged interest on money that debtors had already repaid, which "meant that the real rate of interest was approximately double the one quoted." 548 Compounding the problem, state governments also used a large and incompatible variety of terms and classifications in statutes regulating consumer credit. 549 Although this may have been less of a problem for sophisticated commercial debtors, the new breed of consumer debtors lacked the expertise and patience necessary for distilling the true meaning of credit contracts. 550 The result was that consumer debtors rarely understood the true price of credit contracts to which they agreed. 551



A. The Rise of Truth in Lending



Truth in lending sought to remedy this confusion. 552 The basic idea was that government should require creditors to calculate and quote interest rates and other important contractual terms in a clear and uniform [*877] manner. 553 Former Senator Paul H. Douglas of Illinois is commonly credited with innovating some of the first modern credit price disclosure proposals. 554 Years later Senator Douglas recounted a story of the first time he suggested such a requirement. Working for FDR's National Recovery Administration for the consumer finance industry, Douglas served on a committee responsible for drafting proposed credit code revisions. 555



At the first meeting of the code authority in 1934, I brought up these facts and suggested that the members of the industry should quote their rates on an annual rather than a monthly basis and charge interest only on the unpaid balance. Never did the temperature of a meeting drop so sharply and so far. A chilling silence set in and the authority shortly adjourned. A few days later, I received a letter suggesting that I might want to resign. 556



Douglas did not dare to revisit the proposal for twenty-five years and until he had a decade of experience in the United States Senate. 557



When Senator Douglas did finally introduce the first federal credit price disclosure bill in 1960, the idea was not received any better than in 1934. An awesome array of opponents including the nation's automobile dealers, finance companies, mail order houses, the National Association of Manufacturers, the U.S. Chamber of Commerce, the American Bankers Association, the American Bar Association, virtually all Congressional Republicans, and most of the Southern Democrats denounced the bill. 558 One commentator colorfully summarizes what followed:



Congress spent the eight years from 1960 to 1968 debating the Truth-in-Lending Act. According to the military metaphor that is almost obligatory in these cases, the process must be counted as an epic battle. Forces were rallied, maneuvers undertaken, salvoes exchanged, and casualties incurred. While the reality was political rather than military, it was no less intensely fought and, at some points, no less gruesome. 559



The magnitude of Congress' debate is somewhat tarnished when one realizes the bill was not reported out of the Senate Banking Committee for [*878] debate by the whole Senate until 1967. 560 In reality, much of the struggle was between only a few influential members of a Senate Subcommittee. 561 As for casualties, it is worth noting that Senator Douglas' defeat in the 1966 election bears a striking resemblance to the political demise of Governor Hai Jui in the late Chinese Ming Dynasty. Both eroded their political capital through alienating powerful commercial interests in fighting for widespread credit reform of regulatory systems based on inadequate interest rate caps. Both also fell from power despite their informed and passionate commitment to populist government policy.



While early bills all faltered, they did provide Senator Douglas and later Wisconsin Senator William Proxmire the excuse to hold extensive hearings exploring the issue and hammering out the details. 562 Particularly influential were a series of four 1963 hearings held outside of Washington D.C. in New York City, Pittsburgh, Louisville, and Boston. 563 Supporters of the legislation hoped that these hearings would raise public awareness and put pressure on Banking Committee members to allow the bill onto the Senate floor. 564



In particular, the Boston hearings may have helped spawn one of the first statutes which can fairly be characterized as modern credit disclosure law. 565 In 1966, both the Canadian province of Nova Scotia and the State of Massachusetts adopted local versions of the Truth in Lending Act. 566 Portentously, the Massachusetts legislation included almost the same disclosure requirements as the federal bill. 567 This state statute came to create a feedback effect in the effort to pass uniform federal disclosure rules.

[*879]

How effectively [the Massachusetts law] was working was an open question, but clearly it had not produced the commercial Armageddon which the opponents of Truth- in-Lending had predicted. Small businesses had not closed overnight, nor had the state economy collapsed, no sales clerks had suffered nervous breakdowns at the credit counter, and no bank officials had hanged themselves from their flourescent lights. With life in Massachusetts going on pretty much as it had before, the opposition found itself somewhat embarrassed by the vigor of its prior rhetoric. 568



This state law, combined with 1968 election results favoring supporters of the disclosure bill, led the Senate Banking Committee to allow the bill out onto the Senate floor where it quickly passed. 569



In the House, Representative Leonore Sullivan led a much faster and more dramatic charge than the plodding Senate culminating in the ultimate passage of a much more robust statute. 570 The composition of the House of Representatives was decidedly more liberal than the Senate. This enabled Sullivan to introduce a much more liberal bill which included many substantive provisions in addition to the disclosure bill passed by the Senate. 571 She and her Democratic colleagues on the House Banking Committee's Subcommittee on Consumer Affairs inserted provisions requiring more comprehensive disclosure including those regarding first and second mortgages and credit advertising. 572 Additional substantive proposals included a national interest rate cap of eighteen percent prohibition of all wage garnishments and confessions of judgment in consumer credit cases, the establishment of a national commission on consumer finance, and creation of new, presidential power to control consumer credit rules during economic crises. 573



House Republicans reacted by supporting the comparatively conservative Senate bill. 574 Many of the substantive provisions, including the national usury limit, were bargaining chips which House Democrats intended to trade away in order to strengthen the Senate bill. 575 On the House floor, Republicans, looking to salvage a "tough on crime" theme out [*880] of the impending consumer legislation, added provisions making extortionate credit collection a federal crime. 576 When the legislation surfaced from a joint House and Senate Conference Committee it "retained the structure and discourse of the parent Senate bill," but included many of the added House provisions on first and second mortgages, credit life insurance, credit advertising, wage garnishment, administrative enforcement, loansharking, and the National Commission on Consumer Finance. 577 Because the final bill went far beyond disclosure, it was renamed the Consumer Credit Protection Act. 578 However, Congress retained the "Truth in Lending" label for the disclosure provisions, which still made up the most important and influential bulk of the act. 579



The most important requirements of the Truth in Lending provisions centered around the disclosure of the cost of credit based on standard uniform requirements set out by the act and by the Federal Reserve Board. 580 The two most important disclosures were the "finance charge" and the "annual percentage rate." The finance charge is "the sum of all charges, payable directly or indirectly by the creditor as an incident to the extension of credit." 581 It includes all interest and fees that a creditor requires the debtor to pay. The annual percentage rate is an interest rate based on the actuarial method and calculated in accordance with regulations set out by the Federal Reserve Board. 582 The Act was enforced with tough civil penalties. It gave debtors the right to sue their creditors where the creditor failed to disclose prices and other contract provisions in accordance with the law. 583 To deter noncompliance, creditors found to be in violation of the Act were liable to the debtor for actual damages, statutory damages, attorney's fees, and court costs. In extreme cases a noncomplying creditor was even subject to criminal prosecution. 584



B. The Unique Promise of Disclosure



Although, unsurprisingly, neither industry nor consumer advocates have ever been entirely satisfied with the Truth in Lending Act (TILA), the disclosure approach has in general garnered wide acceptance. It has only been in the past decade that consumer advocates have become [*881] progressively disenchanted with disclosure law. Nevertheless, TILA has remained the cornerstone of Federal consumer credit regulation, and further, most state governments have come to rely heavily on disclosure provisions in state laws. Moreover, industry, rarely welcoming government oversight, has still come to a grudging acceptance of TILA. In particular, high-cost creditors have advocated disclosure rules to deflect legislative pressure for more substantive rules. 585



In retrospect, Congress' adoption of TILA was only possible because the price disclosure approach has distinct political and theoretical advantages over other consumer credit policy options. In theory, disclosure simultaneously provides consumer protection and promotes market outcomes consistent with the conditions classical economics prescribes for efficient market economies. This characteristic makes the disclosure approach unusually attractive in the American political climate. Economic discourse in the United States has typically been characterized by two groups of thinking: those-anchored by Adam Smith-advocating relatively less or no governmental control in the distribution of scarce resources, and those-anchored (albeit in the American case very distantly) by Karl Marx-advocating more or complete governmental control. This dichotomy of economic thinking has had profound influence on policymakers seeking to deal with problems arising in the respective rights of debtors and creditors. The disclosure strategy for controlling the harmful consequences of high-cost lending has the rare advantage of falling within an ideological overlap palatable to both of these usually divisive perspectives.



Disclosure is acceptable in the classical economic perspective because it promotes informed decisionmaking. For classical economists, the ideal method of constructing social policy was to leave nearly all policy decisions to individual economic behavior. Classical economists believed society could rely on its individual members to protect their own best interests, and in turn protect overall social well- being at the same time. Individuals neither intend nor generally recognize that their selfish actions promote societal welfare, but that nevertheless do so. When every member of society is making well-informed decisions in their own best interest, the collective result is better policy than any government planning board might make. The famous metaphor Adam Smith used to describe this predicted phenomenon was that individual self-interested decisions would act as "an invisible hand" guiding social policy to the optimal outcome. In Smith's words:

[*882]

[O]f which the produce is likely to be the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. 586



Thus, in this view there is a presumption against governmental interference with each individual's own decisions about whether or not to purchase a good or service, with credit being no exception.



Nevertheless, most economists are willing to agree that governmental action is sometimes necessary to protect the market conditions which facilitate competition. Where the private decisionmaking process in some way breaks down, the government must intervene to either reestablish the private decisionmaking or correct the failure. One introductory economics textbook plainly explains.



Adam Smith extolled the virtues of private markets, arguing that consumers and producers "promote the public interest" more effectively than any government. If this were always true, then government intervention could only harm the public interest. Smith's argument holds, however, only when certain ideal conditions prevail. When these conditions are not satisfied, market outcomes are not optimal. In such cases government may serve the public interest. Among these reasons for market failure, and therefore government regulation, are natural monopoly, externalities and imperfect information. 587



Information is important because it is a necessary prerequisite to efficient market decisionmaking. Efficient market outcomes can only come about as a result of individuals selecting those product options with the lowest opportunity costs. 588 Opportunity costs are the costs of forgone alternatives to any economic decision. "[G]iven limited or scarce resources and time, the undertaking of any activity or the expenditure of any funds means that we must forgo some other activity or some other use of these [*883] funds." 589 The driving force behind market-based policymaking is harnessing the good sense and local perspective of each individual to make the best decisions available to that person. 590 Without accurate information about the quality and especially the price of any good, no person can minimize their opportunity costs, since they cannot compare the value of that product to their next best option. Thus, in a policymaking system of private decisionmaking, where individuals act without accurate cost information, there is no policymaking at all, rather just the random and often tragic outcomes of market anarchy.



Disclosure regulation of creditors fits within the traditional classical economic perspective because disclosure is directed at fixing a breakdown in the private decisionmaking process which guides markets to optimal outcomes. Traditional government regulation controls the private decisions of debtors. For example, where there are interest rate caps, debtors are not free to choose loans at above ceiling prices. Classical economics recommends debtors have the freedom to make whatever bargains they choose, provided they understand the consequences of their actions. Or as Jeremy Bentham explained, "no man of ripe years and sound mind, acting freely and with his eyes open, ought to be hindered . . . from making such bargain, in the way of obtaining money, as he thinks fit." 591 But to the extent a debtor does not have his or her "eyes open," for classical economics, all bets are off. Unlike interest rate caps and other control devices, disclosure regulation-at least in theory-increases the freedom of consumers through giving the opportunity to open one's own eyes. With a uniform method of learning the costs and characteristics of credit contracts, debtors can determine which credit contracts are in their best interests. With disclosure regulation, consumers have relatively greater freedom to control their financial destiny. In theory, each debtor is empowered to protect their own best interest, and in doing so will contribute to the overall welfare of society.



On the other hand, disclosure regulation is also acceptable to the control- oriented perspective in American economic discourse. This perspective is skeptical that private decisionmaking of individuals in unregulated markets can actually create the society we all hope to have. 592 [*884] Often these thinkers will point to actual stories of economic injustice, as well as empirical data demonstrating economic inequality, to show that market outcomes are not what we want. Apologists for governmental control of markets also often point to the assumptions of classical economic models, arguing that these assumptions are false, and therefore generate flawed predictions. 593 Many of our nation's most respected political leaders consistently advocate regulation at odds with the predictions of economic models. For instance, the continuing support of interest rate caps in many states, despite widespread circumvention, demonstrates that policymakers and the American public have not followed blindly the recommendations of classical economics. Although exceptions for various lenders are both common and complex, all but six states retain some interest rate cap language in their statute books. 594 For those that take this control-oriented statutory language seriously, the emphasis of government action should not be on facilitating private policymaking, but on protecting society's vulnerable members.



This emphasis on protection is why disclosure regulation also fits well within the perspective of those that advocate governmental control of markets. Disclosure regulations provide consumers with an important opportunity to protect themselves from credit bargains that are not truly in their own best interests. 595 Although thinkers with this control-oriented perspective are likely to hope for additional regulations that more completely clamp down on high-cost lending (such as interest rate caps with stiff enforcement and penalties), disclosure regulations are at least a palatably good start.



Historically, the basic strategy of modern price disclosure represents a fundamentally new approach to solving the problems associated with consumer credit. Other American efforts have been variations on older strategies invented long ago on other continents. Interest rate caps throughout most of American history were little different than those enacted in Ming China, Rome, and Babylon. 596 American charitable lending strategies, including cooperative lending societies and community reinvestment efforts, suffer from the same problems as did the first Italian montes pietatum. 597 American cooperative strategies including saving and loan societies and credit unions, albeit important contributions, have not been able to include those who need their services most. 598 And sadly, racially discriminatory mortgage loan policies such as those used by the [*885] Federal Housing Administration in the thirties are prime examples of selective protection of a favored majority from the risks of high-cost borrowing. 599 Truth in Lending does not properly fit into any of these classifications. Although the relative novelty of modern disclosure regulation does not by itself demonstrate greater promise than these older strategies, that so many of us can agree about the basic theoretical advantages of disclosure, may. Both classical market liberals and control-oriented supporters of regulation tend to agree on the formidable theoretical potential of price disclosure policies in regulating consumer credit. 600 This area of agreement is notable not just because it is rare, and not just because it facilitates legislative compromise, but also because the agreement itself speaks well about the value of the approach. None of history's other strategies for controlling the harmful consequences of high-cost lending captures the ideological overlap between laissez-faire capitalists and protection-oriented government regulators so well as does price disclosure.

[*886]

C. The Unfulfilled Potential of Truth in Lending: Truth Is Not Enough



Sadly, the thirty-five year history of modern credit price disclosure regulation has evinced a wide gap between Truth in Lending theory and market reality. Although the basic notion of preventing credit problems before they develop with a uniform price tag disclosure sounds simple, the practical implementation of TILA turned out to be extremely complicated. 601 The statute charged the Federal Reserve Board (FRB) with ironing out the details of the law in what was called Regulation Z. 602 In addition to Regulation Z, between 1968 and 1980 the FRB issued approximately 1500 advisory opinions interpreting what the rules meant. 603 In order to help creditor's digest this vast amount of technical information, the FRB also issued informal pamphlets. 604 In some cases, creditors relied on these pamphlets in designing their disclosure forms, only to have the courts later rule the pamphlets themselves were incorrect. 605



Following passage, consumer advocates did not hesitate to make use of the new laws.



Legal Services attorneys made extensive use of the TILA on behalf of low-income consumers. In addition the private bar developed a consumer segment which relied heavily on TILA. Creditors who did not comply with the Act found themselves defendants in thousands of lawsuits filed on the basis of TILA noncompliance, or found themselves losing what had previously been routine collection actions because of TIL counterclaims. 606



Between 1969 and 1980 over 14,000 suits alleging TILA violations were filed in federal court. 607 By 1979, Truth in Lending litigation constituted [*887] about two percent of the civil case load in federal courts. 608 Congress, hoping to insure enforcement of the intentions of the Act, included language urging courts to broadly interpret TILA requirements and hold creditors to the strict letter of the law. 609 This requirement forced courts to impose penalties on creditors who made only minor disclosure errors. 610 Just as advocates of TILA had seized on the horror stories of cheated debtors, opponents of the legislation found new ammunition in the woes of creditor compliance troubles. 611 Amplified by the finest lobbyists the consumer credit industry could buy, the stories of creditor compliance problems gradually forced Congress to reconsider the ardor with which they passed TILA. 612



Independent of creditor complaints about litigation and the difficulty of compliance, the credit industry as well as many neutral academics led a rhetorical challenge to TILA asserting the information provided to debtors was not useful. A body of academic literature had developed discussing Truth in Lending even before Congress adopted the Act, but it has grown larger and decidedly more skeptical. 613 The early objection which resonated the most was the claim that TILA caused "information overload." 614 The argument rested on studies showing debtors did not understand most of the [*888] disclosed information. 615 Because TILA required disclosure of too much information, disclosures resembled just another legal form, which debtors did not bother to read. 616 Embracing this view, a Governor of the Federal Reserve Board told Senators:



[I]n our opinion, the total present disclosure requirements are simply too extensive to permit effective use by the vast majority of consumers . . . . [T]he mass of information now provided may produce a kind of "information overload" that overpowers many consumers and renders the entire disclosure statement a forbidding and incomprehensible document. Indeed, behavioral research suggests that when confronted with more than a few "bits" of information, consumers cease to read or retain any of the material offered. 617



Opponents of reform countered that most of the complexity of disclosures was due to creditors' unnecessary and over-aggressive contractual efforts to protect themselves in every possible circumstance of default. 618 Consumer advocates also argued that information overload could be solved by visually segregating the most important information apart from less important disclosures. 619 Thus, consumers could have simplified disclosure, but still have the important, more complex information available if they chose to explore it. But, after the FRB-the very administrative agency charged with implementing the Act-called for abandoning many TILA disclosures, fundamental change was inevitable. 620



The 1968 Act endured small amendments to correct technical problems in 1970, 1974, twice in 1976, and again in 1978. 621 But by 1980 Congress bowed to the inescapable industry pressure and the growing tide of deregulation around the country. The Truth in Lending Simplification and Reform Act (1980 Act) cut out many of the most difficult provisions with respect to creditor compliance. 622 At the same time, Congress preempted [*889] state interest rate caps on first mortgage home loans, effectively allowing mortgage lenders to charge whatever interest rates home equity debtors might agree to. 623 The changes to Truth in Lending were so thorough that the Federal Reserve Board considered the law a "new" Truth in Lending Act, rather than an amended version of the old statute. 624 The most important changes included the limitation of statutory penalties to only "significant" violations of the Act, elimination of itemization of the finance charge, and in some instances elimination of itemization of the amount financed. 625 Also, the 1980 Act eliminated or streamlined a variety of secondary, but potentially important, disclosures relating to the legal right to acceleration, security interests, late charges, and rebates. Finally, and perhaps in practical terms most important, the 1980 Act required the FRB to promulgate "safe haven" forms which further encouraged uniformity and gave an added assurance to lenders about liability risks. 626



Many changes, however, had nothing to do with making disclosure documents simpler, but rather focused on protecting major players in the lending markets. For instance, in the 1968 Act, assignees of the original creditor were sometimes held equally liable for any Truth in Lending violations. 627 This encouraged the secondary lending market to police loan originators. But under the 1980 Act, assignees became liable only for violations apparent from the face of the contract. 628 The 1980 Act also reduced the maximum recovery for multiple class actions, eroding the incentive of plaintiffs lawyers to engage in major litigation battles with large lenders. 629 One scholar recently explained, "it was undoubtedly the onslaught of TIL lawsuits, most of which were being won by consumers, more than the failure of the Act to assist consumers in comparison shopping that led Congress to enact a major overhaul of the Act, effective in 1980." 630 It is also worth noting that the claim that Truth in Lending lawsuits in the pre-1980 era were largely premised on technical problems with secondary disclosure requirements is something of a myth. On the contrary, more than half of TILA litigation in this period challenged the accuracy of finance charges "not a 'technicality,' but one of the two most [*890] fundamental disclosures mandated by TIL." 631 Nevertheless, when the Supreme Court quickly resolved several of the most important controversies Congress left unaddressed, many creditor compliance concerns were essentially eliminated. The result was that soon after simplification the levels of litigation over TILA subsided to "relatively sparse" levels. 632



1. The Market for High-Cost Credit Information



While industry has come to a grudging acceptance of Truth in Lending as litigation and compliance problems have largely been solved, it is far less clear whether the Act has achieved the ultimate goal of protecting consumers by creating informed credit decisions. Unfortunately there are strong indications that, at least in the market for high-cost credit, Truth in Lending has failed almost entirely in promoting price informed borrowing decisions among the most vulnerable debtors. In the high-cost credit market, structural and market forces act, not to promote price competition, but to promote confusion and strategic lending behavior. 633 High-cost lenders have a greater incentive to erect barriers to price shopping than moderate and low-priced lenders. The reason relatively inexpensive lenders sell their loan products at lower prices is because their clientele are responsive to those prices. The lender offering the cheapest loan has every incentive to advertise that price. But for lenders who have abandoned price competition for other means of acquiring customers, the wisest course is to hide those prices for as long as possible. 634 The ideal high-cost debtor is one who continues paying without even realizing the true opportunity costs of her purchasing decision.



One way of discouraging comparison of loan products is by making those products complex. After-the-fact legal battles are at least partially to blame in encouraging high-cost credit contract complexity. Because in our legal system courts take the text of contractual provisions seriously-usually regardless of whether the parties understood their own [*891] bargain-creditors have a great incentive to pack their documents to preempt every contingency they can imagine. Affirmative defenses in litigation as well as statutory penalties for flawed disclosure and other debtor consumer protection rules create perverse incentives to craft complex contractual provisions which undermine the ability of consumers to make meaningful comparisons between competing products. 635 Even where the added complexity of a contract does not provide legal protection for a lender in the long run, the threat of protection can be just as effective. High-cost debtors do not know which lending practices are and are not enforceable. This means complexity which looks defensible is often good enough. Especially, if it can scare off the few overworked and often inexperienced lawyers who serve the nation's most vulnerable debtors.



Even absent litigation risks, in the high-cost credit market, many creditors inject complexity into their contracts and the negotiation process preceding them simply for the strategic value of the complexity itself. High-cost mortgage debtors often complain that lenders present stacks of irrelevant brochures, letters, and advertisements in addition to already complex settlement forms in order to cloak their true prices. The story of John Evans, an eighty-seven-year-old retired laundry pressman from Columbia, South Carolina, is indicative. 636 Mr. Evans and his wife bought their home in 1960. Since his retirement seven years ago he has worked part time bagging groceries at a local Kroger supermarket. A telemarketer from Collateral One Mortgage Company called Mr. Evans and convinced him they could refinance his loan with lower monthly payments. Anxious to stretch his small paycheck and social security income farther, he expressed interest. Collateral One, a seven- year-old mortgage lender with operations in Kentucky, North Carolina, South Carolina, and Tennessee immediately sent a salesman to Mr. Evans' home. Soon after, Collateral One signed up Mr. Evans for a $ 71,000 mortgage with higher monthly payments and a 10.792% interest rate. Financed in the loan were more than $ 6,100 in fees which will cost around $ 26,000 over the life of the loan. And, after thirteen years of regular monthly payments, Mr. Evans at 101 years of age will be due to make a balloon payment of $ 58,622. The spokesman for Collateral One insisted Mr. Evans was fully informed about the terms of his completely fair loan. Collateral One provided Mr. Evans all the required paperwork detailing all loan terms and other information prior to closing. They emphasize Mr. Evans never objected or indicated he [*892] could not understand the loan terms. For his part, Mr. Evans says, "[he] thought the contract was all right," but admits he cannot read, having left school after the first grade. 637 What he does know for certain is that he was not told his monthly payments would be more than $ 100 larger than before. With his limited fixed income Mr. Evans can barely make ends meet and is afraid he "can't hang on much longer." 638 If he stops making payments, he will lose his home in foreclosure. 639



An anonymous former branch manager for Associates Financial Service, a major national high-cost lender, paints a similar picture of typical high-cost mortgage loan closings. The former manager confided to a noted Virginian investigative journalist:



"The sales methods are so deceiving." . . . [W]ith all the numbers and documents involved, it's easy for a loan officer to throw out some figures and say, "I can save you $ 25,000, isn't that great?" The loan officer nods his head up and down and makes eye contact. The bewildered customers nod their heads yes too. "They'll be signing their lives away . . . ." It's not until too late that they suddenly realize, "I have an $ 800-a-month house payment." 640



Contrasting the legal doctrine of "informed consent" which governs medical doctors, the former high-cost lending manager emphasized in his business, the norm is to sell credit products under "the doctrine of assumed consent." 641 Such lax communication with potential debtors combined with the increasing complexity of creditor contracts threatens to undermine our system of rational choice policymaking. Credit contracts are often the most important contracts a consumer will sign in a lifetime. When courts enforce contracts, as though there were a real meeting of the minds as to all material terms, when in fact there was not, an enormous potential exists for lenders to include provisions which charge more than the amount to which the customer actually agreed.



Independent of information barriers erected by high-cost creditors, high-cost debtors often have limited resources and skills to invest in price shopping. 642 The costs of acquiring information must be evaluated relative to the resources of credit shoppers. Because current price disclosures only [*893] provide information about one credit contract in a vacuum, in order to make a price comparative decision, debtors must still travel to other creditors, learn the prices they offer money at, and then compare which is the best deal. Those, like Mr. Evans, who rely on creditors to come to them as telemarketers or door-to-door salespersons take extreme risks. 643 Comparing product price and quality in some markets can be a relatively easy task. At a grocery store, a consumer might compare the prices of several different breakfast cereals, looking at the ingredients and the convenience of packaging, recalling advertising claims, and contrasting the quantities offered all in a matter of minutes or even seconds. This is because in the market for breakfast cereals shopping costs are low.



But in the market for high-cost credit, making a similar comparison involves traveling between different locations, asking for the relevant documentation, conversing with clerks, potentially negotiating on the purchase price of a similar financed good, and probably undergoing multiple credit checks. Moreover, the most inexpensive lenders may have short operating hours, intimidating employees and environments, parking congestion, might frown on bringing children along for the application process, and might unintentionally or even intentionally assemble other more subtle, but nevertheless socially profound, barriers as simple as offhand rude remarks or disapproving stares. A debtor must also have an arsenal of resources to keep these shopping costs from skyrocketing. If, for example, a debtor uses public transportation, taking the bus between different potential creditors could take hours upon hours. If the debtor is mobility-limited by a disability, old age, or illness, traveling to more than one or two creditor locations may be impossible. If the debtor has difficulty reading, the time which it would take to wade through many different disclosure statements alone would be prohibitive. At some point shopping costs will outweigh any uncertain benefits of reduced prices which might be gained from shopping, making it irrational for many if not most or all consumers to do pre- transactional shopping.



The problems of cost comprehension and price comparison are only magnified for the growing number of Americans who speak little or no English. Bringing a friend or family member along to translate roughly doubles the shopping costs. In practice, "Spanish speaking consumers essentially rely on the verbal promises of a salesman to get through the process." 644 Unscrupulous high-cost lenders aggressively target Spanish speakers to generate heterogeneously inflated prices. A Port Lavanca, Texas consumer poignantly complained to the Texas Attorney General [*894] about the credit practices of mobile home dealers. The Spanish letter translates, "[t]hey are soliciting business amongst the folks that have poor English skills in order to cheat . . . unsophisticated buyers." 645



Some economists predict that consumers adopt shopping strategies which effectively cope with these types of information problems. For example, when consumers face a wide diversity of product choices, finding the best deal becomes prohibitive. Because the costs of examining the benefits of each possible option outweigh the potential gains from finding the optimal choice, consumers have no incentive to find the best deal. But, if consumers use a few important criteria to screen out options that are unlikely to be ideal, they can come up with an option that is the best choice given their circumstances. Then the consumer selects the best option from the limited set of choices. Although the selected option may not in fact be ideal, if the consumer uses sensible screening criteria, it will still be close enough to force price and quality competition in the market. In these cases, consumers are thought to "satisfice" rather than "optimize." 646



But even if we assume prospective high-cost debtors do attempt to satisfice, it is still unlikely they could effectively force price competition. In the market for high-cost lending, search costs are so high that consumers must typically screen out all but one or two product options from further more detailed investigation. For instance, a recent Consumers Union study of the Texas manufactured home market indicates buyers seeking financing must pay expensive credit report and application fees as well as place deposits long before they ever see a contract or price disclosure statement. 647 The price of a manufactured home loan is almost always much higher at closing than when first quoted. 648 Moreover, sales staff [*895] often caution borrowers not to shop around since the outdated credit reporting system used by many manufactured home lenders penalizes the credit ratings of borrowers for whom lenders submit multiple report requests in a short duration. 649 The story of Porfirio P. from El Paso, Texas is typical of the direct financial charges imposed on those who try to shop. In order to find the best deal, Porfirio left a $ 100 deposit with one El Paso mobile home lender and then a $ 300 deposit with a second lender, buying from a third. 650 When he asked for his initial two deposits back, both mobile home dealer/lenders refused. His "exercise in comparison shopping . . . left him $ 400 out of pocket until the [Texas] Attorney General intervened." 651 Sometimes manufactured home buyers are asked to sign blank documents and dealers often refuse to give buyers copies of loan contracts. 652 The Federal Reserve Board and the Department of Housing and Urban Development confirm that the practice of charging application fees to potential borrowers before providing any closing cost or finance charge estimates is frequent and widespread all around the country. 653



Even "fast loan" businesses have subtle but significant ways of raising shopping costs. For instance, payday and car title lenders often telephone first time loan applicants' bosses or human resource managers to verify applicants are employed. Employment verification almost always occurs before debtors see a contract or any TILA disclosures. 654 Telephone employment verification serves the lender's interests in several respects. Obviously, the practice helps evaluate loan risk. But, it also dramatically increases search costs for first time loan purchasers. Payday lenders themselves admit their customers almost always have unsteady employment. 655 Most borrowers are understandably nervous about [*896] exposing their financial circumstances to their uncommitted and sometimes capricious employers. After the first employment verification telephone call, many prospective debtors immediately end their search because they (perhaps correctly) predict that embarrassment and the risk of jeopardizing their job from additional phone calls will outweigh any potential savings from searching for a cheaper loan. 656 Moreover, the practice encourages a form of artificial brand loyalty. By only verifying employment over the telephone for the first loan, lenders create a subtle but stiff "penalty" for borrowers who choose to look elsewhere in the future. 657 Under this incentive structure the priority for lenders is to make themselves the first option potential borrowers will inspect. Telephone employment verification creates an incentive to compete with flashy signs, promises of quick cash, location, and name recognition, rather than price reduction. Search costs may be so high, borrowers satisfice after inspecting only one or perhaps two market options-an insufficient number to force price competition.



Payday lenders systematically delay divulging accurate comparative price information such as the annual percentage rate of their loans. A nationwide survey found only thirty-seven percent of payday lenders contacted for price information would divulge even a nominally accurate annual percentage rate over the telephone. 658 "Others claimed they 'didn't know' or that the APR was equal to the fee for a two-week loan." 659 A different local study focusing on lenders in Salt Lake City found that even when approached at store locations over sixty-five percent of payday lenders would not disclose the rate of their loans in annual percentage rate format. 660 These results indicate nearly two-thirds of the nation's payday lenders are in consistent violation of the TILA's most basic requirement to respond to oral credit rate inquiries only in terms of the annual percentage rate. 661



Moreover, in the high-cost credit market, many of the inexpensive and more informal shopping strategies used by upper class borrowers are not available. Some economists predict that markets self-correct despite [*897] information asymmetries because consumers use abstracted information sharing strategies such as business reputation to offset seller advantages. 662 This is to say, consumers can effectively shop through more informal channels such as gleaning a producer's reputation from friends, co-workers, and family. But, in the market for high-cost credit, competition through creditor reputation is unlikely to succeed. Initially, because entry and exit costs are low for high-cost creditors, the market is characterized by "a large number of fly-by-night operators with few sunk costs and only modest investments in reputational capital." 663 Because many high-cost lenders do not invest time and effort in building a solid reputation, they have little to fear from word of mouth criticism. Moreover, high-cost debtors often are less embedded within their communities. Because high- cost debtors tend to have more fragile workplace, neighborhood, community, church, and family relationships, they may be less integrated into effective reputation based shopping networks. For example, an inner city single mother of four working nights as a nurse is likely to have less access to reliable information about the reputation of various payday lenders, than two affluent married suburban CPAs would have about the reputation of various banks. Also, high-cost debtors are unlikely to share reputation information because they often suffer from embarrassment and shame over past credit failures and the prospect of imminent default. One study indicated that less than a quarter of borrowers behind on their home mortgages ever mention their trouble to family friends. 664 Sharing word of mouth criticism of high-cost lenders often means exposing embarrassing financial problems. 665 Finally, all reliable shopping information must at some point be obtained on a first hand basis. If virtually no one in a family or neighborhood has access to reliable and effective shopping information, then there is no basis for an effective informal word of mouth shopping process to begin. One Latino social advocate explains,



[i]n many white families, there is a long history of home ownership, so there is someone to help walk them through the process. Many Latinos are first generation home-owners. There is no one to say, "Here's what you should do and here's who you should talk to when getting a loan." 666

[*898]

Because many low income and minority communities are conspicuously devoid of branches of lower cost credit providers, such as credit unions and some banks, shopping may become extremely time consuming for entire social groups. As a result these debtors are likely to select credit on the basis of familiarity, the "convenience" of low initial shopping cost investments, and other non-price related factors. 667



2. The Limitations of Current Disclosure Rules



Sadly, our current credit disclosure laws do not meaningfully address these information distortions, and sometimes encourage them. Initially, current disclosures come too late. Truth in Lending as well as the Real Estate Settlement Procedures Act allow creditors to manipulate the timing of information exchange to inefficiently increase the transactional costs of acquiring price information. Truth in Lending disclosures



come at, or very shortly before, the consummation of a transaction to which the consumer is already verbally and psychologically committed. At this point, comparative shopping by the consumer is unlikely. Moreover, it is equally unlikely that at this point the consumer will opt to pay with cash. Thus, [Truth in Lending] does not put us[e]able credit information into the consumer's hands at a time when it will affect transactional behavior. 668



One study of lenders in the New Orleans area found that, even when specifically asked for disclosure information prior to signing the agreement, every lender surveyed "refused to issue a credit disclosure statement at this point in the transaction." 669 Instead, such statements were "issued only at the time the loan is consummated, never prior to that time." 670 But by then, consumers have already invested a significant time and effort into obtaining the loan. Even short delays in receiving disclosure [*899] statements, when encountered with every lender, can erode borrowers' willingness to compare loans.



Furthermore, Truth in Lending regulations have departed so far from the original vision of a simple all cost inclusive price tag, the key material disclosures themselves can often be a source of disinformation. The credit industry has for years seized on the complaint that credit disclosures are not useful because they are too hard to understand. 671 But, a significant amount of confusion is attributable to the industry's unnecessarily complex contracts which make current disclosures awkward. The complexity of disclosure statutes, regulations, administrative interpretations, and case law, as well as the disclosure statements they produce is a symptom of creditors' evasion. As consumer advocates, regulators, and policymakers have attempted to respond to the endless evolution of new contractual provisions and practices, they have lost sight of a simple truth: credit contracts do not have to be complicated. Creditors can always protect their investment by raising interest rates. Contract and in turn regulatory and then disclosure complexity only develops when lenders seek to protect their investment through uncomparable contract provisions such as junk closing fees, pre-payment penalties, credit insurance, and other hidden revenue producers, rather than interest rates. The principle advantage of these relatively complex and difficult to compare provisions is that they forestall and confuse debtor price resistance. 672



Perhaps the most serious among the Truth in Lending Act's drafting problems is the increasingly misleading calculation of the finance charge disclosure. Theoretically, the finance charge is the total dollar amount debtors must pay to borrow the principal including interest as well as other non-interest charges. 673 Ideally, the finance charge should be equal to the total amount financed minus the principal of the loan. 674 Original proponents of Truth in Lending believed the finance charge would be an extremely powerful shopping device for consumers, since it would make comparing prices a simple matter of comparing a single dollar figure representing all the costs associated with borrowing a given amount. If a consumer wanted to borrower a certain amount, all she would have to do is compare each lenders' finance charge, and she would immediately know which contract was the least expensive. The finance charge is also crucial [*900] because it is the basis for calculating the annual percentage rate, which is simply a yearly percentage expression of the finance charge. 675



But in the years since Truth in Lending, high-cost mortgage lenders have learned to exploit regulatory exceptions to calculation of the finance charge disclosure. When Congress passed Truth in Lending in 1968, most mainstream lenders described all non-interest charges as "points." These points would cover all the incidental costs of closing a loan including title searches, appraisals, and others. One point is usually equal to one percent of the total amount financed. But, over the past twenty years lenders have increasingly "unbundled" the costs which originally justified charging points into a variety of junk fees.



Now, in addition to points (sometimes outrageously high), those costs that points were designed to cover (and more) are unbundled and separately passed on: underwriting fees, warehousing fees, interim funding fees, loan processing fees, document preparation fees, loan disbursement fees, lenders' closing attorney's fees, courier and expedited delivery fees to ferry the paper between the lender and closing agent. Of course, more familiar closing costs are also passed on: . . . title-related fees, credit insurance, property insurance, mortgage guarantee insurance, broker's fees. The list goes on. 676



These fees create enormous difficulty for regulators as well as federal and state courts. Courts must grapple with the invention of each new fee to determine whether it is properly calculated as a finance charge and therefore included in the annual percentage rate. Different types of lenders have different fees and even the same lender will have different fees for different types of loan products. The result is a body of law that is rarely penetrable by the attorneys and judges who work in the legal trenches where-in the best case scenario-high-cost lending disputes are resolved. Because high-cost lending cases are notoriously labor intensive for plaintiffs' attorneys, in practice if not in law, it is left to the discretion of lenders whether to include junk fees in the finance charge. 677

[*901]

The Truth in Lending statute itself, its regulations, rare court oversight, and inadequate debtor access to trained attorneys allow lenders to wedge more and more of these fees into exceptions to the finance charge. Because the annual percentage rate is derived from the finance charge, these seemingly innocuous exceptions can completely undermine the whole transaction cost reducing value of Truth in Lending. In order to know the total price of borrowing a certain amount of money, consumers must search through the documents, find every non-finance charge inclusive fee, and then add those fees to the finance charge themselves. In order to do this debtors must wait until all of the final documents are prepared. And then, they must start all over again and go through the documents for each loan they want to consider. When customers want to rely on the annual percentage rate, there is no guarantee it is accurate, since it is derived from an often horribly distorted finance charge. In reality, most high-cost debtors have trouble understanding the simple notion of a finance charge itself. Most debtors cannot distinguish interest from an annual percentage rate, or understand why the latter is much more reliable. And virtually no debtors can identify and distinguish those fees not included in the finance charge and then comprehend why that understanding is absolutely crucial to knowing the true price of the loan.



The result is that there is no single easily comparable figure which describes the price a borrower will pay for financing-but, to the casual observer it looks like there is. These junk fees are almost always financed as part of the loan principal. Since they do not come directly out of the consumer's pocket, unsuspecting borrowers cannot tell the difference. In the high-cost credit market, borrowers who do not figure this process out until it is too late are forced to pay outrageous fees for worthless services, as well as interest on those fees, in monthly payments over a course of years-sometimes over a lifetime. And, if the borrower refuses to pay, the lender will use well-paid veteran lawyers to quickly and mercilessly take the borrower's home-possibly reaping a big additional home equity windfall in the process. In the hands of sophisticated but shameless high-cost lenders, the TILA as it is currently written may not provide any pre-transactional shopping protection to debtors. Since prospective borrowers can never tell beforehand which lenders are packing the loan with non-finance-charge-inclusive fees, Truth in Lending only serves to create a veneer of legitimacy and safety where there is none. Credit industry lobbying to preserve the legality of these practices has so successfully battered down "Truth in Lending" with manipulative complication, ever expanding exceptions, unnecessary delays, and outright deception, even U.S. Circuit Judge Richard Posner, quarterback for the neo-classic [*902] economic analysis of law team recently quipped "[s]o much for the Truth in Lending Act as a protection for borrowers." 678



The irony is this system may hurt forthright and efficient lenders as much as debtors. Lax finance charge disclosure calculations and other disclosure distortions create a disincentive for all lenders to comply with the spirit of Truth in Lending. Lenders who in good faith include all fees within the finance charge, offer disclosures promptly, and do not bury key price tag information in a stack of misleading and irrelevant information are likely to hurt their own competitiveness. The mainstream banker's opposition to uniform bright line no-exceptions price tag disclosure may be born out of an instinctive reaction against government regulation, rather than good business sense. Because all creditors operate under the same field of government regulation, lenders who intend to comply with the law have much more to fear from easily circumvented disclosure regulations than bright line uniformly enforced regulations. Lenders who are not afraid of efficiency and price competition have nothing to fear from robust disclosure rules. It is only creditors who have something to hide-namely the prices of their loans-who should fear more thorough and consistently enforced disclosure. 679



What the basic approach of Truth in Lending fails to capture is that truth and understanding are not always (or perhaps are rarely) synonymous concepts. One cannot have understanding based on false information, therefore truth is a necessary element of understanding. But, one can have true information and not understand it. In the best of current circumstances, status quo federal law is only concerned with whether disclosures truthfully and completely describe the cost of a loan. The true descriptions provided by federal disclosure rules only provide an opportunity to understand credit prices. If the past thirty years of high-cost consumer credit experience teach one lesson, it is that truth is not enough-vulnerable high-cost debtors need understanding.



V. Conclusion



Although the history of consumer credit in America retains many unique features, the policies we have relied upon to protect vulnerable debtors from the danger of high-cost credit are in most cases older than our country. Sadly, these strategies have not reliably cured the social ills associated with high-cost debt nor prevented our most resent surge in the high-cost credit market. Ironically, many advocates of these policies are quixotically unaware of the histories of failure plaguing each policy option [*903] which date back hundreds or even thousands of years. This Article has attempted to provide a new historically grounded classification of high-cost credit policy which helps highlight these limitations. Debtor amnesty, interest rate caps and other contractual restrictions, selective protection schemes, charitable lending, cooperative lending, and the over reliance on unregulated markets have all had histories indicating inherent drawbacks. As a result our efforts have tended to protect those who least need it-the relatively affluent.



Today America is in the throws of an identity crisis with respect to consumer credit. Social conservatives do not know how to resolve Biblical injunctions against abusive money lending and their tradition of stalwart thrift with their embrace of laissez faire capitalism. Social liberals do not know how to resolve their empathy for the plight of working poor and lower-middle class debtors with their new found commitment to market decisionmaking. Both conservatives and liberals alike have embraced mainstream moderately priced consumer credit. But as of yet both groups have lacked the cultural sophistication to morally distinguish relatively new mainstream moderately priced credit with the millennia old high-cost credit sold in the second tier alternative finance market. It is precisely this collective moral disorientation which has allowed payday lenders, pawnbrokers, rent-to-own retailers, rapid tax refund lenders, car title lenders, and predatory home and manufactured home lenders to cloak themselves with mainstream legitimacy like never before. It is this moral disorientation which has allowed such lenders to slip within the jurisdiction of laws designed to protect the relatively affluent upper and upper-middle classes. It is this disorientation which has allowed some banks to depart from the honorable tradition of American banking by stooping to triple digit interest rate payday lending.



In this respect, the TILA and disclosure laws in general have thus far proven a mixed blessing. From a long term historical perspective, unlike other American high- cost credit policy strategies, the disclosure approach is relatively untried. Despite limitations made apparent over the past thirty-five years, the disclosure approach to preventing harmful social consequences of high-cost credit may yet prove more valuable than other far older strategies. However, to date, Truth in Lending has not lived up to its potential. The challenge for consumer advocates is to rhetorically recapture disclosure law from industry lobbyists. To do so, consumer advocates must recast the goal of disclosure law as aiming not merely to truthfully describe contracts, but as aiming to create practical contractual understanding on the part of vulnerable debtors. Anything less risks wasting the historically unique opportunity of credit disclosure law as yet another demobilizing illusion of debtor protection.





Legal Topics:

For related research and practice materials, see the following legal topics:

Banking Law > Consumer Protection > Truth in Lending > Disclosure


Criminal Law & Procedure > Postconviction Proceedings > Imprisonment


Civil Procedure > Pretrial Judgments > Judgment by Confession



FOOTNOTES:


n1 Sidney Homer & Richard Sylla, A History of Interest Rates 3, 17 (3d ed. 1996). "Credit long antedated industry, banking, and even coinage; it probably antedated primitive forms of money." Id. at 3. Paul Einzig further explains: Deferred payments played an important part in the life of primitive communities from a very early stage. . . . Credit existed on a fairly extensive scale before the stage of money economy was reached. There are many ethnographic instances of credit in kind in communities where no trace of any medium of exchange or even standard value has been discovered . . . . Even during the most primitive phase of barter when the exchange of goods assumed the form of reciprocal presents or services, there was often a discrepancy between the time of making the original payment or rendering the original service and that of the reciprocation. In a sense, it is therefore true to say that credit existed from the very earliest phases of economic activity, even before the evolution of barter proper. Paul Einzig, Primitive Money in Its Ethnological, Historical and Economic Aspects 362-63 (1966).

n2 William Chester Jordan, Women and Credit in Pre- Industrial and Developing Societies 13 (1993).

n3 Homer & Sylla, supra note 1, at 19.

n4 See id. at 18-20; Einzig, supra note 1, at 362-63.

n5 James M. Ackerman, Note, Interest Rates and the Law: A History of Usury, 1981 Ariz. St. L.J. 61, 63; see also A. Leo Oppenheim, Introduction to Letters from Mesopotamia: Official Business, and Private Letters on Clay Tablets from Two Millenia 4-5 (A. Leo Oppenheim trans., 1967) (noting the importance of records in a "storage economy").

n6 See Homer & Sylla, supra note 1, at 21.

n7 Id. at 21, 29.

n8 Id. at 18; see also Charles O. Hardy et al., Consumer Credit and Its Uses 4-5 (1938) ("For the most part loans were not made to persons who, because they borrowed, were able to increase their own earning power and through this increase repay their debts."); Ackerman, supra note 5, at 63 ("The earliest loans were probably extended to people in immediate difficulty- what we would call personal or consumer loans.").

n9 Homer & Sylla, supra note 1, at 21 ("Along with the early development of money and credit there also grew up abuses and prejudices. Some have continued to this day.").

n10 See Alfred Marshall, Principles of Economics 584 (8th ed. 1949).

n11 The Babylonian Code of Hammurabi attempted to address this problem by asserting that debts may be tendered in various types of goods. Ostensibly this prevented some abuses by creditors by preventing creditors from requiring payment in some rare or out-of-season good. See The Oldest Code of Laws in the World: The Code of Laws Promulgated By Hammurabi, King of Babylon B.C.E. 2285-2242, at 59 (C.H.W. Johns trans., 1905) [hereinafter The Oldest Code]. If a man has to pay, in money or corn, but has not money or corn to pay with, but has goods, whatever is in his hands, before witnesses, according to what he has brought, he shall give to his merchant. The merchant shall not object, he shall receive it. Id. Historians no longer believe that the Code of Hammurabi is the oldest code of laws in the world. Since Johns' book was published, a number of important archeological discoveries have outdated his title. Nevertheless, Johns' translation and index to the Code are accessible and user friendly. A more scholarly but less convenient translation is G.R. Driver & John C. Miles, 2 The Babylonian Laws (1955).

n12 Ackerman, supra note 5, at 63.

n13 Hardy, supra note 8, at 4-5; H.W.F. Saggs, Babylonians: Peoples of the Past 97 (1995); Ackerman, supra note 5, at 63-4.

n14 See Howard Zinn, A People's History of the United States: 1492-Present 43 (Rvsd. ed., 1995) (arguing the profit to be had by purveyors of indentured servants, rather than the servants themselves, was among the most powerful forces leading to colonization); Vern Countryman, Bankruptcy and the Individual Debtor-And a Modest Proposal to Return to the Seventeenth Century, 32 Cath. U. L. Rev. 809, 812-13 (1983) ("It is estimated that nearly half of our total white immigration came over under indenture.").

n15 Gerald David Jaynes, Branches Without Roots: Genesis of the Black Working Class in the American South, 1862- 1882, at 32 (1986); Donald G. Nieman, Introduction to From Slavery to Sharecropping: White Land and Black Labor in the Rural South 1865-1900, at x-xi (1994); James Smallwood, Perpetuation of Caste: Black Agricultural Workers in Reconstruction Texas, in African American Life, 1861-1900: From Slavery to Sharecropping 227, 229 (Donald G. Nieman ed., 1994); Harold D. Woodman, King Cotton and His Retainers: Financing and Marketing the Cotton Crop of the South, 1800-1925, at 310-11 (1968); C. Vann Woodward, Origins of the New South, 1877-1913, at 207 (1951).

n16 These creditors were known as the first "loan sharks." Lendol Calder, Financing the American Dream: A Cultural History of Consumer Credit 49-52 (1999); Louis N. Robinson & Maude E. Stearns, Ten Thousand Small Loans: Facts about Borrowers in 109 Cities in 17 States 11 (1930); Clarence W. Wassam, The Salary Loan Business in New York City 26 (1908); Mark H. Haller & John V. Alviti, Loansharking in American Cities: Historical Analysis of a Marginal Enterprise, 21 Am. J. Legal Hist. 125, 133-34 (1977); Peter R. Shergold, The Loanshark: The Small Loan Business in Early Twentieth-Century Pittsburgh, 45 Penn. Hist. 200, 202 (1978).

n17 Lynn Drysdale & Kathleen E. Keest, The Two-Tiered Consumer Financial Services Marketplace: The Fringe Banking System and Its Challenge to Current Thinking About the Role of Usury Laws in Today's Society, 51 S.C. L. Rev. 589, 605 (2000); Jean Ann Fox, Safe Harbor for Usury: Recent Developments in Payday Lending, Consumer Federation of America Report 9-10 (1999); Scott Andrew Schaaf, Note, From Checks to Cash: The Regulation of the Payday Lending Industry, 5 N.C. Banking Inst. 339, 357 (2001); see James J. White, The Usury Trompe l'Oleil, 51 S.C. L. Rev. 445, 445 (2000). Turn of the century salary lenders and today's post-dated check payday lenders both lend at interest rates typically around 10% per week-or 520% per annum. Christopher L. Peterson, Comment, Failed Markets, Failing Government, or Both? Learning from the Unintended Consequences of Utah Consumer Credit Law on Vulnerable Debtors, 2001 Utah L. Rev 543, 548-49.

n18 The term "high-cost credit" has grown in popularity since 1994 when the Home Ownership and Equity Protection Act (HOEPA) established enhanced disclosure rules and some substantive regulations for home mortgages exceeding price threshold triggers. Home Ownership and Equity Protection Act of 1994, Pub. L. No. 103-325, § 151, 108 Stat. 2190 (1994). The relevant regulatory provision itself is entitled "Requirements for certain closed-end home mortgages." 12 C.F.R. § 226.32 (2002). However, courts, along with most commentators, have adopted the more convenient term "high-cost" to reference loans subject to HOEPA. See, e.g., Williams v. Gelt Fin. Corp. (In re Williams), 232 B.R. 629, 636 (Bankr. E.D. Pa. 1999) ("HOEPA thus placed new restrictions on lenders dealing in so called 'high- cost' mortgages by establishing additional 'advance look' disclosure requirements and imposing limits on some potentially abusive substantive terms."). Some litigants and courts also use the description in non-HOEPA contexts. See, e.g., DeBerry v. First Gov't Mortgage & Investors Corp., 170 F.3d 1105, 1107 (D.C. Cir. 1999). The convenient term has also found its way into recent state laws. See Am. Fin. Servs. Ass'n v. Burke, 169 F. Supp. 2d 62, 64, 67-69 (D. Conn. 2001) (granting an injunction against Connecticut Banking Commissioner blocking enforcement of state law prohibiting mandatory arbitration clauses in "high-cost home loan[s]"); see also Alvin C. Harrell, Subprime Lending Developments with Implications for Creditors and Consumers, 52 Consumer Fin. L. Q. Rep. 238, 245 (1998); Kathleen E. Keest et al., Interest Rate Regulation Developments: High-Cost Mortgages, Rent-to-Own Transactions, and Unconscionability, 50 Bus. Law. 1081, 1084 (1995); Deborah Goldstein, Note, Protecting Consumers from Predatory Lenders: Defining the Problem and Moving Toward Workable Solutions, 35 Harv. C.R.-C.L. L. Rev. 225, 232 (2000). For purposes of this Article, the term "high-cost" is one of convenience, aimed at describing the upper end of consumer credit usually extended to the poor and those with risky credit records. Admittedly, at what point credit should be considered high-cost is open to debate. Some would say all consumer loans have high- costs in comparison to commercial loans, while others would argue no loan has a high cost if the borrower willingly agrees to it. This Article does not explore at what particular point a loan should be considered "high-cost." Certainly, an 800% annual percentage rate (APR) "payday" loan qualifies. A 6.7% APR thirty- year, fixed-rate mortgage with low points and fair contractual terms does not. Whether a 29% APR revolving credit card contract qualifies as high-cost is an open question.

n19 Paul R. Beares, Consumer Lending 12 (2d ed. 1992); Kathleen E. Keest, National Consumer Law Center, The Cost of Credit: Regulation and Legal Challenges 54-55 (1995); Christopher C. DeMuth, The Case Against Credit Card Interest Rate Regulation, 3 Yale J. on Reg. 201, 201 (1986).

n20 Beares, supra note 19, at 12.

n21 Marquette Nat'l Bank v. First Omaha Serv. Corp., 439 U.S. 299 (1978); DeMuth, supra note 19, at 215-16.

n22 John P. Caskey, Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor 139 (1994) [hereinafter Fringe Banking] ("Over the 1980s, the number of pawnshops and check- cashing outlets nationwide more than doubled."); John P. Caskey, Lower Income Americans, Higher Cost Financial Services 59 (1997) ("It is also argued that reaching out to these households is a good business proposition, since the number of households using the alternative financial sector is large and growing."); Keest, supra note 19, at 59 (stating that, "[Credit costs] may not be a problem for most consumers, who typically use credit cards or retail charge accounts for small-sum, short-term credit. But for other consumers, a variety of alternate sources with effective rates that would make a loan shark jealous have sprung up."); Michael Hudson, The Poverty Industry, Introduction to Merchants of Misery: How Corporate America Profits from Poverty 2 (Michael Hudson ed., 1996) ("Big companies are fueling the expansion and 'incorporation' of the poverty industry by pouring in growth capital and providing the sheen of brand-name respectability to transactions that Main Street and Wall Street once viewed with distaste.").

n23 See, e.g., Paul Beckett, Clashing Interest: Why Patricia Heaton Could Cause Problems for a GE-Owned Bank, Wall St. J., Mar. 30, 2001, at A1 ("At stake is whether . . . the GE- owned bank . . . can skirt consumer-protection laws in states such as Louisiana by basing its operations in Georgia, which has relatively permissive rules on interest rates."); Ulysses Currie, Maryland's Legal Loan Sharks, Wash. Post, Nov. 21, 1999, at B08 ("Maryland should . . . prohibit the practice of the payday loan, which preys upon our state's poor and financially desperate."); Dean Foust, Easy Money: Subprime Lenders Make a Killing Catering to Poorer Americans. Now Wall Street is Getting in on the Act, Bus. Wk., Apr. 24, 2000, at 107 ("[W]hat is new is the invasion of mainstream financiers into what was once the sole province of check cashers, pawnshops, and the like."); Adam Geller, Payday Lenders Find Ways Around Restrictions, Chi. Trib., Mar. 6, 2001 ("In all, [a customer] says she paid $ 1800-an annual interest rate of nearly 800 percent-and still owed every penny of her original loan."); Molly Ivins, Feeding Off the Bottom, News & Observer (Raleigh, N.C.), Apr. 12, 2000, at A19 ("Another form of legal robbery is 'payday lending,' a practice that makes mob loan sharks look good."); Mary Kane, Subprime Mortgage Loans Raise Concerns; High Rates, Fees Leave Little Equity, Lots of Risk, New Orleans Times-Picayune, Apr. 9, 2000, at F1 ("In a record economy . . . it might seem odd for anyone to worry about home ownership problems. But the growth of subprime lending-high rate, high-fee loans-along with loans that require no down payments or allow for huge debts, is raising concern."); Peter T. Kilborn, New Lenders With Huge Fees Thrive on Workers With Debts, N.Y. Times, June 18, 1999, at A1 ("[A]s borrowers amass loans, taking new ones to pay the fees on the others, the fastest way to payday becomes a fast way, too, to garnished wages and bankruptcy."); Paul Muolo, Be Careful, Fannie and Freddie, Subprime Land Mines Lie Ahead, 4 Mortgage Servicing News 5, 5 (2000) ("As any mortgage pro knows, subprime lenders these days are akin to 'predatory' lenders. A predatory lender is a dressed up word for 'loan shark.'"); Jane Bryant Quinn, Little Loans Come at Staggering Cost, Wash. Post, June 13, 1999, at H02 ("A payday loan can help someone out of a tight spot, provided that he or she borrows only once. But the lenders work hard at turning new borrowers into repeat customers, paying fees again and again."); Terence Samuel, Support Grows for Controls on "Predatory Lending," St. Louis Post-Dispatch, Apr. 16, 2000, at A12 ("[C]oncern is growing in many quarters that as that sub-prime lending market booms, many people, particularly the elderly and the poor, are being savaged by unscrupulous operators who prey on their ignorance, inexperience or desperation."); Edmund Sanders, Ameriquest Defends Loan Practices; Mortgage: Sub-Prime Lender Says It Has Been Fair, But Activists See Examples of Predatory Lending. The Two Sides Are Meeting to Resolve Their Differences, L.A. Times, Apr. 9, 2000, at C1 ("Scores of Protestors stormed into an Ameriquest Mortgage Co. office . . . chanting slogans like 'No more loan sharks!' and 'People over profits!'"); Gwyneth K. Shaw, Battle Looms Over High-Interest Payday Loans, Orlando Sentinel, Mar. 26, 2000, at A1 ("A survey of 34 payday lenders [in Florida] showed interest rates average 400 percent for a two- week loan, and can go up to more than 600 percent."); Kirsten Stewart, Survey Finds Tactics of Some Lenders Questionable; Compliance with Disclosure Laws Lacking, Law Student Says, Salt Lake Trib., Apr. 24, 2001, at E1 ("A University of Utah law student's random survey of check-cashing centers in the Salt Lake area found that a majority don't fully comply with state and federal disclosure laws designed to protect consumers from unfair lending practices."); Borrowing Trouble: How Can Legislators Not Be Offended by Payday-Advance Businesses that Charge Outrageous Fees to Cash-Strapped Consumers? Leaders, Step Forward, Orlando Sentinel, Apr. 17, 2000, at A10 ("Florida ought not to be a haven for people who prey on others in financial distress."); Senator Seeking Input on Subprime Loans; Meeting to Target Predatory Lending, Dallas Morning News, Apr. 20, 2000, at 1C ("The subprime market increased from $ 20 billion in 1993 to more than $ 150 billion in 1998."); Time to Restore Loan-Sharking Laws, Santa Fe New Mexican, Apr. 9, 2000, at F-8 ("[F]or the moment, nothing can be done about this traffic in human misery.").

n24 15 U.S.C. §§ 1601-1667e (2002).

n25 Kathleen E. Keest & Gary Klein, National Consumer Law Center Truth in Lending 31 (3d ed. 1995).

n26 Id.

n27 Act of May 16, 1966 Mass. Acts 284; Act of Aug. 31, 1966 Mass. Acts 587 (codified as amended at Mass. Gen. Laws Ann. ch. 140C, §§ 1-13 (West 1974), repealed by Act of Dec. 24, 1981, 1981 Mass. Acts 733 § 1); see also Edward L. Rubin, Legislative Methodology: Some Lessons From the Truth-in-Lending Act, 80 Geo. L.J. 233, 252-53 (1991) (discussing effect of Massachusetts disclosure laws on later federal law).

n28 Pub. L. No. 90-321, 82 Stat. 146 (1968) (codified in 15 U.S.C. §§ 1601-1667e).

n29 Id. The 1968 Act, entitled the Consumer Credit Protection Act, included provisions in addition to the Truth in Lending disclosure rules. Id. The Truth in Lending Act has since come to refer to the disclosure provisions of the Consumer Credit Protection Act. See Rubin, supra note 27, at 262. Because this Article is concerned primarily with disclosure, the phrase "Truth in Lending" is used.

n30 Keest & Klein, supra note 25, at 31.

n31 Steven W. Bender, Consumer Protection for Latinos: Overcoming Language Fraud and English-Only in the Marketplace, 45 Am. U. L. Rev. 1027, 1029-30 (1996); Jeffrey Davis, Protecting Consumers from Overdisclosure and Gobbledygook: An Empirical Look at the Simplification of Consumer-Credit Contracts, 63 Va. L. Rev. 841 (1977); Elwin Griffith, Truth in Lending-The Right of Rescission, Disclosure of the Finance Charge, and Itemization of the Amount Financed in Closedend Transactions, 6 Geo. Mason L. Rev. 191 (1998); Jonathan M. Landers, Some Reflections on Truth in Lending, 1977 U. Ill. L. F. 669; Jonathan M. Landers & Ralph J. Rohner, A Functional Analysis of Truth in Lending, 26 UCLA L. Rev. 711 (1979); Rubin, supra note 27; see also Symposium, A Symposium on Truth in Lending, 9 Okla. City U. L. Rev. 1 (1984) (providing several additional examples); Howell E. Jackson & Jeremy Berry, Kickbacks or Compensation: The Case of Yield Spread Premiums (Jan. 8, 2002), available at http://www.law.harvard.edu/faculty/hjackson/jacksonberry0108.pdf (last visited Apr. 19, 2002).

n32 See, e.g., Kathleen Keest, Whither Now? Truth in Lending in Transition Again, 49 Consumer Fin. L. Q. Rep. 360, 360 (1995) ("[Truth in Lending] was never intended or designed to substitute for substantive consumer protection. Yet, without any real thought or open debate, it has apparently come to stand in that role.").

n33 Keest, supra note 19, at 36.

n34 White, supra note 17, at 445.

n35 Compare 15 U.S.C. § 1637, with 15 U.S.C. § 1638.

n36 Robin A. Morris, Consumer Debt and Usury: A New Rationale for Usury, 15 Pepp. L. Rev. 151, 157 n.22 (1988).

n37 Truth in Lending's disclosure requirements are often described as a procedural, where interest rate caps are seen as substantive. Keest, supra note 19, at 53.

n38 Id. at 43.

n39 See generally 11 U.S.C. §§ 506-507 (2002) (setting out rules for determination of secured status and debt priority). See also Karen Gross, Failure and Forgiveness: Rebalancing the Bankruptcy System 57-59, 64 (1999) (providing simple summary of the effect of security status in bankruptcy proceedings).

n40 Depository lenders usually include banks, credit unions, and savings and loan associations. Keest, supra note 19, at 41-43. Non-depository lenders include finance companies and retailers. Id. at 41-44.

n41 Id. at 37-38.

n42 See, e.g., Arthur Birnie, The History and Ethics of Interest (1952); Hugh Barty-King, The Worst Poverty: A History of Debt and Debtors (1997); J.W. Blydenburgh, A Treatise on the Law of Usury (1844); Robert Buckley, A Treatise on the Law of Usury (1817); Raymond deRoover, Money, Banking and Credit in Mediaeval Bruges (1948); Rosa-Maria Gelpi & Francois Julien-Labruyere, The History of Consumer Credit: Doctrines and Practices (2000); Homer & Sylla, supra note 1; Jordan, supra note 2; Odd Langholm, The Aristotelian Analysis of Usury (1984); Carol Bresnahan Menning, Charity and State in Late Renaissance Italy: The Monte Di Pieta of Florence (1993); Paul Millett, Lending and Borrowing in Ancient Athens (1991); J.B.C. Murray, The History of Usury (1866); Benjamin Nelson, The Idea of Usury: From Tribal Brotherhood to Universal Otherhood (2d ed. 1969); John T. Noonan, The Scholastic Analysis of Usury (1957); Mark Ord, An Essay on the Law of Usury (3d ed. 1809); Franklin W. Ryan, Usury and Usury Laws (1924); Melanie Tebbutt, Making Ends Meet: Pawnbroking and Working-Class Credit (1983); Ackerman, supra note 5; James G. Frierson, Changing Concepts on Usury: Ancient Times Through the Time of John Calvin, 7 Am. Bus. L.J. 115 (1969).

n43 There are other strategies which are beyond the scope of this Article because they do not suggest relevant insight for contemporary United States policy makers. Foremost among these untreated strategies are laws banning interest altogether. The first example of a civil interest ban was Charlemagne's Admonito Generalis. Gelpi & Julien-Labruyere, supra note 42, at 22-25. And, although Islam provides for many alternative forms of banking, Shari'ah law prohibits the taking of interest or riba. See generally Aidit bin Haji Ghazali, Consumer Credit from the Islamic Viewpoint, 17 J. of Consumer Pol'y 443, 449 (1994) (providing a useful introduction to Islamic credit practices). Another example might include the complex shell currency and credit system of South Pacific Islander society on Rossel Island. In this society certain types of shells were valid tender only for certain types of transactions. See Enzig, supra note 1, at 61-64. Currency traders developed, borrowing from those who did not want a particular type of shell and lending to those who did. Id. Interestingly, beliefs about magic of the currency traders, rather than laws, enforced the consumer credit system. Id. Similarly, the credit policies of totalitarian regimes such as Stalin's U.S.S.R. and Mao's China are probably distinguishable, but hold little relevance for contemporary America.

n44 Thomas H. Greer & Gavin Lewis, A Brief History of the Western World 15-17 (6th ed. 1992).

n45 Id.; M.E.L. Mallowan, Early Mesopotamia and Iran 59-61 (1965); Marc Van De Mieroop, Cuneiform Texts and the Writing of History 9-11 (1999); Oppenheim, supra note 5, at 8-9.

n46 Greer & Lewis, supra note 44, at 18; P.R.S. Moorey, Ancient Mesopotamian Materials and Industries: The Archeological Evidence passim (1994).

n47 Homer & Sylla, supra note 1, at 26; see also Mieroop, supra note 45, at 19 ("The loan is probably the most common private business transaction we find in the textual record . . . .").

n48 Ackerman, supra note 5, at 63, 66.

n49 Samuel Noah Kramer, The Sumerians: Their History, Culture, and Character 78-80 (1963); C. Leonard Woolley, The Sumerians 99, 102, 104 (1928). One loan contract from this era translates: Bak i um has received [x] shekels of silver from Mannum-ki-iliya. He has placed his son as pledge. If Bak i um (wishes to redeem[?]) his son, he shall pay the silver together with its interest. If (the son) dies or escapes, he will take his silver from Bak i um. (7 witnesses, including a smith.). J.N. Postgate, Early Mesopotamia: Society and Economy at the Dawn of History 194 (1992).

n50 Homer & Sylla, supra note 1, at 27.

n51 Kramer, supra note 49, at 78.

n52 Cf. id. (stating that slaves were usually well treated).

n53 Greer & Lewis, supra note 44, at 18; Postgate, supra note 49, at 194.

n54 James G. Macqueen, Babylon 56-57 (1964); Saggs, supra note 13, at 97.

n55 Saggs, supra note 13, at 97; see also Postgate, supra note 49, at 194-95 (describing the Sumerian notion of amar- gi, "which meant 'return to mother,' and referred to the liberation of members of a family enslaved for debt"). Enmetena, a King from the city of Laga , inscribed these words on the face of a building: Enmetena annulled debts for Laga , restoring mother to child and restoring child to mother. He annulled grain loan debts. He annulled debts for the sons of Uruk, of Larsa, and Bad-tibira, restoring them to the hands of Inanna at Uruk, to the hands of Utu at Larsa, and to the hands of Lugal-Emu at the Emu . Id. at 196.

n56 Kramer, supra note 49, at 79.

n57 See id.; Macqueen, supra note 54, at 21-22.

n58 Saggs, supra note 13, at 97.

n59 Louis Edward Levinthal, The Early History of Bankruptcy Law, 66 U. Pa. L. Rev. 223, 246 (1917).

n60 Id.

n61 Id.

n62 Homer & Sylla, supra note 1, at 115. Credit as a social and economic institution survived through the middle ages and into the enlightenment even in the face of staunch medieval Catholic prejudices against interest. Ackerman, supra note 5, at 72-73; Gelpi & Julien-Labruyere, supra note 42, at 38. Gelpi and Julien-Labruyere explain that "interest-bearing loans were practiced throughout society at large, by princes, merchants, simple folk, and the church itself. It was a hypocritical society, trying to disguise the forbidden practice, condemning it publically but having to recourse to it privately, turning away from those who practiced it, yet tolerating them." Gelpi & Julien-Labruyere, supra note 42, at 38 (citation omitted); see also Homer & Sylla, supra note 1, at 106-11 (cataloging interest rates of late medieval era); Nelson, supra note 42, at 29-72 (discussing in detail religious thinkers evolution toward acceptance of interest in the late medieval era).

n63 Homer & Sylla, supra note 1, at 99.

n64 Id. at 112.

n65 Id. at 94.

n66 Id.

n67 Ackerman, supra note 5, at 66.

n68 Greer & Lewis, supra note 44, at 24.

n69 Id.

n70 Id.

n71 Id. at 24-25.

n72 The Oldest Code, supra note 11, at 68.

n73 Homer & Sylla, supra note 1, at 30.

n74 Driver & Miles, supra note 11, at 39.

n75 Homer & Sylla, supra note 1, at 27; The Oldest Code, supra note 11, at 21-22.

n76 The Oldest Code, supra note 11, at 21-22.

n77 Id. at 20-21.

n78 Id. at 30.

n79 Homer & Sylla, supra note 1, at 27. Hammurabi's Code also formalized some standards for granting debtor amnesty. For instance, the Code abated debts where debtors could not pay due to natural disasters such as drought or flood. The Oldest Code, supra note 11, at 12-13.

n80 Homer & Sylla, supra note 1, at 27.

n81 M.I. Finley, Economy and Society in Ancient Greece 162 (1981).

n82 Edward L. Glaeser & Jose Scheinkman, Neither a Borrower Nor a Lender Be: An Economic Analysis of Interest Restrictions and Usury Laws, 41 J. L. & Econ. 1, 20 n.37 (1998) (relying on C.H.W. Johns, Babylonian and Assyrian Laws, Contracts and Letters (1904)).

n83 Karl Christ, The Romans: An Introduction to Their History and Civilisation 13 (Christopher Holme trans., 1984); Stephen L. Dyson, Community and Society in Roman Italy 78 (1992).

n84 See generally Michael Crawford, The Roman Republic 31-42 (2d ed. 1993) (relating brief history of the Roman conquest of Italy); Chester G. Starr, Jr., The Emergence of Rome as Ruler of the Western World 7-13, 16 (1953).

n85 Christ, supra note 83, at 12-15; Starr, supra note 84, at 22.

n86 Christ, supra note 83, at 12-13.

n87 Id. at 12-15.

n88 Id. at 13; T.J. Cornell, The Beginnings of Rome: Italy and Rome from the Bronze Age to the Punic Wars (c. 1000-264 BC) 256-57 (1995).

n89 Id. at 266; see also Christ, supra note 83, at 13 ("In almost all the social disturbances of the Graeco-Roman cultural world, land distribution and the cancellation of debt were primary demands.").

n90 One historian explains: Debt provided the rural elite with another form of sociolegal control, binding free rustics to them in a manner similar to that of slaves and freedmen. Roman law was not kind to debtors. The rural ruling class could use the threat of prosecution laws as a major instrument of control. This rural indebtedness apparently increased during the second and third centuries [C.E.] and contributed to the protofeudal system of the late Empire. Dyson, supra note 83, at 134.

n91 See, e.g., F.R. Cowell, The Revolutions of Ancient Rome 31, 39-40 (1962) ("There was at first no limit to the interest that might be demanded on loans, so those in desperate want were forced to accept any terms. Moneylenders in ancient times were notorious for their harsh, grasping greed and, left uncontrolled as they were, they demanded thirty, fifty, a hundred percent interest and more.").

n92 Id. at 40 (quoting Livy).

n93 Id.

n94 Id.

n95 Id.

n96 Starr, supra note 84, at 23.

n97 Homer & Sylla, supra note 1, at 45.

n98 Id.

n99 Id.

n100 Id. at 45, 52.

n101 Id. at 52.

n102 Id.

n103 The "rapacious faeneratores, or moneylenders" are a staple in ancient Roman history and culture. Dyson, supra note 83, at 78.

n104 Homer & Sylla, supra note 1, at 59.

n105 Id. at 38-39, 48.

n106 Id. at 48.

n107 F.W. Mote, Imperial China, 900-1800, at 474, 549 (1999).

n108 Id. at 564, 776; Franz Michael, The Origin of Manchu Rule in China: Frontier and Bureaucracy as Interacting Forces in the Chinese Empire 1 (1972).

n109 Ray Huang, 1587: A Year of No Significance: The Ming Dynasty in Decline 131 (1981).

n110 Homer & Sylla, supra note 1, at 614.

n111 Huang, supra note 109, at 138 (noting a 3% monthly statutory maximum) (relying on Ta-Ming Hui-tien, at 163.14, 164.25).

n112 Id. at 146-47.

n113 Id. at 140, 144.

n114 Id. at 144.

n115 Id. at 145-46.

n116 Id. at 138, 140.

n117 Id. at 145.

n118 Id. at 138.

n119 See id. at 130-55.

n120 Id.

n121 Id. at 132.

n122 Id. at 135-36.

n123 Id. at 145.

n124 Id. at 135.

n125 Id. at 136.

n126 Id.

n127 Id.

n128 Id. at 137.

n129 Id. at 138-39.

n130 Id. at 139.

n131 Id.

n132 Id. at 140.

n133 Id. at 141.

n134 Id. at 138.

n135 James Bunyan Parsons, The Peasant Rebellions of the Late Ming Dynasty, at xiii (1970); Mote, supra note 107, at 795-96.

n136 Parsons, supra note 135, at 5 n.* (discussing Chi Liu-ch'i, Ming chi pei lueh 4/11a-b). Parsons asserts, without citing evidence, that Chi Liu-ch'i's attribution of the soldier's story as the cause of the rebellion is "undoubtedly an exaggeration." Id. He is probably right. The single incident, if it happened at all, would alone not be enough to start a revolution. But, whether the incident itself actually happened is irrelevant. What is important is that many people, including a Chi Liu-ch'i, probably thought it did. The story points to the charged atmosphere surrounding high cost lending which is indicative of the wide despair of debtors at the time. Id.

n137 Robin A. Morris, Consumer Debt and Usury: A New Rationale For Usury, 15 Pepp. L. Rev. 151, 151 (1988).

n138 See B.S.J. Isserlin, The Israelites (1998).

n139 See id.

n140 Id. at 61.

n141 Id. at 21-24.

n142 Id. at 49-50, 59-64; James C. VanderKam, An Introduction to Early Judaism 5-6 (2001); Niels Peter Lemche, The Relevance of Working with the Concept of Class in the Study of Israelite Society in the Iron Age, in Concepts of Class in Ancient Israel 89, 94-95 (Mark R. Sneed ed., 1999).

n143 Deut. 23:19-20 (Oxford Study ed., 1976) (emphasis added); see also Nelson, supra note 42, at xix-xxii (discussing the linguistic roots of ancient Hebrew terms for foreigner and clan member). The Hebrews also had a few other ancillary rules. For instance, The Bible prohibits holding clothing as collateral. See Exod. 22:26. Also, the Jubilee Year rule established a crude debtor amnesty system which required returning of property sold under duress to the original owner every fifty years. See Glaeser & Scheinkman, supra note 82, at 20 n.37.

n144 Glaeser & Scheinkman, supra note 82, at 21.

n145 Norman K. Gottwald, The Expropriated and the Expropriators in Nehemiah 5, in Concepts of Class in Ancient Israel 1, 7 (Mark R. Sneed ed., 1999).

n146 H. Tadmor, The Period of the First Temple, the Babylonian Exile and the Restoration, in A History of the Jewish People 91, 175 (H.H. Ben-Sasson ed., 1976).

n147 Id. at 175-76.

n148 Id. at 176.

n149 Id.

n150 Id.

n151 Neh. 5:1-13 (Oxford Study ed., 1976).

n152 Tadmor, supra note 146, at 175.

n153 Id. at 176; see also Kramer, supra note 49, at 82 (discussing reforms of Urukagina of Lagash in Sumeria); Saggs, supra note 13, at 97 (discussing reforms of Ammisaduqa in Babylon); Gottwald, supra note 145, at 8 (comparing Nehemiah's reforms to Solon's).

n154 See Gottwald, supra note 145, at 7 ("We are basically left with the wider biblical attestation that in spite of numerous measures to combat impoverishment through debt, none seems to have been effective over any great length of time.").

n155 Finley, supra note 81, at 163; Gottwald, supra note 145, at 9.

n156 Finley, supra note 81, at 163; see Naomi Pasachoff & Robert J. Littman, Jewish History in 100 Nutshells 56-58 (1995) (for a convenient description of the Hasmonean kingdom).

n157 K.V. Rangaswami Aiyangar, Aspects of Ancient Indian Economic Thought 108 (1934).

n158 Id. Ancient Mesopotamiam cultures may have had social norms which led to similar, albeit less formal outcomes. One letter from the city of Ugarit reads, "[g]ive [in the meantime] the 140 shekels which are still outstanding from your own money but do not charge interest between us-we are both gentlemen!" A. Leo Oppenheim, Ancient Mesopotamia: Portrait of a Dead Civilization 88 (1977).

n159 Millett, supra note 42, at 181.

n160 Greer & Lewis, supra note 44, at 63.

n161 Ackerman, supra note 5, at 68; see also 1 Fritz M. Heichelheim, An Ancient Economic History: From the Paleolithic Age to the Migrations of the Germanic, Slavic and Arabic Nations 281-82 (Joyce Stevens, trans. 2d ed. 1958) (giving a more thorough account of the causes of the Solonic crisis).

n162 Homer & Sylla, supra note 1, at 34, 36.

n163 Ivan M. Linforth, Solon the Athenian, in Classical Philology 52 (1919).

n164 Finley, supra note 81, at 156.

n165 Linforth, supra note 163, at 48-49 (citations omitted).

n166 Ackerman, supra note 5, at 68; Homer & Sylla, supra note 1, at 34; Greer & Lewis, supra note 44, at 58-59.

n167 Homer & Sylla, supra note 1, at 34-35.

n168 Id. at 34; see also Finley, supra note 81, at 157 (discussing the linguistic meaning of Solon's reforms).

n169 Homer & Sylla, supra note 1, at 34.

n170 Millett, supra note 42, at 50 (alterations omitted).

n171 Linforth, supra note 163, at 67-68.

n172 Homer & Sylla, supra note 1, at 38-39.

n173 Id. at 34-35.

n174 Ackerman, supra note 5, at 68.

n175 Homer & Sylla, supra note 1, at 35-36.

n176 Id.

n177 See id.

n178 Millett, supra note 42, at 219-20.

n179 Homer & Sylla, supra note 1, at 38.

n180 Millett, supra note 42, at 220-21.

n181 Homer & Sylla, supra note 1, at 35-36.

n182 Id. at 40 (relying on Augustus Boeckh, The Public Economy of the Athenians 179 (Anthony Lamb trans., 1857)).

n183 Id.

n184 Ackerman, supra note 5, at 68-69.

n185 Homer & Sylla, supra note 1, at 35.

n186 Id. at 38.

n187 Ackerman, supra note 5, at 69-70.

n188 Id. at 69 (quoting Plato, The Republic 280 (F. Cornford trans., 1945)).

n189 Barty-King, supra note 42, at 8; Homer & Sylla, supra note 1, at 70-71.

n190 Barty-King, supra note 42, at 10-11; Homer & Sylla, supra note 1, at 71-72.

n191 Homer & Sylla, supra note 1, at 71.

n192 Greer & Lewis, supra note 44, at 273; Homer & Sylla, supra note 1, at 98.

n193 Homer & Sylla, supra note 1, at 104.

n194 Ackerman, supra note 5, at 74; Greer & Lewis, supra note 44, at 286-87.

n195 Greer & Lewis, supra note 44, at 346.

n196 Ackerman, supra note 5, at 74; Greer & Lewis, supra note 44, at 318-19.

n197 Homer & Sylla, supra note 1, at 72.

n198 Id. at 78-79, 104-06; Jordan, supra note 2, at 15.

n199 Caskey, Fringe Banking, supra note 22, at 13-14; Homer & Sylla, supra note 1, at 78-79; Jordan, supra note 2, at 37; M.R. Niefeld, The Personal Finance Business 18-19 (1933); Nelson, supra note 42, at 19-22; Tebbutt, supra note 42, at 108; Ackerman, supra note 5, at 76-77. A similar institution may have existed in the third century B.C.E. in Ptolemaic Egypt. There "directors of the government monopoly banks . . . would loan money upon silver vases or other articles of value deposited with them. . . . The interest charged was the legal one of that time, namely 2 percent per month." William Linn Westermann, Warehousing and Trapezite Banking in Antiquity, 3 J. Econ. & Bus. Hist. 30, 47 (1931). Buddhist monasteries in China also had a tradition of offering a small number of subsidized pawn loans at least as early as 200-300 A.D. Homer & Sylla, supra note 1, at 608. Monasteries also appear to have made pawn loans for profit as well.

n200 Nelson, supra note 42, at 19-20.

n201 Cassell's New Latin Dictionary 379, 449 (1959). The montes pietatum are also commonly referred to by their Italian name, monti di pieta. See, e.g., Caskey, Fringe Banking, supra note 22, at 13.

n202 Cassell's New Latin Dictionary 379 (1959).

n203 Homer & Sylla, supra note 1, at 79.

n204 Caskey, Fringe Banking, supra note 22, at 13-14.

n205 See Homer & Sylla, supra note 1, at 106, 110 (comparing the 20% legal mazim for pawn loans in Florence with the 6% offered rate at montes pietatis).

n206 Id.

n207 Nelson, supra note 42, at 19.

n208 Caskey, Fringe Banking, supra note 22, at 13-14.

n209 Id. at 14.

n210 See id. at 13-15. Currently enduring municipal pawnshops include the "Dorotheum" in Vienna and the "Credit Municipal" in Paris. Mexico also has numerous municipal pawnshops. Id. at 14 n.3; John Dornberg, Vienna's Dorotheum: A Singular Auction House and Hockshop, 21 Smithsonian 110, 110-20 (1990).

n211 Nelson, supra note 42, at 19; Niefeld, supra note 199, at 18.

n212 Nelson, supra note 42, at 19.

n213 Id. (footnote omitted).

n214 Id. Similarly, vicious antisemitism existed throughout Europe. See, e.g., Barty-King, supra note 42, at 10.

n215 Tebbutt, supra note 42, at 109.

n216 Id.

n217 Id.

n218 Id. at 109-10.

n219 Id.

n220 Id. at 110.

n221 Jordan, supra note 2, at 37.

n222 Id.

n223 Id.

n224 Tebbutt, supra note 42, at 111.

n225 See, e.g., Menning, supra note 42, at 259-60 (noting the lack of sufficiant capital in Florence's mons pietatis until the Medici family began using it to pay interest on deposits and lend large sums to a wealthy clientele).

n226 Id.

n227 Paul A. Samuelson & William D. Nordhaus, Economics 462-63, 712, 716 (15th ed. 1995).

n228 Homer & Sylla, supra note 1, at 17.

n229 Id. at 153-54.

n230 Greer & Lewis, supra note 44, at 511-13; Charles Ferguson & Donal McKillop, The Strategic Development of Credit Unions 15 (1997).

n231 M. Manfred Fabritius & William Borges, Saving the Savings & Loan: The U.S. Thrift Industry and the Texas Experience 1950-1988, at 12 (1989).

n232 Mark Boleat, The Building Society Industry 3 (1982); Homer & Sylla, supra note 1, at 153-54, 181-84.

n233 Fabritius & Borges, supra note 231, at 11-12.

n234 Barty-King, supra note 42, at 165.

n235 Id.; Boleat, supra note 232, at 3.

n236 Barty-King, supra note 42, at 165.

n237 Boleat, supra note 232, at 3.

n238 Id.

n239 Id.

n240 Homer & Sylla, supra note 1, at 154.

n241 See Dalton Conley, Being Black, Living in the Red: Race, Wealth, and Social Policy in America 60-61 (1999) (making a similar point in a contemporary context).

n242 Barty-King, supra note 42, at 165-66; Boleat, supra note 232, at 3-5; Fabritius & Borges, supra note 231, at 11-12.

n243 Jack Dublin, Credit Unions: Theory and Practice 143 (1971).

n244 Id.

n245 Id.

n246 Id.

n247 Id.; Ferguson & McKillop, supra note 230, at 15- 16.

n248 Dublin, supra note 243, at 143-44.

n249 Id. at 143.

n250 Id. at 144.

n251 Id.

n252 J. Carroll Moody & Gilbert C. Fite, The Credit Union Movement: Origins & Development 1850-1970, at 11 (1970).

n253 Id.

n254 Ferguson & McKillop, supra note 230, at 16.

n255 Id.

n256 Id.

n257 Id. at 16-17.

n258 Dublin, supra note 243, at 146; Olin S. Pugh & F. Jerry Ingram, Credit Unions: A Movement Becomes an Industry 2 (1984).

n259 Dublin, supra note 243, at 46; Ferguson & McKillop, supra note 230, at 16-19 (1997); Rolf Nugent, Consumer Credit and Economic Stability 75-76 (1939); Pugh & Ingram, supra note 258, at 1-2.

n260 Dublin, supra note 243, at 146.

n261 Ronald Rudin, In Whose Interest? Quebec's Caisses Populaires 1900-1945, at 13 (1990).

n262 Id.

n263 Id.

n264 Boleat, supra note 232, at 3.

n265 Dublin, supra note 243, at 143-44.

n266 Rudin, supra 261, at 5, 11.

n267 Id. at 27.

n268 Pugh & Ingram, supra note 258, at 6.

n269 Homer & Sylla, supra note 1, at 274 ("The colonists from England brought with them seventeenth-century English attitudes toward credit and interest.").

n270 Keest, supra note 19, at 37; Ackerman, supra note 5, at 85; Tracy A. Westen, Usury in the Conflict of Laws: The Doctrine of the Lex Debitoris, 55 Cal. L. Rev. 123, 131 & n.45 (1967); Laurence M. Katz, Comment, Usury Laws and the Corporate Exception, 23 Md. L. Rev. 51, 52 & n.11 (1962).

n271 Katz, supra note 270, at 52.

n272 Act to Reduce the Rate of Interest, 12 Ann., c. 16 (1713), reprinted in Katz, supra note 270, at 52 n.11.

n273 Id.

n274 Ackerman, supra note 5, at 85.

n275 Id.

n276 Keest, supra note 19, at 37.

n277 Ackerman, supra note 5, at 85.

n278 Id. at 85-86.

n279 Id. at 86.

n280 Id. at 86-87; Westen, supra note 270, at 133-34.

n281 Keest, supra note 19, at 37.

n282 Homer & Sylla, supra note 1, at 274.

n283 Calder, supra note 16, at 98; Homer & Sylla, supra note 1, at 274.

n284 H.C. Carey, The Credit System in France, Great Britain, and the United States 25 (1838).

n285 Calder, supra note 16, at 91-104 (providing extensive historical discussion of Victorian American moral attitudes towards personal consumption debt).

n286 David M. Tucker, The Decline of Thrift in America: Our Cultural Shift From Saving to Spending 9-10 (1991); 7 The Papers of Benjamin Franklin 342-49 (Leonard W. Labaree ed., 1963).

n287 Homer & Sylla, supra note 1, at 275.

n288 Calder, supra note 16, at 112.

n289 Haller & Alviti, supra note 16, at 127.

n290 Calder, supra note 16, at 112.

n291 Countryman, supra note 14, at 812-13.

n292 Id. at 813.

n293 Id. at 814.

n294 Id. at 816.

n295 Id.

n296 Id. at 809-10; John C. McCoid, II, Discharge: The Most Important Development in Bankruptcy History, 70 Am. Bankr. L.J. 163, 164, 181 (1996); Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 Am. Bankr. Inst. L. Rev. 5, 7-8 (1995).

n297 McCoid, supra note 296, at 163-65.

n298 Tabb, supra note 296, at 6-7.

n299 Both British and American bankruptcy laws have consistently suffered from inconsistency. Both have exhibited a "pattern of lapse [and] revival." McCoid, supra note 296, at 181.

n300 Countryman, supra note 14, at 813.

n301 Id. at 811-13.

n302 Id. at 813.

n303 Id.; Tabb, supra note 296, at 15.

n304 See Countryman, supra note 14, at 813; Tabb, supra note 296, at 14-15.

n305 Countryman, supra note 14, at 814-15.

n306 See id.

n307 Id.

n308 Charles Warren, Bankruptcy in United States History 13-20 (1935); Countryman, supra note 14, at 815-16; Tabb, supra note 296, at 14, 18-22.

n309 See, e.g., Richard Holcombe Kilbourne, Jr., Debt, Investment, Slaves: Credit Relations in East Feliciana Parish, Louisiana 1825-1885 (1995) (conducting a systematic historical study of the role of slave property in securing credit contracts).

n310 Nieman, supra note 15, at vii-viii.

n311 Smallwood, supra note 15, at 227.

n312 For general discussions of sharecropping in the nineteenth-century South, see William Cohen, At Freedom's Edge: Black Mobility and the Southern White Quest for Racial Control, 1861-1915 (1991); Ronald L.F. Davis, Good and Faithful Labor: From Slavery to Sharecropping in the Natchez District, 1860-1890 (1982); Jaynes, supra note 15; Roger L. Ransom & Richard Sutch, One Kind of Freedom: The Economic Consequences of Emancipation (2d ed. 1977); James L. Roark, Masters Without Slaves: Southern Planters in the Civil War and Reconstruction (1977); Crandall A. Shifflett, Patronage and Poverty in the Tobacco South: Louisa County, Virginia, 1860-1900 (1982).

n313 Smallwood, supra note 15, at 238-39.

n314 Id. at 229.

n315 Nieman, supra note 15, at x.

n316 Smallwood, supra note 15, at 229.

n317 Id. at 238-39.

n318 Id. at 229.

n319 See, e.g., Tebbutt, supra note 42, at 1.

n320 Id.

n321 Calder, supra note 16, at 43; see also Elizabeth Ewen, Immigrant Women in the Land of Dollars 159 (1985).

n322 Calder, supra note 16, at 47-48.

n323 Haller & Alviti, supra note 16, at 127-28.

n324 Id.

n325 Id. at 128.

n326 Id. at 127, 129.

n327 Id. at 128.

n328 Id. at 128-29.

n329 See, e.g., Ackerman, supra note 5, at 89.

n330 Id.; Robert W. Kelso, Social and Economic Background of the Small Loan Problem, 8 Law & Contemp. Probs. 14, 15-20 (1941).

n331 Haller & Alviti, supra note 16, at 125-26.

n332 Homer & Sylla, supra note 1, at 428.

n333 Id.

n334 Id.

n335 Haller & Alviti, supra note 16, at 133.

n336 Id.

n337 Id.

n338 Id.

n339 Id.

n340 Id.

n341 Id.

n342 Homer & Sylla, supra note 1, at 428.

n343 Id.

n344 Id.

n345 Peter W. Herzog, The Morris Plan of Industrial Banking 5-6 (1928); Keest, supra note 19, at 38-39; Haller & Alviti, supra note 16, at 125.

n346 Haller & Alviti, supra note 16, at 133-34.

n347 Calder, supra note 16, at 46.

n348 Id.

n349 See id. at 52 n.39 (relying on Arthur H. Ham, The Campaign Against the Loan Shark 1 (1912); Shergold, supra note 16, at 202).

n350 See, e.g., David J. Gallert et al., Small Loan Legislation: A History of the Regulation of the Business of Lending Small Sums 17 (1932) (characterizing early interest rate caps and their enforcement provisions as "piecemeal" and prone to "frequent failure").

n351 Id. at 180; Calder, supra note 16, at 50.

n352 Keest, supra note 19, at 38.

n353 Id. at 37-38.

n354 Id. at 37.

n355 Calder, supra note 16, at 50.

n356 See, e.g., id.

n357 See, e.g., Act to Reduce the Rate of Interest, 12 Ann., c.16 (1713), reprinted in Katz, supra note 270, at 52 n.11.

n358 Calder, supra note 16, at 116.

n359 These lenders were commonly called Morris Plan Banks. Evans Clark, Financing the Consumer 69 (1930); Hardy et al., supra note 8, at 32; Keest, supra note 19, at 39; see also Herzog, supra note 345, passim (providing detailed if somewhat generous description of Morris Plan lending).

n360 Haller & Alviti, supra note 16, at 134.

n361 Id.

n362 Id.

n363 Id.

n364 Id. at 135.

n365 Id.

n366 Id. at 134.

n367 Id. at 134-35.

n368 For example, the number of reported cases is paltry in comparison to the number of salary lenders openly operating in violation of general usury limits. The Russell Sage Foundation estimated about 300 lenders were doing business in New York City alone around the turn of the century. Glenn et al., 1 Russell Sage Foundation, 1907-1946, at 138. Although Russell Sage advocates attempted to investigate and find attorneys to deal with the large volume of illegal lending, it is clear their efforts were an exception to the norm. Id.

n369 See, e.g., State v. Halburt, 72 A. 1079, 1080 (Conn. 1909) (holding salary wage assignment invalid under state interest rate cap).

n370 Gallert et al., supra note 350, at 53-54.

n371 Id.

n372 See, e.g., Haller & Alviti, supra note 16, at 134 n.14.

n373 Id. (citing Forest Halsey, The Bawlerout (1912); Frank M. White, The Story of a Debt, in World Work 346 (Jan. 1912)); see also Calder, supra note 16, at 54 (providing a similar description).

n374 In re Home Disc. Co., 147 F. 538, 546 (N.D. Ala. 1906) ("Railroad companies, owners of furnaces and mills, and other large employers of labor, made and enforced rules, for their own protection, that employes [sic] who had unsettled disputes about an assignment of their wages should be laid off, and if the dispute were long-continued, should be discharged.").

n375 Calder, supra note 16, at 19.

n376 Homer & Sylla, supra note 1, at 275.

n377 Calder, supra note 16, at 39-40.

n378 Id. at 40 (quoting Robert Porter, Public and Private Debts, 153 N. Am. Rev. 610-12 (1891)).

n379 See id.

n380 See Caskey, Fringe Banking, supra note 22, at 23.

n381 See id.

n382 Id.

n383 Id.

n384 Id.

n385 Id.

n386 See generally id. (providing a brief historical discussion of the Collateral Loan Company).

n387 Id.

n388 Calder, supra note 16, at 120.

n389 1888 Mass Acts ch. 100.

n390 Calder, supra note 16, at 120-21.

n391 Caskey, Fringe Banking, supra note 22, at 23-24.

n392 Glenn et al., supra note 368, at 66 n.2.

n393 Caskey, Fringe Banking, supra note 22, at 24.

n394 Fabritius & Borges, supra note 231, at 12-13.

n395 Id. at 16, tbl. 2.1.

n396 Dublin, supra note 243, at 146; Ferguson & McKillop, supra note 230, at 18-20; Nugent, supra note 259, at 75-76; Pugh & Ingram, supra note 258, at 2.

n397 See Tabb, supra note 296, at 23.

n398 Id.

n399 See Countryman, supra note 14, at 817.

n400 Id. at 817-18.

n401 Tabb, supra note 296, at 24.

n402 See Countryman, supra note 14, at 817.

n403 Id. at 818.

n404 Id. at 818-19.

n405 Id. at 818.

n406 Bankruptcy Act of 1898, ch. 541, § 4, 30 Stat. 544-547; Countryman, supra, note 14, at 817-18; David A. Moss & Gibbs A. Johnson, The Rise of Consumer Bankruptcy: Evolution, Revolution, or Both?, 73 Am. Bankr. L.J. 311, 312-14 (1999); Tabb, supra note 296, at 23-26.

n407 Lawrence P. King, The History and Development of the Bankruptcy Rules, 70 Am. Bankr. L.J. 217, 218 (1996).

n408 Tabb, supra note 296, at 25-26.

n409 Id. at 25.

n410 Id.

n411 Id.

n412 Id. at 24.

n413 Robert Weisberg, Commercial Morality, The Merchant Character, and the History of the Voidable Preference, 39 Stan. L. Rev. 3, 5 (1986).

n414 Moss & Johnson, supra note 406, at 312-14; Tabb, supra note 296, at 23-26; Weisberg, supra note 413, at 5.

n415 Clark, supra note 359, at 7-8.

n416 Calder, supra note 16, at 52.

n417 Id. at 1 (relying on Arthur H. Ham, The Campaign Against the Loan Shark 1 (1912)).

n418 Id. at 52.

n419 Id. at 50; Gallert et al., supra note 350, at 54; Homer & Sylla, supra note 1, at 428.

n420 Keest, supra note 19, at 38-39.

n421 Calder, supra note 16, at 120.

n422 See, e.g., Willson v. Fisher, 75 Misc. 383, 387 (N.Y. 1912) ("I do not see how any one can look at this transaction as a whole and escape from the conclusion that it is not only usurious, but that plaintiff has been fully paid, and more."); State v. Hurlburt, 72 A. 1079, 1080 (Conn. 1909) ("[T]o allow loans at a rate of interest exceeding 15 percent, a year, where the lender disguises the true nature of the transaction by exacting an absolute conveyance, would frustrate the main object of the enactment, which was to protect borrowers from extortion."). See also Gallert et al., supra note 350, at 54 (listing additional cases).

n423 In re Home Disc. Co., 147 F. 538, 546 (N.D. Ala. 1906); see also Gallert et al., supra note 350, at 54 (demonstrating scholarly perception of these changes by 1932).

n424 Moss & Johnson, supra note 406, at 318-19.

n425 Id. at 318.

n426 Id. at 318-19.

n427 Id.

n428 Gallert et al., supra note 350, at 54.

n429 Id. at 55.

n430 Pugh & Ingram, supra note 258, at 2-3; Nugent, supra note 259, at 76.

n431 Gallert et al., supra note 350, at 13.

n432 See Caskey, Fringe Banking, supra note 22, at 24.

n433 See id.

n434 Gallert et al., supra note 350, at 13.

n435 Caskey, Fringe Banking, supra note 22, at 24 ("The Provident Loan Society probably survived when the others did not because it was the largest and best capitalized of the remedial loan societies, enabling it to weather years with operating losses. It also undoubtably gained from the dense population of New York City . . . .").

n436 See id. at 26.

n437 Calder, supra note 16, at 121-22.

n438 Clark, supra note 359, at 6.

n439 See Keest, supra note 19, at 39.

n440 Adam Smith explained: When the law prohibits interest altogether, it does not prevent it. Many people must borrow, and nobody will lend without such a consideration for the use of their money as is suitable, not only to what can be made by the use of it, but to the difficulty and danger of evading the law. Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations 97-98 (Richard F. Teichgraeber, III ed., Random House 1985). Herve Moulin has recalled the same point more recently. See Herve Moulin, Cooperative Microeconomics: A Game-Theoretic Introduction 7 (1995) ("[T]here is the concern that a well- intentioned politician who invokes ethical principles to interfere with the market process . . . is likely to be countereffective . . . illegal usury is more expensive because the borrower must pay a premium to insure the lender against the risk of being caught . . . .").

n441 Keest, supra note 19, at 39.

n442 See id. at 48.

n443 See id.

n444 Gallert et al., supra note 350, at 89; Keest, supra note 19, at 48.

n445 Calder, supra note 16, at 124-25; Keest, supra note 19, at 48.

n446 Calder, supra note 16, at 125-27.

n447 Keest, supra note 19, at 48.

n448 Calder, supra note 16, at 150.

n449 Id. at 49.

n450 Id. at 156.

n451 Calder, supra note 16, at 147; Clark, supra note 359, at 45, 191-92.

n452 Calder, supra note 16, at 147; Keest, supra note 19, at 48.

n453 Calder, supra note 16, at 147.

n454 Id.

n455 Id. at 153 (quoting Burr Blackburn, Financial Consultation Services, 16 Pers. Fin. News 22 (1932)).

n456 See Loren Baritz, The Good Life: The Meaning of Success for the American Middle Class 64 (1989); Daniel Bell, The Cultural Contradictions of Capitalism 21, 69-70 (1976); Thomas C. Cochran, Challenges to American Values: Society, Business, and Religion 86 (1985); John Kenneth Galbraith, The Affluent Society 170-72 (2d ed. 1969); Christopher Lasch, The Culture of Narcissism: American Life in an Age of Diminishing Expectations 53 (1978); William E. Leuchtenburg, The Perils of Prosperity, 1914-1932, at 197 (2d ed. 1993); Tucker, supra note 286, at 114- 15; Haller & Alviti, supra note 16, at 140-42.

n457 See Galbraith, supra note 456, at 171; Leuchtenburg, supra note 456, at 197; Tucker, supra note 286, at 115.

n458 Tucker, supra note 286, at 115; see also Baritz, supra note 456, at 64.

n459 Baritz, supra note 456, at 80.

n460 See id. at 64, 80; Calder, supra note 16, at 164- 65; Galbraith, supra note 456, at 171.

n461 Calder, supra note 16, at 291.

n462 See id. at 291-92.

n463 Beares, supra note 19, at 11.

n464 Calder, supra note 16, at 291, 302-03.

n465 Scott B. MacDonald & Albert L. Gastman, A History of Credit and Power in the Western World 227 (2001); Lewis Mandell, The Credit Card Industry: A History XII-XIII, at 23 (1990).

n466 MacDonald & Gastman, supra note 465, at 227.

n467 Id.

n468 Mandell, supra note 465, at xv.

n469 Lewis Mandell, Credit Card Use in the United States 1 (1972).

n470 MacDonald & Gastman, supra note 465, at 227-30; Mandell, supra note 465, at 1, 2, 4, 22-23.

n471 Teresa A. Sullivan et al., The Fragile Middle Class: Americans in Debt 108 (2000).

n472 See Tabb, supra note 296, at 26-27.

n473 Id. at 28.

n474 See id. at 29-30.

n475 Id.

n476 Id. at 31.

n477 See King, supra note 407, at 218-19; Tabb, supra note 296, at 31.

n478 Tabb, supra note 296, at 32.

n479 Id. at 31-32.

n480 Id. at 34.

n481 Id. at 35.

n482 King, supra note 407, at 236; Tabb, supra note 296, at 35.

n483 N. Pipeline Constr. Co. v. Marathon Pipe Line, 458 U.S. 50 (1982); Tabb, supra note 296, at 38-39.

n484 See Moss & Johnson, supra note 406, at 311.

n485 See id. at 311-14.

n486 See id. at 312.

n487 Sullivan et al., supra note 471, at 140.

n488 Kenneth T. Jackson, Crabgrass Frontier: The Suburbanization of the United States 195 (1985).

n489 Id. at 196.

n490 See Gregory D. Squires, Community Reinvestment: An Emerging Social Movement, in From Redlining to Reinvestment: Community Responses to Urban Disinvestment 1, 4 (Gregory D. Squires ed., 1992).

n491 Id.

n492 Jackson, supra note 488, at 200; Squires, supra note 490, at 4.

n493 Jackson, supra note 488, at 203; R. Allen Hays, The Federal Government and Urban Housing 85 (2d ed. 1995).

n494 Squires, supra note 490, at 5.

n495 See id.

n496 Id. (quoting U.S. Federal Housing Administration, Underwriting Manual <pmark> 937 (1938)).

n497 Id. at 6.

n498 See generally Conley, supra note 241, at 1-4, 32- 42, 121-22, 150-52 (1999) (discussing historical importance of home ownership as a factor in the relative wealth of African- Americans).

n499 Squires, supra note 490, at 6-7.

n500 Conley, supra note 241, at 37-42.

n501 Id.

n502 See generally 12 U.S.C.A. §§ 2901-2905 (West 2002).

n503 See id.

n504 See generally id.

n505 Squires, supra note 490, at 11.

n506 Allen J. Fishbein, The Community Reinvestment Act After Fifteen Years: It Works, But Strengthened Federal Enforcement Is Needed, 20 Fordham Urb. L.J. 293, 296 (1993); Stephen A. Fuchs, Discriminatory Lending Practices: Recent Developments, Causes and Solutions, 10 Ann. Rev. Banking L. 461, 479-80 (1991); Richard D. Marisco, Fighting Poverty Through Community Empowerment and Economic Development: The Role of the Community Reinvestment and Home Mortgage Disclosure Acts, 12 N.Y.L. Sch. J. Hum. Rts. 281, 282 (1995).

n507 Discrimination in Home Mortgage Lending Hearing Before the Subcomm. on Consumer and Regulatory Affairs of the Committee on Banking, Hous., and Urban Affairs, U.S. Senate, 101st Cong. 118 (1989) (statement of Senator Alan J. Dixon).

n508 Discriminatory Mortgage Lending Patterns, Field Hearing Before the House Committee on Banking, Finance, and Urban Affairs, 101st Cong. 2 (1989) (statement of Chairman Gonzales).

n509 Daniel M. Leibsohn, Financial Services Innovation in Community Development, 8 J. Affordable Housing & Com. Dev. L. 122, 128 (Winter, 1999).

n510 Pugh & Ingram, supra note 258, at 13.

n511 See id. at 12-13.

n512 See id. at 12.

n513 Id. at 33-34.

n514 Id. at 6.

n515 Id. at 25.

n516 Id.

n517 Dublin, supra note 243, at 166; Pugh & Ingram, supra note 258, at 12-13, 25, 34-35.

n518 Pugh & Ingram, supra note 258, at 6.

n519 Id. at 6-7, 19-20.

n520 Id.

n521 Id. at 19.

n522 Id.

n523 Ferguson & McKillop, supra note 258, at 23-24; MacDonald & Gastmann, supra note 470, at 231-32; Pugh & Ingram, supra note 259, at 10, 19, 26, 34-35; Melissa Allison, Area Credit Unions Not Serving All, Study Says, Chi. Trib., Feb. 15, 2001, at Business 1.

n524 Beares, supra note 19, at 12.

n525 Id.

n526 Id.

n527 Keest, supra note 19, at 54.

n528 Id. at 55.

n529 Beares, supra note 19, at 12; Christopher C. DeMuth, The Case Against Credit Card Interest Rate Regulation, 3 Yale J. on Reg. 201, 201 (1986).

n530 Keest, supra note 19, at 54.

n531 Id. at 55.

n532 For example, previous banking regulations allowed only national banks to operate under a variable interest ceiling. Congress extended this privilege to all federally insured depository lenders. See Depository Institutions Deregulation and Monetary Control Act of 1980 (hereinafter DIDA), Pub. L. No. 96- 221, 94 Stat. 132 (1980).

n533 439 U.S. 299 (1978).

n534 Id. at 312-13.

n535 Id.

n536 See Keest, supra note 19, at 74 n.121.

n537 Id.; Peterson, supra note 17, at 553.

n538 William F. Baxter, Section 85 of the National Bank Act and Consumer Welfare, 1995 Utah L. Rev. 1009, 1010-11, 1028; Richard P. Eckman, The Delaware Consumer Credit Bank Act and 'Exporting' Interest Under Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980, 39 Bus. Law. 1264, 1264-70 (1984); Donald C. Langevoot, Statutory Obsolescence and the Judicial Process: The Revisionist Role of the Courts in Federal Banking Regulation, 85 Mich. L. Rev. 672, 686 (1987); Moss & Johnson, supra note 406, at 333; White, supra note 17, at 447-48.

n539 Jean Ann Fox & Edmund Mierzwinski, Rent-A-Bank Payday Lending: How Banks Help Payday Lenders Evade State Consumer Protections 10-12 (Nov. 2001), available at http://www.pirg.org/reports/consumer/payday/2001/paydayreportnov1 3.pdf (last visited Feb. 13, 2003).

n540 Al Guart, "Loanshark" Banks Bite Apple, N.Y. Post, Apr. 7, 2002, at 23 ("The lenders aren't leg-breaking mobsters. They're out-of-state banks that skirt New York's usury laws to make a killing through what is known as 'payday' loans."). In April of 2002, Virginia finally relented to licensing payday lenders as they were already present. Carol Hazard, Payday Lending gets Warner OK, Richmond Times-Dispatch, Apr. 10, 2002, at B1 ("Until now, [payday] lenders have teamed with obscure national banks to skirt state laws that prohibit triple-digit interest rates."). Eagle National Bank, Country Bank, Brickyard Bank, and Crusader Savings Bank are all examples of federally insured banks which engage in a high volume of payday lending. NCRC Calls for Immediate CRA Exams for Abusive Payday Lenders, U.S. Newswire, Apr. 11, 2002, available at http://www.usnewswire.com/topnews/first/0411-132.html (last visited Apr. 12, 2002). Although the Marquette decision cast itself as merely a case of statutory interpretation, footnote 31 establishes that state interest rate caps are not applicable to federally chartered banks by virtue of the Supremacy Clause of the U.S. Constitution. Marquette, 439 U.S. at 318-19 n.31 ("To the extent the enumerated federal rates of interest are greater than permissible state rates, state usury laws must, of course, give way to the federal statute."). See generally Comment, Syndicate Loan-Shark Activities and New York's Usury Statute, 66 Colum. L. Rev. 167 (1966) (reporting extortionate criminal loanshark interest rates averaging 250% annually).

n541 White, supra note 17, at 447-48.

n542 See generally Tucker, supra note 286, at 1-15.

n543 H.R. Rep. No. 90-1040, reprinted in 1968 U.S.C.C.A.N. 1962, 1970.

n544 Id.

n545 See Paul H. Douglas, In Our Time 105-06 (1968).

n546 See id. at 95.

n547 Id.

n548 Id.

n549 Keest, supra note 19, at 48.

n550 See Barry A. Abbott & John W. Campbell, The Truth in Lending Act After 15 Years: Its Goals and Its Limitations, 9 Okla. City U.L. Rev. 1, 2 n.4 (1984) (providing illustrative example).

n551 See Ford Motor Credit v. Millhollin, 444 U.S. 555, 559 (1980); Mourning v. Family Publ'ns Serv., Inc., 411 U.S. 356, 363-69 (1973); John R. Fonseca, 1 Handling Consumer Credit Cases 301 (3d ed. 1986); Keest & Klein, supra note 25, § 1.1; Abbott & Campbell, supra note 550, at 1-2; Rubin, supra note 27, at 233- 34.

n552 Mourning, 411 U.S. at 364.

n553 Id.

n554 Keest & Klein, supra note 25, at 31.

n555 Douglas, supra note 545, at 95-96.

n556 Id. at 96.

n557 Id.

n558 Id. at 97.

n559 Rubin, supra note 27, at 242.

n560 See id. at 255.

n561 See id. at 245.

n562 See id. at 245-50.

n563 See id. at 250-51.

n564 Id.

n565 Douglas, supra note 545, at 99. Senator Douglas commonly called credit disclosure an old idea, citing the requirement that loan contracts be written down in Hammurabi's ancient Babylonian code. See id.; see also Homer & Sylla, supra note 1, at 26-27. However, this may be rhetorical flourish since the Babylonian rule was probably directed not at debtor understanding so much as preventing false contracts and violations of other code provisions. The Babylonian rule is probably better characterized as an early version of the much more common statute of frauds.

n566 Douglas, supra note 545, at 99.

n567 Rubin, supra note 27, at 252. One important difference between the Massachusetts rules and the federal bill was that Massachusetts did not include a private right of action for debtors to sue violating creditors. Instead, the state rule provided that "failure to comply barred recovery of finance charges and subjected the lender to a fine of up to $ 500 or imprisonment of up to six months, or both." Id. at 252 n.116 (citing 1966 Mass. Acts ch. 284 §§ 29-30; 1966 Mass. Acts ch. 587, §§ 10-11).

n568 Id. at 252-53 (footnotes omitted).

n569 Id. at 251-52.

n570 See id. at 255-63. Kathleen Keest and Gary Klein have adroitly pointed out that if Paul Douglas is the father of Truth in Lending, Representative Sullivan, the chief House sponsor, must fairly be counted as its mother. Keest & Klein, supra note 25, at 31 n.4.

n571 Rubin, supra note 27, at 255-57.

n572 Id. at 256.

n573 Id.

n574 See id. at 257.

n575 Id. at 256.

n576 Id. at 261.

n577 Id. at 262.

n578 Id.

n579 Id.

n580 John R. Fonseca, Consumer Credit Compliance Manual §1:4 (2d ed. 1984).

n581 15 U.S.C. § 1605(a) (2002); see also Fonseca, supra note 580, §1:4; Dee Prigden, Consumer Credit and the Law §§ 6:1, 6:2 (1990 & Supp. 2002).

n582 15 U.S.C.A. § 1606(a) (West 2002).

n583 Keest & Klein, supra note 25, at 34.

n584 Id.

n585 Keest, supra note 32, at 360.

n586 Smith, supra note 440, at 225-26.

n587 James F. Ragan, Jr. & Lloyd B. Thomas, Jr., Principles of Micro Economics 371 (1993) (emphasis added).

n588 Karl E. Case & Ray C. Fair, Principles of Macroeconomics 2-4 (4th ed. 1996).

n589 Robert B. Carson & Wade L. Thomas, The American Economy: Contemporary Problems and Analysis 508 (1991); see also Paul A. Samuelson & William D. Nordhaus, Economics 119 (15th ed. 1995) ("The opportunity cost is the value of the good or service forgone.").

n590 Smith, supra note 440, at 225-26.

n591 See Homer & Sylla, supra note 1, at 81 (quoting Bentham and describing the historical context of Bentham's arguments).

n592 See, e.g., E.K. Hunt, Property and Prophets: The Evolution of Economic and Institutional Idologies 192 (7th ed. 1995) (serving as a stark example of the social liberal approach).

n593 Id.

n594 Fox & Mierzwinski, supra note 539, at 25-26.

n595 See 15 U.S.C. § 1601 (describing the purpose of the Truth in Lending Act).

n596 For instance, compare note 74, supra with note 273, supra.

n597 Compare note 223, supra with notes 434 & 509, supra.

n598 See supra note 518.

n599 Many believe similar discrimination continues to exist in mortgage lending markets. For an introduction to this extensive debate, see Harold A. Black, Is There Discrimination in Mortgage Lending? What Does the Research Tell Us?, 27 Rev. of Black Pol. Econ. 23 (1999); Cathy Cloud & George Galster, What Do We Know About Racial Discrimination in Mortgage Markets?, 22 Rev. of Black Pol. Econ. 101 (1993); Theodore E. Day & S. J. Liebowitz, Mortgage Lending to Minorities: Where's the Bias?, 36 Econ. Inquiry 3 (1998); Stephen A. Fuchs, Discriminatory Lending Practices: Recent Developments, Causes and Solutions, 10 Ann. Rev. Banking L. 461 (1991); Fred Galves, The Discriminatory Impact of Traditional Lending Criteria: An Economic and Moral Critique, 29 Seton Hall L. Rev. 1467 (1999); Glenn W. Harrison, Mortgage Lending in Boston: A Reconsideration of the Evidence, 36 Econ. Inquiry 29 (1998); Helen F. Ladd, Evidence on Discrimination in Mortgage Lending, 12 J. Econ. Persp. 41 (1998); Stanley D. Longhofer, Discrimination in Mortgage Lending: What Have We Learned?, Econ. Comment., Aug. 15, 1996 at 1; Robert E. Martin & R.Carter Hill, Loan Performance and Race, 38 Econ. Inquiry 136 (2000); Alicia H. Munnell et al., Mortgage Lending in Boston: Interpreting HMDA Data, 86 Am. Econ. Rev. 25 (1996); Reynold F. Nesiba, Racial Discrimination in Residential Lending Markets: Why Empirical Researchers Always See It and Economic Theorists Never Do, 30 J. Econ. Issues 51 (1996); Ron Nixon, Application Denied: Do Lending Institutions Overlook Hispanics?, 11 Hisp. 30 (1998); Ronald K. Schuster, Lending Discrimination: Is the Secondary Market Helping to Make the 'American Dream' a Reality?, 36 Gonz. L. Rev. 153 (2000/2001); Peter P. Swire, The Persistent Problem of Lending Discrimination: A Law and Economics Analysis, 73 Tex. L. Rev. 787 (1995); see also Robert Schafer & Helen F. Ladd, Discrimination in Mortgage Lending (1981).

n600 Lenders made a similar point in explaining support for Truth in Lending as derived from "the traditional yankee faith in the shrewdness of the consumer, and his ability to police the market place and choose the best buy." Ndiva Kofele- Kale, The Impact of Truth-in-Lending Disclosures on Consumer Market Behavior: A Critique of the Critics of Truth-in-Lending Law, 9 Okla. City U. L. Rev. 117, 120 (1984) (quoting Johnathan M. Landers, Some Reflections on Truth in Lending, 1977 Ill. L. J. 669).

n601 See Abbott & Campbell, supra note 550, at 3; Elwin Grifith, Truth in Lending-The Right of Recission, Disclosure of the Finance Charge, and Itemization of the Amount Financed in Closedend Transactions, 6 Geo. Mason L. Rev. 191, 192-94 (1998); Kofele-Kale, supra note 600, at 126-29; Jonathan M. Landers & Ralph J. Rohner, A Functional Analysis of Truth in Lending, 26 UCLA L. Rev. 711, 713-25 (1979); Rubin, supra note 27, at 279-80, 306.

n602 15 U.S.C. § 1604; Keest & Klein, supra note 25, at 43.

n603 Keest & Klein, supra note 25, at 36.

n604 See generally Ives v. W.T. Grant Co., 522 F.2d 749 (2d Cir. 1975) (holding that reliance on federal reserve board staff letters and pamphlets was not justified).

n605 Id.; see Keest & Klein, supra note 25, at 35-36, 368 n.85.

n606 Keest & Klein, supra note 25, at 34.

n607 See David S. Willenzik & Mark Leymaster, Recent Trends in Truth-in-Lending Litigation, 35 Bus. Law. 1197 n.4 (1980). This, however, does not include suits filed in state courts where debtors also asserted TILA defenses. Id. at 1197 n.5.

n608 See Federal Reserve Board, Regulatory Analysis of Revised Regulation Z, 46 Fed. Reg. 20941, 20942 (1981); see also Keest & Klein, supra note 25, at 36.

n609 See, e.g., Semar v. Platte Valley Fed. Sav. & Loan Ass'n, 791 F.2d 699, 704 (9th Cir. 1986); Bizier v. Globe Fin. Serv., 654 F.2d 1, 3 (1st Cir. 1981); Smith v. Wells Fargo Credit Corp., 713 F. Supp. 354, 355 (D. Ariz. 1989).

n610 See, e.g., Smith v. No. 2 Galesburge Crown Fin. Corp., 615 F.2d 407, 416-17 (7th Cir. 1980) ("It is not sufficient to attempt to comply with the spirit of TILA . . . . Rather, strict compliance with the required disclosures and terminology is required . . . . [W]e will not countenance deviations from those requirements, however minor they may be in some abstract sense." (citations omitted)), overruled by Pridegon v. Gates Credit Union, 683 F.2d 182 (7th Cir. 1982).

n611 Keest & Klein, supra note 25, at 35.

n612 Id. at 35-36.

n613 A sample of the academic literature includes: Abbott & Campbell, supra note 550, passim; William K. Brandt & George S. Day, Information Disclosure and Consumer Behavior: An Empirical Evaluation of Truth in Lending, 7 U. Mich. J.L. Reform 297 (1974); Davis, supra note 31, at 906; Robert W. Johnson, The New Law of Finance Charges: Disclosure, Freedom of Entry, and Rate Ceilings, 33 Law & Contemp. Probs. 671, 673-76 (1968); Robert L. Jordan & William D. Warren, Disclosure of Finance Charges: A Rationale, 64 Mich. L. Rev. 1285 (1966); Kofele-Kale, supra note 600, at 146-47; Homer Kripke, Consumer Credit Regulation: A Creditor-Oriented Viewpoint, 68 Colum. L. Rev. 445 passim (1968); Landers & Rohner, supra note 601, at 751-52; Paul R. Moo, Legislative Control of Consumer Credit Transactions, 33 Law & Contemp. Probs. 656, 661-62 (1968); Rubin, supra note 27, at 306; William C. Whitford, The Functions of Disclosure Regulation in Consumer Transactions, 1973 Wis. L. Rev. 400. See also S. Rep. No. 96-73, at 2-3 (1979), reprinted in 1980 U.S.C.C.A.N. 236, 281-82.

n614 Kofele-Kale, supra note 600, at 128.

n615 See id.

n616 See id.

n617 Simplify and Reform the Truth in Lending Act: Hearings Before the Subcomm. on Consumer Affairs of the Comm. on Banking, Hous., and Urban Affairs United States Senate, 95th Cong. 16 (1977) (statement of Philip C. Jackson, Jr.).

n618 Keest & Klein, supra note 25, at 36 n.37.

n619 Id. at 36.

n620 In addition, the Federal Trade Commission also expressed concern over creditor compliance troubles. Simplification of the Truth in Lending Act: Oversight Hearings Before the Subcomm. on Consumer Affairs of the House Comm. on Banking, Fin. and Urban Affairs, 95th Cong. 6 (1978) (statement of Michael Pertschuk, FTC Chairman).

n621 Keest & Klein, supra note 25, at 34 n.27.

n622 See Truth in Lending Simplification and Reform Act, Pub. L. No. 96-221, tit. VI, 94 Stat. 168 (1980).

n623 The Truth in Lending Simplification and Reform Act was passed as part of the Depository Institutions Deregulation and Monetary Control Act which preempted state interest rate caps on first mortgage home loans. DIDA, Pub. L. No. 96-221, 94 Stat. 132 (codified as amended at 12 U.S.C. § 1735f-7a).

n624 Keest & Klein, supra note 25, at 34.

n625 Id. at 35-36.

n626 See 15 U.S.C. § 1604(b) (2002).

n627 Prigden, supra note 581, § 4:3.

n628 Id.

n629 Id.

n630 Id. § 4:2.

n631 Keest & Klein, supra note 25, at 36; see also Truth in Lending Simplification and Reform Act, Hearings on S.108 Before the Sentate Comm. on Banking, Hous., and Urban Affairs, 96th Cong. 30-31 (1979) (statement of Richard Hobbs, National Consumer Law Center).

n632 Fonseca, supra note 551, § 1:1; Keest & Klein, supra note 25, at 35-36; Prigden, supra note 581, § 4.3.

n633 W. David Slawson, The New Meaning of Contract: The Transformation of Contracts by Standard Forms, 46 U. Pitt. L. Rev. 21, 38-39 (1984) (making a similar point about form contracts in general); see also R. Ted Cruz & Jeffrey J. Hinck, Not My Brother's Keeper: The Inability of an Informed Minority to Correct for Imperfect Information, 47 Hastings L.J. 635, 640-46 (1996) (providing a useful summary of related articles).

n634 Brian Ratchford makes a related point with respect to the economic model of human capital. See Brian T. Ratchford, The Economics of Consumer Knowledge, 27 J. Consumer Res. 397, 406-07 (2001).

n635 See Michael I. Meyerson, The Reunification of Contract Law: The Objective Theory of Consumer Form Contracts, 47 U. Miami L. Rev. 1263, 1274-76 (1993) (discussing Professor Prosser's concerns over this incentive in the context of contractual waiver of product liability).

n636 Mr. Evans story is chronicled in Rick Brundrett, How Mounting Loans Devastated 87-Year-Old, The State (Columbia, S.C.), Feb. 24, 2002, at A1. Also see Editorial, Predatory Lending A Shameful Practice That Must Be Ended, The State (Columbia, S.C.), Feb. 24, 2002, at A1.

n637 Brundett, supra note 636.

n638 Id.

n639 See id.

n640 Michael Hudson, "Signing Their Lives Away"-Ford Profits from Vulnerable Consumers, in Merchants of Misery: How Corporate America Profits from Poverty 42, 47 (Michael Hudson ed., 1996).

n641 Id.

n642 See Peterson, supra note 17, at 565.

n643 Id.

n644 Reggie James et al., In Over Our Heads: Predatory Lending and Fraud in Manufactured Housing, in 5(1) Consumers Union Southwest Regional Office Public Policy Series 1, 16 (2002), available at http://www.consumersunion.org (last visited Feb. 23, 2002).

n645 James et al., supra note 644, at 16-17; see also Steven W. Bender, Consumer Protection for Latinos: Overcoming Language Fraud and English-Only in the Marketplace, 45 Am. U. L. Rev. 1027, 1034-35 (1996).

n646 James G. March & Herbert A. Simon, Organizations 140-41 (1958); Scott Plous, The Psychology of Judgement and Decisionmaking 94-95 (1993); David M. Grether et al., The Irrelevance of Information Overload: An Analysis of Search and Disclosure, 59 S. Cal. L. Rev. 277, 285-89 (1986). Satisficing behavior can be conceptualized as either a welfare maximizing response to imperfect information or as a problem of irrational behavior. See, e.g., Avery Wiener Katz, Foundations of the Economic Approach to Law 268 (1998). In this Article, I take satisficing behavior to be consistent with welfare maximization. Consumers rationally satisfice when the opportunity costs of pursuing larger product data sets outweigh the predictive potential gains to further shopping. Nevertheless, this does not necessarily imply that high-cost debtors always behave rationally. There may be irrational cognitive errors which impede optimal market outcomes in addition to transaction cost distortions. However, irrational behavior is beyond the scope of this article.

n647 James et al., supra note 644, at 4-6.

n648 RESPA requires lenders provide a "Good Faith Estimate" of closing costs within three days after a customer applies for a loan. 12 U.S.C.A. § 2601(b)(1) (West 2002). However, RESPA does not include any penalties or liability for wild inaccuracies on the estimate or even failure to provide the estimate at all. Both the Federal Reserve Board and HUD have characterized RESPA good faith estimates as "unreliable." Board of Governors of the Federal Reserve System & United States Department of Housing and Urban Development, Joint Report to Congress Concerning Reform to the Truth in Lending Act and the Real Estate Settlement Procedures Act 20 (1998), available at www.federalreserve.gov/boarddocs/RptCongress/tila.pdf (last visited May 15, 2002).

n649 James et al., supra note 647, at 4.

n650 Id. at 4.

n651 Id. at 4-6.

n652 Id.

n653 See Board of Governors of the Federal Reserve System & United States Department of Housing and Urban Development, supra note 648, at II.

n654 See Peterson, supra note 17, at 573; Christopher Peterson, Only Until Payday: A Primer on Utah's Growing Deferred Deposit Loan Industry, 15 Utah Bar J. 16, 16 (2002).

n655 One industry funded demographic survey of payday loan debtors remarks, "[p]ayday advance customers are not deeply rooted in their employment. 50% of respondents have had their current job for three years or less, and 70% have had their current job for five years or less." Io Data Corporation, Utah Consumer Lending Association: Utah Customer Study 30 (2001) (available on file with author).

n656 Peterson, supra note 17, at 573.

n657 This penalty has also been conceptualized as a "sunk" cost. Gilian K. Hadfield et al., Information-Based Principles for Rethinking Consumer Protection Policy, 21 J. Consumer Pol'y 131, 139 (1998).

n658 Public Interest Research Group and Consumer Federation of America, Show Me the Money! A Survey of Payday Lenders and Review of Payday Lender Lobbying in State Legislatures 6 (2000).

n659 Id.

n660 Peterson, supra note 17, at 564-65.

n661 The Truth in Lending Act states, "In responding orally to any inquiry about the cost of credit, a creditor, regardless of the method used to compute finance charges, shall state rates only in terms of the annual percentage rates . . . ." 15 U.S.C.A. § 1665a (West 2002).

n662 See Hadfield et al., supra note 657, at 161 (noting regulations affecting business reputation can provide effective consumer protection at a low cost).

n663 Id. at 155.

n664 Janet Ford, The Indebted Society: Credit and Default in the 1980s, at 126 (1988).

n665 Caskey, supra note 22, at 70-71; Ford, supra note 664, at 126-30; W.C.A.M. Dessart & A.A.A. Kuylen, The Nature, Extent, Causes, and Consequences of Problematic Debt Situations, 9 J. Consumer Pol'y 320, 328 (1986).

n666 Ron Nixon, Application Denied: Do Lending Institutions Overlook Hispanics?, 11 Hispanic 30, 30 (1998) (quoting Luis Artega, executive director of the Latino Issues Forum in San Francisco).

n667 Even if a simpler disclosure procedure existed, "improved disclosures may not aid comparison shopping significantly in underserved markets where there is less competition." Board of Governors of the Federal Reserve System & United States Department of Housing, supra note 648, at 51; see also A. Charlene Sullivan, Understanding the Consumer Credit Environment 35 (1989) ("Consumers tended to choose among the various classes of credit grantors on the basis of perceived relative costs, but chose a particular creditor on the basis of familiarity."); Melissa Allison, Poorer Areas of Chicago Also Remain Poor in Bank Branches, Knight Ridder Trib. Bus. News, Nov. 26, 2001, available at 2001 WL 31004762.

n668 Landers & Rohner, supra note 601, at 715-16 (footnotes omitted).

n669 Simplify and Reform the Truth in Lending Act: Hearings, supra note 617, at 333.

n670 Id. at 334.

n671 Keest & Klein, supra note 25, at 35.

n672 As Kathleen Keest has persuasively explained, high-cost creditors "place the point at which prices hit market resistance higher by deceptively understating the price." Keest, supra note 32, at 362.

n673 See Ralph J. Rohner & Fred H. Miller, The Law of Truth in Lending <pmark> 4.01[2][c][i] (1984).

n674 See id.

n675 See id.

n676 Keest & Klein, supra note 25, at 77.

n677 The few attorneys that do provide services to high-cost borrowers must be very selective because of the formidable time commitment each case involves. Cynthia Vinarsky, Youngstown, Ohio, Program Helps Homeowners Victimized by Predatory Lenders, Knight-Ridder Trib. Bus. News, Apr. 14, 2002, available at 2002 WL 19772538. Moreover, many debtors themselves prefer to cut their losses and walk away from the hassle of a lawsuit even after learning of a creditor's illegal actions. See Deborah A. Schmedemann, Time and Money: One State's Regulation of Check-Based Loans, 27 Wm. Mitchell L. Rev. 973, 995 (2000).

n678 Emery v. Am. Gen. Fin., Inc., 71 F.3d 1343, 1346 (7th Cir. 1995); see also Keest, supra note 32, at 364 (making a similar point).

n679 Keest & Klein, supra note 25, at 75.

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