The Free Market Institute at Texas Tech hosted Todd J. Zywicki for a lecture on ‘The Law & Economics of Consumer Credit and the Loan Shark Protection Act’ on Thursday evening in the Rawls College of Business.

During the event, Zywicki, a George Mason University Foundation Professor of Law at the Antonin Scalia Law School, discussed topics, such as why consumers use credit, the dangers of regulating consumer credit and the proposed Loan Shark Prevention Act.

The event opened with Benjamin Powell, the executive director of the Free Market Institute, welcoming attendees and introducing Zywicki. 

“(Zywicki) is the author of more than 100 articles in leading law reviews and economics journals. He has testified several times before congress on issues of consumer bankruptcy and consumer credit,” Powell said. “He is a frequent commentator in the popular press both on TV and in print.” 

Zywicki began his lecture by discussing two bills that were introduced in congress, the Loan Shark Prevention Act and the Military Lending Act for All. These bills introduce usury ceilings, he said, price controls on the interest rate that can be charged on credit products, such as loans. 

The Loan Shark Prevention Act was co-sponsored by Senators Bernie Sanders and Alexandria Ocasio-Cortez, Zywicki said. Zywicki went on to quote remarks from Senator Sanders discussing how modern day loan sharks work on Wall Street, rather than on street corners, and remarks from Representative Ocasio-Cortez on how interest rates higher than 15 percent are debt traps that are designed to keep working families under water. 

The type of rhetoric used by Sanders and Ocasio-Cortez trivializes the experience people have had with real loan sharks, Zywicki said. 

“I want to just say right now as an aside I find, as you’ll see later on, this analogy with the loan sharks to be actually somewhat disgusting, as we’ll see because there actually were real loan sharks," he said.

Zywicki then went on to touch on topics including why consumers use credit, why businesses use credit, how credit is priced and what history can reveal about the consequences of regulations. 

Business and consumers use credit for a similar reason: to level out expenses, Zywicki said. Incurring debt can make sense for households. 

“We also use credit to smooth income and expenses,” he said. “So, you have an unexpected payment, like a medical bill, for example, or car breakdown, or something like that, we use credit.”

What people, such as Senators Elizabeth Warren, Sanders and Ocasio-Cortez are concerned about are credit cards, Zywicki said. 

“Before I talk about credit cards in detail, I just want to pause for a moment and marvel at credit cards,” he said. “I mean this sincerely: we have never seen anything in history, like credit cards, right. A 24-hour, instantaneous, secure payment system that can be used anytime, day or night, any place in the world, online, on the phone, in person, you get cash, you can buy goods and services.” 

In the 1970s, only fifteen percent of households had credit cards, and it began to loosen up after that, Zywicki said. Warren remarked in 1980, the world changed because prior to that, people generally saved up for things in lieu of credit. However, she is wrong. 

“There was plenty of consumer credit before 1980,” Zywicki said. “It was just a different form of consumer credit."

When credit cards emerged, they were a more efficient vehicle of credit and replaced the odds and ends of credit back in the old days, Zywicki said. 

“What we see here is far from the idea that the introduction of credit cards caused people to become profligate spenders and borrows, in fact, credit cards simply seemed to have substituted for all these others forms of installment credit that preceded it for many decades,” he said. 


The story of America in the 20th century is of consumer credit, Zywicki said. As consumer credit grew in the past, so did home ownership in the suburbs in the post-war era. 

Some people have obviously overused credit and credit cards, Zywicki said, as seen in the financial crisis when people even misused mortgages. But data clearly suggests consumers use credit in a rational fashion. 

“The debt burden tends to fluctuate within a fairly narrow band over long periods of time, and so we shouldn’t be distracted by headlines indicating there is something inherently bad about credit,” he said. 

Regulation of credit always has some intended consequences, Zywicki said. For example, if one was to pass a 10 percent usury ceiling in Arkansas, by in large, loans will not be charged over 10 percent. 

But there also are three and sometimes four unintended consequences of regulatory acts, such as the Loan Shark Prevention Act, Zywicki said. These include pyramid pricing, product substitution, rationing and dynamic effects on competition. 

When certain terms of a loan, such as interest rates, are regulated, other terms can adjust, Zywicki said, such as annual fees, larger borrowed sums and more. 

In states, such as Pennsylvania, where there is a 36 percent usury ceiling, only about 1.5 out of 1000 people get a loan, Zywicki said. Almost no one gets a loan for less than $500, and only one percent of loans are for less than a $1,000. The majority of the loans have maturities of over two years.

“So, if you want to get a loan in Pennsylvania, you have to get a big loan. The reality is a lot of people don’t want to borrow that much money and the other reality is that lenders won’t lend you a lot of money if you’re a poor risk.” 


In Texas, where there is less regulation, there are a lot more small loans and people can borrow what they want, Zywicki said.

Zywicki went on to discuss the other three consequences of regulation. He concluded his lecture by summarizing his argument against the Loan Shark Prevention Act and its proposed usury ceiling. 

If a 15 percent interest rate ceiling is imposed, a lot of people that have credit cards today will no longer have them despite needing credit, Zywicki said. The people affected will primarily be low-income, young people, those without good credit scores. 

Those who do have credit cards will also suffer, Zywicki said. They will likely have annual fees, lose the benefits they get on their cards and other terms and conditions will adjust because of the inability to charge a market interest rate. More people will also be forced to rely on payday loans.

“We know how this story ends,” Zywicki said regarding the proposed regulation and its impact. “It’s not a mystery. There may be unintended consequences, but it certainly can’t be unanticipated consequences.”

Nicholas Olvera, a senior accounting major from Lubbock, said he attended the lecture due to an extra credit opportunity in one of his classes. His takeaway was that regulations on interest rates would negatively affect the economy for consumers.

Attending the event was important because students should know about current events and information that is outside of the classroom, Olvera said. 

“Class teaches you about like old stuff, but this is like current events so it’s important,” he said. 

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