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Systemic usury and the European Consumer Credit Directive

Author

Listed:
  • Neuberger, Doris
  • Reifner, Udo

Abstract

Usury is a frequent occurrence in consumer credit markets and particularly affects low-income households. Systemic usury exploits poverty by shifting usury into additional products and leveraging usury gains by stringing together individual loan agreements. This paper reviews the economic rationale for usury legislation and on this basis evaluates the European Consumer Credit Directive 2008/48/EC. Systemic usury is a market failure. The most powerful explanations for such failure in consumer credit markets are monopoly power, where the consumer is locked in a bilateral credit relationship, discrimination through risk-based pricing, and negative externalities, where the least solvent borrowers are cross-subsidized by the more solvent ones. Incomplete information of consumers cannot explain systemic usury in credit markets, because even fully informed consumers would be discriminated and trapped into a situation of bilateral monopoly. However, the European Consumer Credit Directive is primarily based on the model of incomplete information, which it seeks to correct by informational duties. As a consequence, usurious practices and products are implicitly acknowledged as legal, which has eroded the national combat against usury. Therefore, this Directive is not effective and must be reformed.

Suggested Citation

  • Neuberger, Doris & Reifner, Udo, 2019. "Systemic usury and the European Consumer Credit Directive," Thuenen-Series of Applied Economic Theory 161, University of Rostock, Institute of Economics.
  • Handle: RePEc:zbw:roswps:161
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    References listed on IDEAS

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    More about this item

    Keywords

    discrimination; Consumer Credit Directive; incomplete information; payment protection insurance; overindebtedness; monopoly power; responsible lending; risk-based pricing; usury;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K15 - Law and Economics - - Basic Areas of Law - - - Civil Law; Common Law
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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