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The phenomenal growth of personal installment credit over the past forty years has generated inevitable pressures for regulatory reform of consumer credit markets. Much of the impetus for consumer protection has stemmed from the perceived abuses that mark the process of coercive collection upon default. Some of these abuses have been identified, quite properly, as the sort of deceptive or fraudulent practices often associated with industries experiencing rapid growth. But other creditor remedies, though troublesome to many observers, cannot be as easily characterized. For example, many critics have challenged the common practice of self-help repossession and resale of consumer goods by secured creditors. Repossession belongs to a family of contractually created remedies, including wage assignments, confessions of judgment and waivers of exemption from execution, that is often characterized as coercive. Creditors are assumed to use the threat of these self-enforcing remedial options to coerce defaulting debtors to agree to one-sided settlements.

The concept of "lost value" underlies the objection to most coercive creditor remedies. Creditors often pursue coercive collection in cases in which the benefits to the creditor appear to be significantly less than the costs imposed on the debtor. The punitive aspect of this destruction of value forms the primary justification for the recently promulgated Federal Trade Commission Credit Practices Rule, which prohibits such common credit terms as blanket security interests in household goods and contractual wage assignments. Indeed, the lost value assumption supplied the crucial argument that the benefits from regulating creditor remedies were far greater than the costs: since the prohibited practices are believed to cause more injury to consumers than corresponding benefits to creditors, prohibition should have only a modest effect on the price or the supply of installment credit.

The lost-value thesis has also sparked a vigorous academic debate. William Whitford, developing ideas first suggested by Arthur Leff, has argued that information asymmetries lead to a systematic bargaining impasse between debtors and creditors. This impasse results either in repossessions that destroy value unnecessarily or in coercive threats that induce debtors to accept unfavorable settlements. Alan Schwartz, on the other hand, suggests that lost value is largely a perceptual illusion fueled by would-be regulators' ignorance of the actual operation of credit markets. While conceding the possibility that creditors may threaten coercive action to induce repayment, Schwartz argues that they will do so only when the action represents the cost-minimizing collection option.


Banking and Finance Law | Law | Law and Economics