Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/209120
Authors: 
Neuberger, Doris
Reifner, Udo
Year of Publication: 
2019
Series/Report no.: 
Thünen-Series of Applied Economic Theory - Working Paper No. 161
Abstract: 
Usury is a frequent occurrence in consumer credit markets and particularly affects low-income households. Although the term usury conjures images of a greedy individual consciously acting to exploit the weak bargaining position of another by deceitful and even fraudulent means, we consider it as a systemic issue: as a problem of social discrimination, where belonging to a group which is statistically discriminated against leads to entrapment in a chain of usurious credit and financial contracts. This paper reviews the economic rationale for usury legislation and evaluates the European Consumer Credit Directive 2008/48/EC in this context. It identifies systemic usury as the product of market failure: the most powerful explanations for which are monopoly power, where the consumer is locked in a bilateral credit relationship; discrimination through risk-based pricing, and negative externalities. Contrary to the main focus of the European Consumer Credit Directive, improved disclosure of contract terms and other relevant information to consumers at the point of contracting cannot address systemic usury in credit markets. Even fully informed consumers can be discriminated against and become trapped in a situation of bilateral monopoly. As a consequence, the Directive is found to be ineffective: it implicitly acknowledges usurious practices and products as legal and undermines the national fight against usury. The Directive must be reformed.
Subjects: 
discrimination
Consumer Credit Directive
incomplete information
payment protection insurance
overindebtedness
monopoly power
responsible lending
risk-based pricing
usury
JEL: 
D14
D18
D42
D62
D63
G21
G28
K15
K22
K33
L12
L14
Document Type: 
Working Paper

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