Shadow Credit and the Devolution of Consumer Credit Regulation

Authors

Nathalie Martin, University of New Mexico School of Law
Lydia Pizzonia

Author Details

Lydia Pizzonia, J.D. 2019, University of New Mexico School of Law

First Page

1439

Abstract

Shadow credit is trending. Shadow credit has all the essential attributes of regular credit except that it is unregulated. It operates in a world in which products and services that look, act, and feel like credit products are deemed to be something that is not actually credit. This legal sidestep is accomplished either by passing industry-friendly legislation or by tweaking the shadow credit product just enough to not be defined as credit, but “something else.” That “something else” is often called a “lease,” an “advance,” or in the case of After- pay, simply a “service.” At its essence, however, it is still credit. More and more shadow credit products are popping up to take the place of actual credit prod- ucts.

The purpose of avoiding being “credit” is to avoid consumer credit regulation. We see this trend among purveyors of rent-to-own household goods, rent-to- own real estate, employer payday advances, buy-now-pay-later services like Af- terpay, income sharing agreements in higher education finance, and even bail bonds, all of which seek to avoid complying with usury laws or interest rate caps, Article 9 of the Uniform Commercial Code (U.C.C.), the federal Truth in Lending Act, and all other consumer credit protection laws.

While some of these products are helpful to consumers, or at least not particu- larly harmful, some are deeply predatory. They can operate outside the law. For example, classic rent-to-own contracts that were historically used for house- hold goods are now being used in housing contracts in vulnerable Native American communities.

Emerging shadow credit products are testing the limits of what should be per- mitted in rent-to-own contracts and similar financing tools. The trend toward shadow credit has the capacity to derail our entire consumer credit regulation system.

Recommended Citation

Nathalie Martin & Lydia Pizzonia, Shadow Credit and the Devolution of Consumer Credit Regulation, 24 Lewis & Clark L. Rev. 1439 (2020).
Available at: https://lawcommons.lclark.edu/lclr/vol24/iss4/8