PRICE CEILINGS AND CREDIT RATIONING**

Abstract

THERE IS LITTLE DOUBT that usury laws and small loan laws effectively lower the finance rate to many borrowers obtaining installment loans from consumer credit lenders.' But it also seems likely that the maximum rate provisions contained in small loan legislation restrict the availability of credit to marginal risk loan applicants, forcing them either to abstain from borrowing altogether or to seek credit from illegal lenders. The purpose of this paper is to demonstrate some of the effects of rate ceilings on credit allocation at consumer finance companies. First, price theory analysis is applied to the problem. Then, an empirical test measures the relationship between rate ceilings and credit rationing. Finally, the impact of rate ceilings on illegal lending and on general economic development in the low income sector of our economy is discussed. At the present time, all of the states except one have small loan laws imposing some form of consumer credit rate ceiling.2 Maximum rates on a one year $500 loan range from 24 per cent per annum to over 33 per cent. For example, the maximum rate of charge on a $500 loan from a legally licensed small loan lender in New York is approximately 26 per cent per annum, while the rate on a $500 loan from the same finance company in West Virginia is approximately 34 per cent.3 Efforts are now being made by the National Conference of Commissioners on Uniform State Laws (NCCUSL) to unify these laws and to recommend a Model Uniform Consumer Credit Code that all states may adopt. A very important feature of such a model bill is a rate ceiling provision limiting charges on most forms of consumer credit. It is particularly important that the credit availability and credit rationing impact of rate ceilings be thoroughly understood by the draftors of this proposed code because