To ensure that creditors follow ethical business policies while loaning out money to the borrowers, the governments maintain a strict vigil on them. This is done by designing and enforcing a few laws and regulations that will control the debt market and at the same time improve the money lending and debt collection practices. Over the years several such laws have been formulated and implemented and a number of significant amendments have been made in the laws that already exist.
This has protected both the lenders as well as the consumers but just as every other law there are also a few downsides that have had significant effect on the economy of the country, accessibility to credit for the honest and genuine borrowers and has had a significant effect on the high risk borrowers. It is all due to the inefficient regulation of creditor remedies as well as the distributive effects of it.
- According to a study conducted by Dunkelberg, the high risk borrowers are the most adversely affected segment in the money lending market.
- They are subject to the pressures of higher interest rates, lower accessibility to credit and most importantly of the more stringent lending standards and policies as imposed by the lenders.
- The lenders are compelled to do so as the ultimate consequences of the tighter limits on debt collection which they have to response and abide by them strictly.
If you go through the debt settlement and debt consolidation reviews you will be able to know how these high risk borrowers have trouble finding a debt relief option to deal with their present debts or to find a new one to meet with their financial needs.
The regressive distributional effect
The tighter debt laws are more will be the regressive distributional effect. According to the findings of Hynes and Posner on such regressive distributional effect, this is the result of the restrictions on the collector remedies. The regressive distributional effects that were noted in this study are:
- It affected the unsecured credit more severely in comparison to the secured credit circuit
- It raised the cost to of loans to the consumers for obtaining any type of unsecured credit as compared to secured credit
- It cause the high income consumers to have more and easy access to loans as they are more likely to provide assets as collateral for the loans they seek such as home equity.
In order to eliminate such discrimination in the lending market the governments racked up their brains to determine whether or not it is theoretically possible to put in a few restrictions on the creditors remedies. They thought it will be more effective and efficient for some consumers in this context to some extent.
It was found after considerable thinking that if there are few restrictions imposed on some remedies of creditors there will be associated increase several other allied aspects such as:
- In the likelihood of any given consumer to have access to credit and
- In the likelihood that a greater overall amount of credit will be available.
However, it was also found on the other hand that by restricting all other remedies of the creditors will also have a negative impact on the quantity of credit outstanding.
Therefore, even if some restrictions may increase the consumer demand more than these would reduce the supply graph of the lender, the results obtained due to such restrictions will be surely mixed.
The different implications
There are different implications of such findings but more of it is found to be positive which encouraged the governments to make the amendments in the debt laws for the benefit of the country’s economy.
However, it was also found that a few of these positive findings are not replicable given the current regulatory setting of the government. In today’s environment, the collection remedies are overall much more highly regulated than these were in the past.
It is fund that the remedies are efficient enough to control several other allied aspects of debt such as:
- The non-purchase money security
- Interests in household goods and
All these are more regulated now than before. That means the task of recognizing and classifying all other additional regulations though is difficult but will be highly beneficial for the consumers even though it is highly likely to exceed the costs of the loans.
Implications for the creditors
These changes will also have significant implication for the part of the creditors as well. They will now probably have to insist on cosigners along with the applicants who are high risk before making any loan. This requirement will however favor the debtors from higher income credentials further.
That means as a result, the high wealth and high income borrowers will be able to evade the higher costs factor more easily than the high risk customers. In addition to that, these high costs are also accompanied by stricter lending policy which is the result of the limits on the creditor remedies. The creditors will now have to increase their use of secured credit as well to respond to such changes and reduce the risk of lending.
The low income consumers
By contrast, the low risk consumers are more likely to be forced to turn to alternative products such as the payday loans or pawnshops to meet with their financial needs. As a matter of fact, the borrowers with low risk are more benefitted as there is an increase in the supply of lending capital from the specific type of debts. This is due to the reducing access to credit by the high risk borrowers.
In addition to that, there is also a significant distributional consequence amongst different types of borrowers who have been subjective to different heterogeneous preferences with regards to the types of remedies that they are ready to accept by default.
It is seen that a few of such consumers are more tolerant and will even try out different practices and remedies that may be more useful than the others. To sum up, change in debt laws has helped both high and low risk borrowers.