Small loan regulation in Massachusetts
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Consumer credit may be defined as that type of credit which satisfies the individual in his role as a consumer. The maximum contract life is set at three years in order to eliminate real estate credit and other types of "investment" credit. Consumer credit is commonly divided into two catagories, Money Credit and Merchandise Credit. Money Credit institutions are commercial banks, credit unions, industrial or "Morris Plan" banking companies, industrial loan companies, small loan companies and miscellaneous agencies such as pawnbrokers. Merchandise Credit has two principle sub-divisions, charge account credit and installment sales credit. Statistical information as to consumer credit throughout the United States appears each month in the Federal Reserve Bulletin under the heading, "Consumer Credit Statistics".
Lending started with the earliest cultures as an exchange of material goods. It developed into loans made to a friend or acquaintance and finally into an impersonal business. As early as 1900 B.C. lending had reached such proportions that there was an attempt to regulate it by means of the Codes of Hammurapi. Famous philosophers and writers of both the Greek and Roman empires were vitally concerned with the practice of interest taking. The prohibitive theory of lending regulation was already taking shape.
One of the strongest and most determined opponents of interest and lending was the Christian Church. It was gradually forced to to give way before the pressure of growing trade during the Middle Ages. One of the best illustrations of this withdrawal is that Saint Thomas Aquinas made a distinction between interest and the sin of usury. The prejudice against lenders which developed as a result of this battle has lasted up to the present day.
During the Middle Ages there was a migration of Jewish peoples into almost every country of Europe. Because of the rise of antisemitism and because a "loophole" in the Mosaic law allowed the Jews to lend to Christians, they came to be the principle moneylenders of Europe.
It was during this period that charitable loan associations were set up, the Monte de Piete. These associations never were very successful in Europe and did not penetrate into England at all.
The first penal laws against usury were enacted in England in the seventh century, A.D. These laws were refined and altered through the centuries but the basic philosophy of prohibition remained the same. Lending continued to flourish because of the Jewish lender, papal revenue collector, the Lombards and evasions of the law such as rent charges, compensation for loss and partnerships.
Goldsmiths, because they were required to provide safe storage of valuables, gradually developed a deposit banking business. The expansion of the goldsmiths into banking forced the older type of lender into pawnbroking activities as the lacked the capital to compete.
After the Reformation there came a gradual growth of a new philosophy towards lending. Frances Bacon expressed this philosophy when he declared that while the rate of interest chould be limited it should be sufficient to attract investment into trade.
The Colonists took English law with them to the New World. As trade increased they soon became dissatisfied with the effectiveness of usury laws. After the passage of the first usury laws in the United States, all subsequent laws had the effect of either repealing or greatly reducing the effectiveness of the law. The search for more efficient regulation was underway.
There were many problems facing the legislators who were attempting to develop a comprehensive regulatory small loan law. They had to choose between the various theories which had sprung up, they had to solve the problems of the interest rate and of the loan shark.
There are four theories which have been used in an attempt to regulate small loan lending. The prohibitive theory, the semi-philanthropic theory, the non-regulated commercial theory and the regulated-commercial theory have all been tried. It would appear that three theories are not adequate. The prohibitive theory, developed in very early times, has been proven inadequate, the semi-philanthropic theory, which envisages non-profit lending, is basically good but has not been able to attract sufficent capital to meet consumer demand, the non-regulated commercial theory, which seeks to attract capital to the business by allowing higher interest rates, is unrealistic as it provides for no regulation. It was the adoption of the regulated-commercial theory, which allows for higher interest rates but under supervision, that has supplied real meaning to the term "regulation".
Public misconceptions over the interest rate has complicated the development of effective regulation. Because of high over-head, personal loan companies are required to charge a rate of interest which is above that charged by other types of lenders. A rate which is set too low has the same effect as no regulation whatsoever, recent conditions in the state of Missouri where the citizens have suffered great hardships and were forced to pay up to 240% per year interest to illegal lenders, exemplifies this problem. Because of high costs and the risks envolved in the business of making small loans, gross charges of 12% to 15% per year do not provide an excessive profit to the legitimate small lender.
The ever present danger existing in the small loan business is that of the infiltration of the loan shark. The problems of several states such as South Carolina, Kansas and Missouri where the citizens have been forced to pay up to 400% interest on small loans, show vividly that the regulators of the loan business must be constantly on the alert to protect the average citizen.
Early regulation in the United States generally followed the prohibitive type. There came an increasing realization that this type of regulation was not working. Massachusetts repealed it usury laws and pioneered the development of state supervision of small loans. An interesting development during this era was the belief that economic competition could resolve the problem. The "law of supply and demand" was looked upon as a magic formula. This idea fostered the development of semi-philanthropic organizations.
During the early twentieth century the states experimented with all types of regulation. There was no attempt to exchange information between the states until the Russell Sage Foundation started to do extensive research into the problem of small lending. The Russell Sage Foundation and the National Federation of Remedial Loan Associations, instigated an era of coordination. The Russell Sage Foundation published a model law, the Uniform Small Loan Act, and an increasing number of states adopted the better features of this act. Today there are 31 states with effective regulation in the United States and only five with no small loan law at all. The state of Missouri is "on the fence" at the present time, as it has just passed regulation which is not yet effective.
The federal government has made no attempt to regulate the small loan business. It has recognized it as a legitimate part of consumer credit by including it in the Federal Reserve Board's anti-inflation regulation, Regulation "W".
Recent trends would seem to indicate that comprehensive legislation will spread, not only into those states that are lacking adequate protection, but also into all sections of consumer credit. State supervision is rapidly being augmented by the lending companies themselves, through cooperation with the state regulators and through effective self-relgulation.
The colony of Massachusetts Bay inherited the English law. Usury laws were enacted which followed the same general principles of those developed in England. The people of Massachusetts soon became dissatisfied, however, with the workings of these laws, and so they were repealed in 1867.
The development of a new more effective regulation in Massachusetts was hampered by the same misconceptfons over correct interest rate policies and by the existence of loan sharks as were the other states.
Massachusetts has gone through a tortuous growth of loan regulation. They have experimented with the four major theories of loan regulation as well as the concept of economic competition. The state of Massachusetts has the distinction of pioneering the development of effective state-supervised regulatory laws. Its act of 1911 anticipated the first draft of the Russell Sage Foundation's Uniform Small Loan Act.
The act of 1916, which is the basic law of today in Massachusetts, was formulated with the advice and council of the Russell Sage Foundation.
Regulation today fundtions with a great degree of effectiveness through the competent action of the state supervisory office, the Bureau of Loan Agencies, and as a result of cooperation and self-regulation on the part of the licensed small lenders of the state. Massachusetts has one of the lowest legal maximum rates of interest (2%) in the United States. Its citizens need no longer fear the "loan shark".
There is a movement under way in the state to correct one of the outstanding weaknesses of its law. Massachusetts has developed a dual control of lending which is unique. The Tender act regulates loans under $1,000 which are not covered by the Small Loan Act, which provides for a legal maximum loan of $300. The weakness has arisen as a result of increasing prices and of demand. The $300 limit is not too small and the Tender Act provides for no state supervision of lending.
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Thesis (M.A.)--Boston University
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