Colleen Honigsberg

How Does Legal Enforceability Affect Consumer Lending? Evidence from a Natural Experiment

We use a natural experiment—an unexpected judicial decision—to study how the enforceability of debt contracts affects consumer lending. In May 2015, a federal court unexpectedly held that the usury statutes of three states—Connecticut, New York, and Vermont—applied to certain loans that market participants had assumed were exempt from those statutes. The case introduced substantial uncertainty about whether borrowers affected by the decision were under any legal obligation to repay principal or interest on their loans. Using proprietary data from three marketplace-lending platforms, we use a difference-in-differences design to study the decision’s effects. We find no evidence that borrowers defaulted strategically as a result of the decision. However, the decision reduced credit availability for higher-risk borrowers in affected states. Secondary-market data indicate that the price of notes backed by above-usury loans issued to borrowers in affected states declined, particularly when those borrowers were late on their payments.

Hedge Fund Regulation and Fund Governance: Evidence on the Effects of Mandatory Disclosure Rules

This paper uses three alternating changes in hedge fund regulation to study whether regulation reduces hedge funds’ misreporting, and, if so, why regulation is effective. Relative to public companies, hedge fund regulation is relatively light. Much of the regime is a “comply-or-explain�? regime that allows funds to forego compliance with governance rules, providing that they disclose their lack of compliance. The results show that regulation reduces misreporting at hedge funds. Further analysis suggests that the disclosure requirements led funds to make changes in their internal governance, such as hiring or switching the fund’s auditor, and that these changes induced funds to report their financial performance more accurately.

The Effects of Usury Laws on Higher-Risk Borrowers

We use a natural experiment — an unexpected judicial decision — to study how the legal enforceability of debt contracts affects consumer lending. In May 2015, a federal court unexpectedly held that the usury laws of three states — New York, Connecticut, and Vermont — applied to certain loans that market participants had assumed were exempt from those statutes. The case introduced substantial uncertainty about whether borrowers affected by the decision were under any legal obligation to repay principal or interest on their loans. Using proprietary data from three marketplace lending platforms, we use a difference-in-differences design to study the decision’s effects. We find no evidence that borrowers defaulted strategically as a result of the decision. However, the decision reduced credit availability for higher-risk borrowers in affected states. And secondary-market data indicate that the price of notes backed by above-usury loans issued to borrowers in affected states declined, particularly when those borrowers were late on their payments.