Consumer Protection Laws in Auto Lending

We examine the impact of consumer protection laws on loan terms and outcomes in auto financing. We find that dealers strategically adjust contracts such that similar borrowers face the same monthly payments in states with and without interest rate limits. However, monthly payments are higher in states that prohibit post-default collections through wage garnishment. Default rates do not vary with usury law when lenders can seek deficiency payments; however, default rates are higher where wage garnishment is prohibited. We find that default rates are lower among borrowers who cannot discharge their debts due to a recent Chapter 7 bankruptcy, suggesting moral hazard as a plausible explanation for the higher default rates in states that prohibit wage garnishment. Although wage garnishment laws benefit borrowers who default, borrowers who pay their debt in full face higher total observable loan costs where wage garnishment is prohibited