Shadow Credit and the Devolution of Consumer Credit Regulation

Abstract

Shadow credit is trending. Shadow credit has all the essential attributes of regular credit except that it is unregulated. It operates in a world in which products and services that look, act, and feel like credit products are deemed to be something that is not actually credit. This legal sidestep is accomplished either by passing industry-friendly legislation or by tweaking the shadow credit product just enough to not be defined as credit, but “something else.” That “something else” is often called a “lease,” an “advance,” or in the case of Afterpay, simply a “service”. At its essence, however, it is still credit. More and more shadow credit products are popping up to take the place of actual credit products.

The purpose of avoiding being “credit” is to avoid consumer credit regulation. We see this trend among purveyors of rent-to-own household goods, rent-to-own real estate, employer payday advances, buy-now-pay-later services like Afterpay, income sharing agreements in higher education finance, and even bail bonds, all of which seek to avoid complying with usury laws or interest rate caps, Article 9 of the U.C.C., the federal Truth in Lending Act, and all other consumer credit protection laws.

While some of these products are helpful to consumers or at least not particularly harmful, some are deeply predatory. They can operate outside the law. For example, classic rent-to-own contracts that were historically used for household goods are now being used in housing contracts in vulnerable Native American communities.
Emerging shadow credit products are testing the limits of what should be permitted in rent-to-own contracts and similar financing tools. The trend toward shadow credit has the capacity to derail our entire consumer credit regulation system