The Development of Regulation

• Author: John S. Bradway
• DOI: 10.1177/000271623819600126
• Published date: 01 March 1938
• Date: 01 March 1938
• Subject Matter: Articles

The Development of Regulation
By JOHN S. BRADWAY
RECENTLY a Congressman was
ures were employed by the medieval
elected on a platform of repeal-
church to abolish usury. Ecclesiasti-
ing a law a day. A less obvious, but
cal sanctions, and later criminal penal-
perhaps sounder approach, would be
ties, have been employed to punish
a more careful scrutiny of proposed
violators. There are still many exam-
legislation. Four stages, arbitrarily
ples. In a number of states in this
selected, indicate the nature of a sci-
country the law declares a maximum
entific law-drafting procedure: an ade-
rate of interest which, in effect, pro-
quate collection and evaluation of the
hibits lending to a majority of con-
relevant facts; a thorough and well-
sumers, and provides a variety of
balanced study of the social and eco-
punishments-some civil, some crimi-
nomic trends and self-interests in the
nal-for the usurer. The prevalence
field; a carefully considered tentative
of abuses under this system is so no-
philosophy of a solution, with the ap-
torious that the second approach is
propriate administrative machinery;
winning more and more favor.
and one or more permanent watchmen
Regulatory devices are found in
to report upon the future operation of
England and in many states in this
the law and its effectiveness in accom-
country. In England, the change in
plishing the desired results.
philosophy was evidenced by a statute
The consumer credit field provides
in 1854 which repealed the existing
two examples of this process: the small
usury laws. Released from restraint,
loan regulation, which shows it to be
the money lenders employed the con-
well advanced; and the installment
ditional bill of sale and the promissory
selling business, which is in the trial-
note to gain excessive interest. By
and-error, preliminary stage.
1900 the situation was so serious that
a regulatory act was passed which pro-
LEGISLATION IN THE SMALL LOAN
vided for the registration of money
FIELD
lenders and for authority in the court,
The nature of small loans, usury,
in cases where the interest charged was
the loan shark, and the reputable
&dquo;excessive&dquo; or the transaction &dquo;harsh
lender, has been considered in other
and unconscionable,&dquo; to
articles. The abuses have been de-
reopen the transaction and take an ac-
scribed. This is a statement of reme-
count between the money lender and the
dial legislative efforts. In recent years,
person sued, and may, notwithstanding
increasingly, statistics have become
any statement or settlement of account or
available to the student, trends have
any agreement purporting to close previ-
been observable, two general tentative
ous dealings and create a new obligation,
philosophies have been set up with ap-
reopen any account already taken between
propriate administrative machinery,
them, and relieve the person sued from
and various watchmen have been in-
payment of any sum in excess of the sum
adjudged
stalled
by the court to be fairly due in
at strategic points.
respect of such principal, interest and
The two philosophies may be de-
charges, as the court, having regard to the
scribed as &dquo;prohibitive&dquo; and &dquo;regula-
risk and all the circumstances, may adjudge
tory.&dquo; Historically, prohibitive meas-
to be reasonable.
181

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182
Observers report a satisfactory
legislation in time found a place on the
functioning of the English system.
statute books. The laws relating to
the borrower with character and pros-
SIGNIFICANCE IN THE UNITED
pects as collateral and to loans of $300
STATES
or less are of particular concern here.
In the United States, regulation has
In 1910 the Russell Sage Foundation
a different significance. The adminis-
established its Division of Remedial
trative supervisor is usually the state
Loans which began a study of the sub-
banking commissioner instead of the
ject. In 1913 certain fundamental ele-
court, and a maximum interest rate is
ments in a philosophy of regulation
provided. Early efforts at legislative
were presented, and three years later
reform in New
Jersey (1884), in Mis-
the first draft of a model law appeared.
souri (1891), in Maryland (1894) ,
These fundamental elements are: (1)
and in Wisconsin (1895), sought to
a license for all money lenders engaged
prevent wage assignments from being
in the business or charging more than
employed to further a usurious trans-
the banking rate of interest, inclusive
action, or sought to invalidate the
of fees and charges of all kinds; (2)
pledge or mortgage of personal prop-
a bond to secure observance of the
erty given to secure usurious loans.
law; (3) an adequate interest rate (2
Massachusetts in 1898 required a li-
or 3 per cent per month) reckoned on
cense ; New York required a special
unpaid balances; and fees prohibited,
corporation act.
or, if allowed, safeguarded against un-
These developments must be con-
due repetition; (4) a supervisory office
sidered against a background of non-
to enforce the law; (5) adequate penal-
legislative efforts in the form of
ties for violations, including revoca-
philanthropic funds established by in-
tion of the license, fine and imprison-
dividuals and employers, credit unions,
ment, and the recovery of excess pay-
and remedial loan societies and con-
ments by the borrower; (6) notice to
ducted along semi-philanthropic lines.
the employer and consent by the wife
While their capital was not great
to an assignment of wages; (7) ade-
enough to make much impression on
quate records kept by licensees and in-
the problem, the experience recorded
1

within the transactions pointed the
Since the American regulatory system re-
quires an interest rate, the task has been to
way toward the next step.
reach a compromise between the borrower’s
It was gradually clearer that the
necessity and the lender’s self-interest which
small loan problem had to be broken
will permit reputable capital to engage in the
up, at least roughly. For the man
business, and thus by competition to eliminate
who might
or to curb the activities of unscrupulous lend-
use as security stocks,
ers.
The Foundation’s first...