not really a new problem. 63 A segment of American society has always been financially
illiterate, 64 which, in the past, was either caused by or resulted in their economic marginalization.
The economically marginalized simply lacked the ability to have an impact on the overall
economy. 65 Now, however, the democratization of credit has made it so that even the
economically marginalized can impact the economy in a large way. 66
The democratization of credit refers to the increasing ability of consumers from all
economic levels to obtain items on credit.67 This phenomenon is evidenced in many ways.
Today, lenders may provide a number of options for payment on a desired good or loan. 68 Some
companies, such as payday lenders, pawn shops, rent-to-own centers, and many more, exist to
provide financing options to Americans with poor credit, often at incredibly high interest rates. 69
The democratization of credit is a positive change that allows Americans to participate more fully
in the economy, yet simultaneously requires the economically marginalized, who have
traditionally been rejected by creditors, to understand what they are signing. 70
The second reason that more Americans are financially illiterate has to do with the
change in America’s financial landscape since the 1980s. 71 One major change is seen in the way
Americans plan and prepare for their retirement. 72 Today, the “baby boomer” generation is
entering retirement in large numbers, having a considerable impact on the economy. 73
Historically, people participated in defined benefit plans, commonly referred to as pension
63 Surowiecki, supra note 42 (“The financial marketplace, meanwhile, has become a dizzying emporium of choice and easy credit. The
decisions are more numerous and complex than ever before.”).
64 See generally Harnisch, supra note 28 (stating that widespread financial illiteracy still exists today, particularly among low-income
people and minorities).
65 Improving Financial Literacy in the United States: Hearing Before the S. Comm. on Banking, Housing, & Urban Affairs, 109th
Cong. 39 (2006) (statement of Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Reserve Sys.).
Notably, increasingly sophisticated information technologies enable lenders to collect and process data
necessary to evaluate and price risk much more efficiently than in the past. For example, the expanded use of
credit-scoring models, by reducing the costs of making loans and by increasing the range of assets that can be
securitized, has facilitated greater extension of credit to a larger group of borrowers. Indeed, we have seen an
increasingly wide array of products being offered to consumers across a range of incomes, leading to what has
been called the democratization of credit.
67 See Regina Austin, Of Predatory Lending and the Democratization of Credit: Preserving the Social Safety Net of Informality in
Small-Loan Transactions, 53 AM. U. L. REV. 1217, 1225 (2004) (“Formal lenders would justify the extension of their financial
products to debtors occupying the lowest socioeconomic tiers on the grounds that they, no less than the affluent, are deserving of the
benefits of a democratization of credit, which is to say ‘formal credit.’ Nonetheless, the suitability of the options available to small-sum debtors is important because credit is an essential component of the social safety net that protects citizen-consumers from
excessive financial insecurity.”).
68 Id. at 1230.
69 Id. at 1218-19; see Christopher Konneker, Comment, How the Poor Are Getting Poorer: The Proliferation of Payday Loans in
Texas via State Charter Renting, 14 SCHOLAR 489, 507 (2011) (stating that interest rates on payday loans typically range between
450% to 880% APR on a two-week loan); see also Zoe Elizabeth Lees, Comment, Payday Peonage: Thirteenth Amendment
Implications in Payday Lending, 15 SCHOLAR 63, 65 (2012) (explaining that one borrower’s $300 payday loan cost her $1,200 in
interest per year).
70 See Austin, supra note 67, at 1219, 1221 (contextualizing lending practices in the formal and informal economy).
By providing credit outside of formal markets via informal transactions, informal lenders are part of the social
safety net twice over. They are loosely organized and operate on a small scale. They may specialize or cater to a
discrete niche of the loan market. They are physically and socially accessible, lend very small amounts of
money, employ fairly simple and transparent procedures, and process requests or applications for loans rapidly.
Id. at 1229.
71 Harnisch, supra note 28, at 8.
72 Id. at 4.
73 See Sponging Boomers, ECONOMIST (Sept. 29, 2012), http://www.economist.com/node/21563725 (“Another economic mess looms
on the horizon—one with a great wrinkled visage. The struggle to digest the swollen generation of ageing baby-boomers threatens to
strangle economic growth. As the nature and scale of the problem become clear, a showdown between the generations may be