Colleen Honigsberg and Robert J. Jackson
- Published in print:
- 2019
- Published Online:
- September 2019
- ISBN:
- 9780226599403
- eISBN:
- 9780226599540
- Item type:
- chapter
- Publisher:
- University of Chicago Press
- DOI:
- 10.7208/chicago/9780226599540.003.0009
- Subject:
- Law, Company and Commercial Law
For many of our most innovative companies, corporate law is difficult to define. These companies—whose profits flow in part from regulatory arbitrage—are subject to a complex framework of state, ...
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For many of our most innovative companies, corporate law is difficult to define. These companies—whose profits flow in part from regulatory arbitrage—are subject to a complex framework of state, federal, and local laws, the overlap of which can create inconsistency and ambiguity. Using marketplace lending as a case study, we document extraordinary uncertainty faced by many of America’s most cutting-edge businesses. Marketplace lenders built their business on the longstanding assumption that they were exempt from state usury law because marketplace loans are originated by state or nationally chartered banks, which have enjoyed federal preemption of state usury caps for a century. But in a 2015 ruling the Second Circuit suddenly concluded that only loans held by banks enjoy preemption from state usury law, reactivating interest-rate caps for billions of dollars of loans and decreasing the supply of credit for higher-risk borrowers. We argue that this type of legal uncertainty is increasingly prevalent for American corporations and can stifle innovation, and that the true challenge for the corporate lawyers of the future will be to convince the wide range of actors now producing business law to produce predictable and consistent rules for the firms they seek to govern.Less
For many of our most innovative companies, corporate law is difficult to define. These companies—whose profits flow in part from regulatory arbitrage—are subject to a complex framework of state, federal, and local laws, the overlap of which can create inconsistency and ambiguity. Using marketplace lending as a case study, we document extraordinary uncertainty faced by many of America’s most cutting-edge businesses. Marketplace lenders built their business on the longstanding assumption that they were exempt from state usury law because marketplace loans are originated by state or nationally chartered banks, which have enjoyed federal preemption of state usury caps for a century. But in a 2015 ruling the Second Circuit suddenly concluded that only loans held by banks enjoy preemption from state usury law, reactivating interest-rate caps for billions of dollars of loans and decreasing the supply of credit for higher-risk borrowers. We argue that this type of legal uncertainty is increasingly prevalent for American corporations and can stifle innovation, and that the true challenge for the corporate lawyers of the future will be to convince the wide range of actors now producing business law to produce predictable and consistent rules for the firms they seek to govern.
