Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:


As laws on repossessed auto sales ease, CFSP economists show consumer access to credit jumps

A key change in Brazilian law simplifying the sale of repossessed cars has enabled low-income borrowers in the country to get credit more easily and buy newer, more expensive cars, a new study shows.
The study from the Consortium on Financial Systems and Poverty examines car loans from one of Brazil’s leading banks before and after a 2004 law that enabled banks to sell repossessed cars quickly without going through a lengthy court process.

“As far as we know, this research is the first to provide evidence that stronger creditor rights lead to a ‘democratization of credit’ – as lower-income, riskier borrowers were now granted a loan,” the research team of economists note.

The study, which is described in a working paper titled “Repossession and the Democratization of Credit,” was made by Juliano Assunção and Fernando Silva of Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio) and Efraim Benmelech of Harvard University.

The researchers examined 17,000 loan contracts from the period August 2003 to July 2005 – one year before and one year after the change in the law. According to the Brazilian central bank, credit for vehicles grew from R$34.7 billion (US$11.5 billion) in August 2004 to R$60.2 billion (US$27.9 billion) two years later.

Prior the change in the law, banks were able to repossess vehicles when borrowers defaulted on their loans but could not resell them until after a trial. As the auto market in Brazil grew, this came to mean a delay of two to three years, which discouraged banks from making car loans.

By eliminating the need for a trial to resell the car, the change in the law encouraged banks to expand the market for car loans to riskier, low-income borrowers, even though this led to a higher rate of default and repossession.

“Ultimately, the law has reformulated relationships among borrowers, creditors, and courts,” the economists wrote. “Borrowers and creditors now engage in direct relationships, and courts play a significant role only when borrowers explicitly request it. The law avoids unnecessary trials, reduces the reliance on courts, and increases the enforceability of auto loan contracts.”

The change also enabled consumers to buy newer, more expensive cars. The banks’ ability to sell foreclosed cars encouraged them to offer better contractual terms, including longer maturities and lower spreads. This in turn allowed borrowers to spend more on cars.
The use of micro-level data enabled researchers to separate the direct effect of the legal change on contracts from the composition effect that resulted in increased lending to riskier borrowers. This is the “democratization of credit” identified by the researchers. The strengthening of the ability of lenders to foreclose, repossess, and sell assets increased the supply of credit to those who need it most.

The change did lead to higher rates of delinquency and default. The researchers found an increase of approximately 30% in late payments and defaults.

The Consortium on Financial Systems and Poverty at the University of Chicago provided financial support for the study. The CFSP is a private research organization comprised of leading and emerging economists. Their goal is to improve the lives of the world’s poor and to reduce poverty through helping to identify, design and implement more efficient financial systems. Principal researcher for the program is Robert M. Townsend, Elizabeth and James Killian Professor of Economics in the Department of Economics at MIT. The paper can be found on their website at

Juliano Assunção and Fernando Silva are in the Department of Economics at PUC-Rio. Assunção is also a research member of CFSP. Efraim Benmelech is affiliated with the Department of Economics at Harvard University and the National Bureau of Economic Research.

Jennifer Roche | EurekAlert!
Further information:

More articles from Business and Finance:

nachricht Blockchain Set to Transform the Financial Services Market
28.09.2016 | HHL Leipzig Graduate School of Management

nachricht Paper or plastic?
08.07.2016 | University of Toronto

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: New 3-D wiring technique brings scalable quantum computers closer to reality

Researchers from the Institute for Quantum Computing (IQC) at the University of Waterloo led the development of a new extensible wiring technique capable of controlling superconducting quantum bits, representing a significant step towards to the realization of a scalable quantum computer.

"The quantum socket is a wiring method that uses three-dimensional wires based on spring-loaded pins to address individual qubits," said Jeremy Béjanin, a PhD...

Im Focus: Scientists develop a semiconductor nanocomposite material that moves in response to light

In a paper in Scientific Reports, a research team at Worcester Polytechnic Institute describes a novel light-activated phenomenon that could become the basis for applications as diverse as microscopic robotic grippers and more efficient solar cells.

A research team at Worcester Polytechnic Institute (WPI) has developed a revolutionary, light-activated semiconductor nanocomposite material that can be used...

Im Focus: Diamonds aren't forever: Sandia, Harvard team create first quantum computer bridge

By forcefully embedding two silicon atoms in a diamond matrix, Sandia researchers have demonstrated for the first time on a single chip all the components needed to create a quantum bridge to link quantum computers together.

"People have already built small quantum computers," says Sandia researcher Ryan Camacho. "Maybe the first useful one won't be a single giant quantum computer...

Im Focus: New Products - Highlights of COMPAMED 2016

COMPAMED has become the leading international marketplace for suppliers of medical manufacturing. The trade fair, which takes place every November and is co-located to MEDICA in Dusseldorf, has been steadily growing over the past years and shows that medical technology remains a rapidly growing market.

In 2016, the joint pavilion by the IVAM Microtechnology Network, the Product Market “High-tech for Medical Devices”, will be located in Hall 8a again and will...

Im Focus: Ultra-thin ferroelectric material for next-generation electronics

'Ferroelectric' materials can switch between different states of electrical polarization in response to an external electric field. This flexibility means they show promise for many applications, for example in electronic devices and computer memory. Current ferroelectric materials are highly valued for their thermal and chemical stability and rapid electro-mechanical responses, but creating a material that is scalable down to the tiny sizes needed for technologies like silicon-based semiconductors (Si-based CMOS) has proven challenging.

Now, Hiroshi Funakubo and co-workers at the Tokyo Institute of Technology, in collaboration with researchers across Japan, have conducted experiments to...

All Focus news of the innovation-report >>>



Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

Agricultural Trade Developments and Potentials in Central Asia and the South Caucasus

14.10.2016 | Event News

World Health Summit – Day Three: A Call to Action

12.10.2016 | Event News

Latest News

Resolving the mystery of preeclampsia

21.10.2016 | Health and Medicine

Stanford researchers create new special-purpose computer that may someday save us billions

21.10.2016 | Information Technology

From ancient fossils to future cars

21.10.2016 | Materials Sciences

More VideoLinks >>>