In many countries consumer credit legislation provides for the extension
of liability for product failure to the financial institution that
advances credit to the consumer. In particular, lender liability is imposed
on those credit grantors who closely operate with the supplier
of the good.
This paper provides a rationale for lender-responsibility in the consumer
credit market. It shows that, when judicial enforcement is inefficient
or there is risk of seller liquidation, lender-liability helps to
protect consumers who systematically underestimate the probability
of product failure and overestimate the extent to which they can obtain
compensation
