Do-Gooding Done Bad
The Woodstock Institute was a big booster of Illinois’ 36% rate cap on small dollar loans. It backed the proposal, and over the past year or so has continued to push its perspective, as though discussing it enough will make the outcome of the cap better. Woodstock did so again last week, by releasing a poll it claimed showed that the majority of Illinois citizens support a rate cap and are doing well.
Woodstock even had a semi-clever, Twitter-ready quote about the survey: “I’m convinced some of the predatory lenders have tattoos that say ‘access to credit’ because that is their only real argument and they’ve been repeating it for decades. The reality is that the consumers who they purport to serve don’t want them.”
Let’s be clear. There is not a single poll ever taken where individuals, when asked whether they would like to pay interest rates of 75% or 36 % have indicated a preference to pay more. This is what is called in the polling biz, “Catching fish in a barrel.”
But no sooner does Woodstock ridicule the phrase, “access to credit” than it uses the phrase to tout its survey, claiming two thirds of low-income respondents (about 250 individuals), “continue to have access to credit.”
Incongruity aside, there are two problems with Woodstock’s rigged poll.
First, there is recent independent, academic research regarding Illinois’ rate cap that confirms Woodstock’s opinion survey is wrong. Preliminary findings of economics professors Brandon Bolen and Tom Miller and Principal Federal Reserve Economist Gregory Elliehausen (using data from a major credit bureau), show that after implementation in the first quarter of 2021 the Illinois rate cap decreased the number of loans in Illinois to subprime borrowers by 29,000 loans (or 36 percent). Further, it decreased the number of loans to deep subprime borrowers by 4,700 loans (or 57 percent).
The Illinois study also shows that subprime borrowers still able to get loans took out larger and therefore more expensive loans. Loan size grew by 75 percent for deep subprime borrowers (average $700 increase); subprime and no-score borrowers saw loan size increased by roughly 30 percent.
The upshot: There are lots of consumers who want small dollar loans; today, thanks to the rate cap, they can’t get them. At least 36% of Illinois residents who before the rate cap could qualify for reliable and ethical small dollar installment loans could not after the rate cap’s imposition. And if by chance they could find a responsible lender, they had to borrow more, because as a recent Federal Reserve update, notes, no responsible lender can offer a short-term loan for less than $2500 at or under 36%.
Second, while Woodstock ridicules the use of the term “access to credit,” for consumers in Illinois who don’t have a bank account or good credit and wonder how they will get the funds they need, access to reliable and responsible credit is the only argument they care about, particularly when because of their financial status or credit standing such loans are the only form of credit they can access.
In making light of “access to credit” Woodstock reflects a misguided do-gooder mindset that fails to see the real harm and unintended consequences of policies designed to help, but that impose unnecessary financial pain on the very people they claim to be helping.
October 6th, 2022 by Dan Bucherer