Rate Cap Still Being Proposed. Still Unhelpful to Consumers

Rep. Glenn Grothman (R-WI) has again introduced legislation to apply the Military Lending Act’s 36 percent rate cap to consumer credit nationwide. Given that it’s an election year and consumer prices and uncertainty about the economy are front and center, it’s not a surprise that an elected official would play the populist card.  What is somewhat surprising is that after so many recent studies showing how ineffective – even harmful – rate caps can be that the policy itself is taken seriously.

Let’s start with the policy that the bill wants to impose: In 2015 the Defense Department applied the MLA’s 36 percent all-in cap to revolving products such as credit cards. The Urban Institute examined what followed, using credit bureau records from 2013 through 2021 covering borrowers in military communities with subprime credit scores, the group the cap was written to protect. Delinquency rates did not fall. Collections did not fall. Credit scores did not rise. For service members with the deepest subprime scores, the researchers found that the policy cut off access to credit. They concluded that extending the same protections to everyone would not improve credit health for most Americans.

Despite such data points, Illinois thought rate caps a good idea. In 2021 the state capped consumer loans under $40,000 at 36 percent all-in. Three economists studied the rate cap’s effect on Illinois consumers. Loans to subprime borrowers fell 38 percent.

Last December, economists at the Federal Reserve Bank of New York studied three states that adopted 36 percent all-in caps against seven states that did not, using quarterly credit bureau data on close to four million households. Borrowers in the bottom tenth of the credit score distribution lost roughly a fifth of their open accounts and a comparable share of their balances. Delinquency among those same borrowers did not improve.

Different researchers, different states, different products. The same results. A rate cap does not make credit more accessible or affordable. The family that needs $900 for a new transmission isn’t charged less, they are simply told they won’t get a loan to repair the vehicle.

Three different, independent academic studies. The same takeaway: in times of uncertainty, when consumers need to access to credit, putting in place policies that will limit their ability to borrow creates more uncertainty for the very people who need a little bit more.