Rate Caps Reduce Competition
The American Financial Services Association (AFSA) yesterday sent a comment letter to Secretary of the Treasury Janet Yellen highlighting new research on the significant drop of credit availability in areas where rate caps are present. The letter is in response to President Biden’s executive order promoting competition and how new preliminary research conducted by academics Brandon Bolen, Gregory Elliehausen and Tom Miller found that the imposition of all-in rate caps is at odds with the Administration’s goals.
The research found that after the imposition of a 36% all-in rate cap in Illinois, several lenders left the state entirely. This reduced the number of available loans to subprime borrowers by 36% (29,000) and to deep subprime borrowers by 57% (4,700). The same data found that the consumers who still were able to qualify for a loan were forced to take out large loans, thereby making them more expensive. The research found that in New Mexico, where an all-in rate cap was recently enacted, 550,000 New Mexicans will be unable to qualify for a loan.
The letter goes on to detail the important role traditional installment loans play for many Americans, a product that has in many ways, been taken away or drastically reduced in states with all-in rate caps. Numerous studies, including one from the Federal Reserve itself, have found that all-in rate caps reduce the number of loans and increase the required loan amount for consumers who are still able to get them. That research was correct as has been seen in Illinois and New Mexico.
The research referenced in the letter will be available later this year and will likely be formally presented at the 2022 Independents Conference & Expo in La Quinta, California.
March 6th, 2022
