Senator Reed’s Lump of Coal for Consumers
Sponsors in the U.S. Senate of the latest national rate cap bill apparently aren’t clear on the concept of holiday giving. The goal should be to give a gift, not take things away. Yet that is what Sen. Jack Reed’s “all-in” 36% APR cap legislation would do: take away access to much needed credit for millions of American consumers. You can review the bill here. You can read AFSA’s letter of opposition here:
As AFSA has pointed out before – and as consumers and active military personnel have experienced first-hand – rate caps are financially harmful to the very people supporters of such regressive policies claim to want to help. In Illinois, a recent independent study found that state’s 36% rate cap:
- Increased the short-term debt of some borrowers, perhaps because the borrowers no longer had access to their form of credit due to the new law. The analysis also indicates short term debt dissipated a year or 18 months after the bill’s passage.
- “[I]s not associated with a significant change in credit scores among Illinois consumers who used alternative financial services loans, relative to peers in states with high APR caps.”
- Neither improved nor damaged credit scores after the rate cap was implemented, relative to similar consumers in states with high APR caps.
A similar analysis by the Urban Institute late last year found that the law Senator Reed’s bill is modeled after, the Military Lending Act has similarly failed to achieve its intended purpose. The study found that the MLA had little to no effect “on the credit health of most service members and their families,” did not decrease “delinquency and collections rates among borrowers with subprime credit scores, and in some cases “that consumers with deep subprime credit scores had less access to credit after the MLA was extended in 2015.”
The Urban Institute analysis adds credence to the independent findings of economists Tom Miller, Brandon Bolen and Principal Federal Reserve Economist Gregory Elliehausen. Using data from a major credit bureau their recent peer-reviewed study shows that after implementation in the first quarter of 2021 the Illinois rate cap decreased the number of loans to subprime borrowers in Illinois by more than 20,000 (or more than 30 percent).
The U.S. economy finds itself in a fragile recovery, with most American households due to inflation paying out on average about $700 per more per month for basic expenses than they were two years ago. In a time when consumers are seeking any opportunity for financial flexibility, now is not the time for Congress to be “gifting” them greater uncertainty and tighter credit access for those who really need it.
December 15th, 2023
