Polls Shouldn’t Drive Public Policy
The Center for Responsible Lending (CRL) responded to the American Financial Services Association’s recent op-ed with one of their own. The CRL does not dispute the facts we laid out earlier this week related to the organization’s flawed approach of simply focusing on the rate of a loan, rather than the more important factors consumers should consider: length of the loan and affordability, for example.
As we noted, focusing on the interest rate on small-dollar loans can be deeply misleading. Suppose you borrow $100 and you only must repay $101. If you repay that loan in one year, 365 days from when you took it out, the annual percentage rate (APR) will be one percent. Repay it in one month? the APR is 12 percent. One week? 52 percent. If you pay the loan the day after you take it out? The rate is what appears to be a massive 365 percent. If you repay that $100 loan with $1 of interest an hour after you take it out, you’ll be paying an 8,760 percent APR.
So-called consumer advocates like CRL avoid such explanations of APR, instead preferring to scare folks with large, out-of-context numbers, like 400 percent. If they sincerely wanted to educate consumers, they would encourage consumers to ask such questions as, “What is the total amount I have to repay?”, “What is the monthly payment?”, and “How many payments do I have to make?” The end result would be more empowered and savvier consumers.
CRL also goes out of its way to conflate predatory payday and vehicle title loans with traditional installment loans. This is deceptive and irresponsible. Traditional installment loans don’t have “balloon payments,” early payment penalties, or hidden fees. They are already regulated by federal and state truth-in-lending laws. They are loans with transparent, easy-to-understand terms, due dates, and payment amounts. The average loan is about $1,500. The average monthly payment is about $120 and the average term is 15 months.
Rather than serve consumers well by acknowledging the facts on responsible lending and that an arbitrary rate cap (36 percent APR) accomplishes little for consumers, CRL doubled down on what we’d call the “Sally Field Argument”: “Rate caps must be good because in polls people like them; they really, REALLY like them.”
While polling data is interesting, it isn’t the type of data that policy makers should be using to determine a policy’s efficacy. But CRL can’t point to any other data to confirm the wisdom of rate caps … because there is no data. There is no data available on the effects that the “Military Lending Act” interest rate cap for service members may or may not have had over the past few years. There is no data on how other rate caps have impacted consumers. Just a poll from CRL, and one at that which was rigged to elicit the answers rate-cap supporters wanted.
So, is it really a good idea to set policy based on polling? Imagine the policies that might govern us. What poll of 5000 young people about a mandatory weekly “living wage” allowance wouldn’t result in a vast majority of support? Or dietary policies that ban broccoli? Or to abolish the IRS, or to eliminate speed cameras? Sorry, perhaps eliminating speed cameras is actually a good idea. But you get the point.
Polling alone should not set policy, just as policies affecting 330 million consumers that are backed by little or no data should require a higher bar for consideration and implementation. AFSA wholly supports holding predatory lenders accountable. One way to do that is to ensure consumers are knowledgeable about their personal finances. For more information about how vehicle financing and installment lending works, visit our American Financial Services Association Educational Foundation.
February 24th, 2020
