Even in the sometimes-arcane world of academic research where biases were once frowned upon, it’s interesting to see how those biases have real world consequences.
Take, for example, the comments of Adam Levitin, a law professor and practicing attorney with extensive time in the Washington policy world, on a working draft of an independent academic study of the effects of the 2021 Illinois Predatory Loan Prevention Act (PLPA), which imposed a 36% APR cap on all loans made by non-bank, credit union, and insurance company lenders.
The study, which is in final draft form and open for comments, focuses on assessing the effect of the Illinois rate cap on the supply and accessibility of small, unsecured consumer loans. Traditional installment loans are an opportunity for consumers, particularly those with subprime credit scores, to access a credit product that is ethical and potentially help improve their credit standing. The Illinois rate cap, however, makes such loans unprofitable below about $2500, an amount generally well above the average traditional installment loan amount.
The study finds that thousands of Illinois consumers no longer qualified for small dollar installment loans, leaving them with few if any credit options. The study also finds that if subprime borrowers do qualify for a small dollar loan, they do so only because the loan amount is for more than they otherwise may want or need.
Professor Levitin claims the study is flawed because it doesn’t account for all forms of credit, but as the authors of the study note, the intent was not to be all-encompassing, but to show the rate cap’s deleterious effect on a form of credit – traditional installment loans – that up until 2021 was used by tens of thousands of Illinois consumers, particularly those with less than perfect, subprime credit scores.
Professor Levitin also claims that policies like rate caps help ensure or further “consumer welfare.” But it’s one thing to put in place targeted policies that hinder predatory lending tactics, and another to in name of “welfare,” put in place overly broad policies that actually hinder consumers from getting the funds they need or saddle them with a larger loan than they want. Neither of those outcomes is helpful to consumers.
Yet, despite his criticism of the study and his insistence on policies that address consumer welfare, Professor Levitin concludes, “Put all of this together and what do we have? A paper that shows that after the PLPA the number of subprime installment loans in Illinois fell, while the size of those loans increased. And that’s about it.”
Which is exactly the point of the study. Every consumer should have choices for their credit needs. Small dollar, traditional installment loans played an important role in the financial welfare of Illinois consumers with subprime credit. Now that option has been removed for many, and other consumers are now weighed down by higher levels of debt than they want. Put all of that together and what do we have? Less consumer welfare than Illinois had in 2020.
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