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Do-Nothing Policies Can Do Harm

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The Urban Institute has been doing yeorman’s work providing independent, fact-based analysis on the effects of consumer credit rate caps.  Taken together with other independent, academic analysis of rate caps, there is a growing body of evidence that shows rate caps fail to achieve the so-called benefits for consumers touted by rate cap advocates, while also imposing real financial harm on many consumers.

The Institute’s most recent study examined the status of consumer lending in the wake of Illinois’ 36% APR cap.  Their study found the 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.

This tracks with a similar analysis by the Urban Institute late last year on the effects of the Military Lending Act. The results?

  • The MLA had little to no effect “on the credit health of most service members and their families.”
  • There is no evidence that the policy “decreased delinquency and collections rates among borrowers with subprime credit scores, nor did the policy have an impact on these consumers’ credit scores.”
  • There is “suggestive evidence that consumers with deep subprime credit scores had less access to credit after the MLA was extended in 2015.”

Notice a trend?

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 Miller/Bolen/Elliehausen study also shows that subprime borrowers still able to get loans took out larger and therefore more expensive loans. Loan size grew by 75 percent for deep subprime borrowers (average $700 increase); subprime and no-score borrowers saw loan sizes increase by roughly 30 percent.

The upshot: a third of Illinois residents who before the rate cap could qualify for reliable and ethical small dollar installment loans could not after the rate cap’s imposition.  And if by chance they could find a responsible lender, they had to borrow more, because as a recent Federal Reserve update, notes, no responsible lender can offer a short-term loan for less than $2500.

It’s important to note that the Urban Institute analysis had a very different methodology compared to the Miller/Bolen Elliehausen academic study. But the analysis is important because it confirms that despite claims otherwise, the APR cap did not in any meaningful way improve the financial standing or security for the consumers policymakers claimed to be helping.

Taken together, these recent studies show the folly of well intentioned but misguided policies and the real harm they can cause for consumers who have no access to credit but very much need it.

Do-Nothing Policies Can Do Harm
Sep 27, 2023

The Urban Institute has been doing yeorman’s work providing independent, fact-based analysis on the effects of consumer credit rate caps.  Taken together with other independent, academic analysis of rate caps, there is a growing body of… Read the rest

Registration Open for 2024 Vehicle Finance Conference
Sep 27, 2023

It’s time! Register for the 2024 Vehicle Finance Conference & Expo today and enjoy Early Bird Pricing!

What can you expect?

Influential Speakers. Gain insights and inspiration from incredible speakers, including our keynote:… Read the rest

Industry Expertise | Audit-Ready Best Practices for Lenders
Sep 27, 2023

AFSA’s Industry Expertise allows Business Partners to provide thought leadership and best practices information directly with AFSA member companies. For more information about taking part, contact Dan Bucherer.

Audit-Ready Best PracticesRead the rest

AFSA Applauds Bureau CRO Consumer Advisory
Sep 25, 2023

Today, the Consumer Financial Protection Bureau (CFPB) issued an advisory reminding consumers that they have the right to see results from Credit Repair Organizations (CRO) before they pay and, more importantly, that they do not need to … Read the rest

2023 Annual Meeting Breakouts
Sep 21, 2023

The AFSA Annual Meeting is full of great general sessions and breakouts, too. Don’t miss out on two concurrent sets of breakouts Wednesday morning!

Wednesday, October 4th at 10:00 a.m. – 10:45 a.m.

Fraud in the Age of AI
The rapid… Read the rest

Accountability is Paramount
Sep 21, 2023

This week, the House Subcommittee on Financial Institutions and Monetary Policy held a hearing entitled A Holistic Review of Regulators: Regulatory Overreach and Economic Consequences, which sought to explore the interaction and economic… Read the rest

AFSA Supports SAFER Banking Bill
Sep 20, 2023

A bipartisan group of Senators led by Jeff Merkley (D-OR), Steve Daines (R-MT), Kyrsten Sinema (I-AZ), and Cynthia Lummis (R-WY) announced the introduction of a new cannabis-related banking bill today, the Secure and Fair Enforcement Regulation… Read the rest

News from our Members | Alfa Announces Free Scope 3 Emissions Reporting
Sep 20, 2023

Alfa Announces Free Scope 3 Emissions Reporting
Alfa Systems

Alfa, the makers of Alfa Systems – the first-choice software platform for providers of asset finance, worldwide – has announced new functionality to help its customers

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Joint Trades Sound Alarm
Sep 20, 2023

AFSA joined seven other leading financial services trade associations on a letter to Sen. Josh Hawley (R-MO) expressing concern about the Capping Credit Card Interest Rates Act (S.2760), which would cap credit cards’ APR at 18%.

The letter… Read the rest

One Revolution: Chris Waddell
Sep 19, 2023

Join us at the 2023 Annual Meeting in Salt Lake City to be motivated and inspired by Chris Waddell’s life journey and learn how you can embrace his hard-earned wisdom for yourself, your team, and business for the challenges ahead.

Get ready for… Read the rest

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