A recent opinion piece by Bill Himpler, President of the American Financial Services Association (AFSA), make some very good points about the nature of interest caps on small-dollar loans and the unintended consequences when policymakers opt to regulate small-dollar loans in this way.
In it, Himpler says that a bill proposed by Sen. Bernie Sanders (D-VT) and Rep. Alexandria Ocasio-Cortez that would cap the highest rate a bank, credit card company or other consumer loan business at 15 percent, is misguided and based on faulty information.
He points out that small lenders cannot cover their fixed costs at this rate, including the cost of compliance with “almost 30,000 new regulations imposed on them since 2010”. The effect of a 15% rate cap, he says, would be that finance companies and banks would stop making small dollar loans.
Critically, he says, the demand for credit would be unaffected:
“With all of that said, the need for small-dollar credit doesn’t get eliminated. Consumers will still need to find ways to pay for car repairs or to fix their air-conditioning. Under this proposal, consumers would be forced to either borrow more money they don’t need (and may not be able to pay back) or they go to unlicensed or predatory lenders, the very thing this proposal claims it wants to avoid. How does either outcome help consumers?”
NILA shares and strongly supports AFSA’s position on APR caps and discusses their failings on this website’s Regulation Page – The Use and Abuse of APR.The issue is also covered in great detail in our Frequently Asked Questions (FAQs),under “Are Rate Caps Good Policy?”
NILA’s FAQs are available for download.
You can read Bill Himpler’s entire piece here:
New Proposed Rate Caps Would Create Adverse Unintended Consequences