Following up from our recent post on APR caps, showcasing the American Financial Services Association’s position on caps as a tool for regulating small-dollar loans, we have another article on the subject in The Hill. The author is Thomas P. Vartanian, executive director and professor of law at the Program on Financial Regulation & Technology at the Antonin Scalia Law School at George Mason University.
Professor Vartanian too, rails against Senator Sanders’ (I-Vt) and Representative Ocasio-Cortez’s (D-NY) so-called “Loan Shark Prevention Act”. He points out a number of problematic factors. Primary among these is the fact that the bill adopts provisions of another law already on the books, that has limited the interest rate on credit union loans to 15-percent. The bill sponsors have cited a record of success of this cap on credit union lending over the past several decades. The problem with this, says Vartanian, is that:
Unfortunately, credit unions have almost never lived under this 15-percent cap. Their regulator eliminated it in 1987, replacing it with an 18-percent rate in effect today. The exception for payday-type lending hovers around 28 percent.
Credit unions are inadequate models for the feasibility of interest rate caps on all consumer lending throughout the nation. US credit unions together are about one-half the size of J.P. Morgan. Moreover, credit unions don’t pay federal income tax, a government subsidy that allows them to charge lower interest rates.
He further points out that the larger problem is that interest rate caps have rarely ever worked. He notes that in a competitive system, interest rates reflect a variety of financial factors, including credit history, customer defaults, transaction size, credit limits, rewards programs, collection proceedings and fraud. Professor Vartanian finishes by making the point that:
As attractive, popular and politically expedient as interest rate caps may seem, such actions ultimately are painful medicine for the folks that really need the help. When it comes to running the largest economy in the world, more care and deliberation would go a long way to making it work better for everyone.
The entire piece can be read here: The unintended consequences of interest rate caps (The Hill)
It is NILA’s long-held position that government efforts to subvert market forces by imposing limits on the Annual Percentage Rate (APR) that loans can carry, are bad public policy.
SOURCE: The Hill