Freedom Line Blog

As the global economy slows, inflation remains elevated and wages fail to keep pace, we continue to emphasize how government regulators targeting short-term lenders only end up hurting the people they claim to be helping.

Now, a stark new study just released by Gregory Elliehausen of the Federal Reserve among other authors hammers home that point.  Namely, new laws artificially capping interest rates resulted in surveyed borrowers themselves saying that borrowing money when they needed it only became more difficult.  “Disapprobation of high interest rates,” the study begins, “reflects a longstanding and widely held belief that lenders take advantage of needy individuals by charging high interest and imposing harsh terms.”  Their work clearly found, however, that government mandates manifesting that disapprobation inflicted even greater pain:

[W]e find that the interest-rate cap decreased the number of loans to subprime borrowers by 44 percent and increased the average loan size to subprime borrowers by 40 percent.  We examine the welfare effects of the loss of credit access using an online survey of short-term, small-dollar-credit borrowers in Illinois.  Most borrowers answer that they have been unable to borrow money when they needed it following the imposition of the interest rate cap.  Further, only 11 percent of the respondents answered that their financial well-being increased following the interest-rate cap, and 79 percent answered that they wanted the option to return to their previous lender.  Thus, the Illinois interest-rate cap of 36 percent significantly decreased the ability of small-dollar credit, particularly to subprime borrowers, and worsened the financial well-being of many consumers.”  (Emphasis added.)

Rather than harming the very working Americans they claim to be helping, government officials at the federal, state and local levels need to increase access to small-dollar credit by first doing no harm.

As inflation continues to spiral upward at multi-decade highs and with the U.S. economy now in recession, maintaining an “all of the above” array of lending options for American consumers becomes more and more important.  Unfortunately, activist groups like the “National Consumer Law Center” aim to do the opposite and limit rather than expand consumer options.

For a sense of consumers’ growing desperation, consider a Federal Reserve report on exploding credit card debt, as highlighted by Steve Cortes:

How have consumers dealt with these skyrocketing prices? The simple answer, unfortunately: via credit cards, particularly for working-class households. Just last week, the Federal Reserve Bank of New York issued a damning report on this credit binge for consumers, into a pronounced economic slowdown.

Total consumer debt rose a staggering $40 billion in June, far surpassing Wall Street expectations of a $25 billion increase…

A huge portion of this new debt flows from costly, risky credit card use. In fact, for the April-June second quarter of 2022, total credit card debt rose a staggering $46 billion, the biggest jump in 20 years. Americans pile into new accounts to accomplish this borrowing, opening up a whopping 233 million new cards during that second quarter, the most new cards since 2008. Such comparisons to the Great Recession should worry everyone.”

Additionally, credit cards aren’t always a viable option for many Americans, and traditional bank loans aren’t always an option due to small amounts needed for short-term emergencies.  Whereas higher-income Americans with stronger credit history can borrow from banks, utilize assets they possess as leverage or use their savings, consumers with lower credit scores or lacking sufficient savings cannot.  Indeed, according to the Fair Isaac Corporation, some 46% of consumers possess credit scores below 700, meaning that traditional bank loans aren’t possible for them.

In such circumstances, struggling Americans can access the money they need for the short-term via consumer finance loans.

Groups like the National Consumer Law Center (NCLC), however, want to limit the availability of such options, which they falsely characterize as some sort of scheme “to snare consumers into predatory loans for auto repairs, tires, furniture, and even pets.”

In reality, however, the unintended consequence of efforts like that of the NCLC will be to drive temporarily strapped consumers to seek out illegal loansharks, suffer overdrafts, or simply be unable to cover their temporary costs.  As none other than the World Bank found, such limitations lead to “increases in non-interest fees and commissions; reduced price transparency; lower number of institutions and reduced branch density; and adverse impacts on bank profitability, in addition to the lack of access for smaller and riskier borrowers.”

That doesn’t help the people whom groups like the NCLC claim to protect, it hurts them.  Accordingly, American consumers and elected leaders should recognize the peril that NCLC and similar groups present.  Their efforts would only make consumer lending more difficult, more dangerous and more expensive.

We’ve often highlighted how federal and state regulators who target short-term lenders only end up hurting the struggling Americans they claim to be helping.

That dynamic is even more pronounced in times of increasing economic uncertainty like today.

According to a 2018 study from the federal government itself, nearly 40% of American families don’t possess sufficient savings to cover even a $400 emergency expense, including 51% of military service members living paycheck-to-paycheck.   For such people, credit cards aren’t always a viable option and traditional bank loans aren’t feasible because of the small amounts involved.

They can, however, access desperately-needed money for the short-term via consumer finance loans.   Unfortunately, the Biden Administration, the Pelosi-Schumer Congress, federal bureaucrats who think they know better and government officials at the state and local levels constantly pursue legislation and regulation to make consumer finance lending less available.  As a consequence, vulnerable Americans are forced to seek illegal loansharks, suffer overdrafts or simply fail to pay their pressing bills.

Our friends at National Taxpayers Union (NTU) commendably highlight the latest dangerous Biden Administration effort in a piece entitled “The Consumer Financial Protection Bureau Continues to Attack the Financial Industry”:

While taxpayers look for relief from out-of-control inflation, the Consumer Financial Protection Bureau (CFPB) continues to attack the financial industry, tipping our already unstable economy further over the edge…

As recently as April CFPB announced they would be invoking a long dormant authority to examine nonbank financial companies or ‘fintech’ companies.  CFPB inaccurately posits that these nonbank entities are harmful to consumers, however these companies often represent some of the only credit available to struggling Americans who have been continuously left behind by traditional institutions.  At a time when the economy is faltering and everyday Americans’ financial futures are so uncertain, the CFPB’s action seems misplaced.”

As NTU rightly concludes, “in many cases these institutions are doing the exact opposite of what CFPB claims, they are providing a lifeline to their users and breaking barriers to traditional institutions.” 

As our economy weakens due to the Biden Administration’s own counterproductive economic policies, the least it could do is avoid making matters even worse for struggling Americans increasingly desperate for a workable lifeline, non-traditional lenders.

This week, the House Financial Services Committee – headed by far-left Representative Maxine Waters (D – California) – holds a hearing on the issue of loan services to struggling American consumers, including legislation that would make matters worse in the name of claiming to help them, such as the so-called “Veterans and Consumers Fair Credit Act.”

On a superficial level, federal legislation regulating lending services and capping repayment rates may seem helpful to Americans struggling paycheck-to-paycheck.  But the real-world impact only eliminates a source of reliable, legal short-term loans to get them through temporary emergencies.

According to the Federal Reserve System’s Board of Governors in a study on the economic wellbeing of U.S. households in 2018, nearly 40% of American families don’t possess sufficient savings to cover even a $400 emergency expense. Incredibly, 51% of military service members live paycheck-to-paycheck.

In such circumstances, credit cards aren’t always a viable option for them, and a more traditional bank loan isn’t an option due to the small amount needed.  Whereas higher-income Americans with stronger credit history are able to borrow from banks, use assets they possess as leverage or use their savings amounts, those with lower credit scores and without sufficient savings cannot.  In fact according to the Fair Isaac Corporation, some 46% of consumers possess credit scores below 700, meaning that traditional bank loans aren’t possible for them.

In such circumstances, struggling Americans can access the money they need for the short-term via consumer finance loans.  But under the sorts of legislation contemplated by the House and pushed by leftists who think they know better, consumer finance lending will become less available.

And the unintended consequence will be more people seeking out illegal loansharks, suffering overdrafts, or simply being unable to cover their temporary costs.  As the World Bank found, such regulatory and legislative proposals lead to “increases in non-interest fees and commissions; reduced price transparency; lower number of institutions and reduced branch density; and adverse impacts on bank profitability, in addition to the lack of access for smaller and riskier borrowers.”

That’s not fair, nor does it help the people that such legislation claims to protect.  For that reason, all of our elected leaders should reject this chimerical effort, which would only serve to make consumer finance lending more difficult and more expensive.