Freedom Line Blog

Whenever governments at any level artificially cap interest rates on consumer installment loans, they claim to be acting on behalf of vulnerable and lower-income Americans.

For straightforward reasons according to the laws of economics, however, such efforts only end up counterproductively harming the very people they allegedly help.

Sadly, we’re witnessing yet another effort tempting that destructive spiral in New Mexico, where the House of Representatives Consumer and Public Affairs Committee has approved by a narrow 3-2 margin H.B. 132, a proposal that would cap interest rates on consumer loans.

Making matters worse, the Committee even gutted funding for financial education in New Mexico, thereby evading reference to the House Appropriations Committee, in deceptive fashion to rush the bill through.

At a simplistic level, government laws 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 a 2018 Federal Reserve System Board of Governors study on the economic wellbeing of U.S. households, nearly 40% of American families don’t possess sufficient savings to cover even a $400 emergency expense.  Alarmingly, that same study noted that 51% of military service members live paycheck-to-paycheck.

Because of their credit profiles, credit cards aren’t always a viable option for such people, and traditional bank loans aren’t an option due to the small amounts at issue.  Whereas higher-income Americans with stronger credit history can borrow from banks, use assets they possess as leverage or access savings amounts, American consumers with lower credit scores and insufficient 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.

That’s where consumer finance loans come in, providing a critical life preserver for lower-income Americans and New Mexicans.

In such circumstances, struggling Americans can access the money they need for short-term emergencies via consumer finance loans.  But under H.B. 132 as contemplated by the New Mexico House, consumer finance lending will only become economically unsustainable and therefore less available.

In turn, 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 aptly summarized, regulatory and legislative proposals like H.B. 132 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.”

Obviously, that quickly ends up punishing the very people that legislation like H.B. 132 claims to protect.  It only threatens to make consumer finance lending more difficult, more expensive and less available.