Rather than restricting Virginia consumers’ choices, state lawmakers should promote policies that expand access to responsible financial services.

Tweet

“The nine most terrifying words in the English language are, ‘I’m from the government, and I’m here to help.’”  

Ronald Reagan’s quip remains among his most celebrated for good reason: Interventionist efforts by government bureaucrats tend to harm their supposed beneficiaries more than they help.  

That’s particularly true with consumer financial regulation, and a counterproductive proposal in Virginia offers just the latest unfortunate illustration.  

At issue is S.B. 1252, which would prohibit community banks and credit unions from partnering with third-party vendors, whose purpose in working together is simply to extend credit to underserved consumers.  However well-intentioned, the proposed legislation would arbitrarily restrict how financial institutions can better serve their customers, and its effect would be to deprive Virginians of their freedom to choose banking services that best fit their individual needs.  

Access to individualized financial services is a necessity, not some abstract convenience.  When faced with unanticipated expenses, working-class families need more flexible lending options ito bridge financial gaps.  

Under S.B. 1252, however, Virginia consumers would be deprived of helpful options, which would in turn impose greater financial hardship by making credit more difficult to secure.  

That’s because S.B. 1252’s annual interest rate cap of 12% would effectively eliminate viable loan options for borrowers with less-than-stellar credit.  This is simple economics.  Banks can’t afford to offer more traditional loans to higher-risk borrowers under S.B. 1252’s constraints.  The inevitable consequence, therefore, would be fewer options in the marketplace for families who need access to flexible credit options most.  

By way of background, fintech partnerships have transformed the consumer banking industry in recent years by expanding access to underserved and high-risk populations.  Those burgeoning collaborations allow banks and credit unions to leverage cutting-edge technology to provide more customized lending options to meet customers’ unique individual circumstances.  

Those fintech partnerships allow financial institutions to provide more tailored customer solutions by structuring loans with risk-based pricing and flexible repayment options, helping to ensure that they fit particular borrowers’ needs.  In addition to enhancing customer access, they also allow borrowers to improve their financial wellbeing by building credit through responsible lending reported to major credit bureaus.  

By targeting those types of partnerships, however, S.B. 1252 would dismantle efforts that have brought meaningful financial empowerment to thousands of Virginians.  

Shouldn’t consumers possess the right to decide for themselves which options work for them, rather than having them erased arbitrarily by counterproductive government regulations?  After all, we needn’t speculate on the potential negative consequences of S.B. 1252.  Real-world examples from across the nation provide conclusive evidence.  

For instance, when Illinois imposed similar interest rate caps on non-bank loans in 2021, the consequence was a 44% decline in credit availability for subprime borrowers.  Predictably, consumer financial wellbeing declined, as evidenced by increases in missed and late bill payments, as well as by an increased inability to meet critical expenses as reported by consumers themselves.  

Although proponents of S.B. 1252 contend that fintech partnerships somehow lack sufficient government oversight, the reality is the polar opposite.  

Specifically, banks and fintech enterprises operate under extremely rigorous regulations by myriad and overlapping federal and state agencies, including the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC).  Those duplicative agencies and regulations ensure more than full transparency and responsible lending.  Additionally, Virginia already maintains a comprehensive regulatory framework that protects consumers while also allowing for financial sector innovation to meet consumer needs.  

Rather than restricting Virginia consumers’ choices, state lawmakers should promote policies that expand access to responsible financial services.  First, they can promote innovation and encourage partnerships between banks and fintech firms to create products for underserved communities.  Second, they can enhance financial literacy via investment in programs helping consumers make more informed financial decisions and avoiding predatory practices.  Third, lawmakers can conduct more due diligence through comprehensive market research on the potential disruptions of S.B. 1252 before imposing top-down policies that do more harm than good for consumers.   

At a moment when Virginians need and demand more financial options, not fewer, S.B. 1252 represents a dangerous governmental overreach that limits consumer choice and restricts access to responsible sources of badly needed credit.  By artificially interfering with banks’ ability to operate and innovate, S.B. 1252 would deprive consumers of a resource that they need to build stable financial futures.  It’s an attack on financial freedom for working-class families in particular, who rely on innovative banking solutions to navigate today’s economic uncertainties.  

Virginia should work to expand access to responsible sources of credit, not strip it away through counterproductive proposals like S.B. 1252.