Categories
Domestic Policy Economy Government Regulation Life Markets and Finance New Mexico Political Thought Poverty & Welfare Poverty and Inequality Public Opinion Top Issues

Santa Fe New Mexican: Here’s What Rate Caps Really Do To Consumers

Originally published at Santa Fe New Mexican on June 11, 2022.

Earlier this year, as New Mexico debated legislation limiting to 36 percent the annual percentage rate for consumer loans in the state, the primary witness testified in support of the bill before the Consumer and Public Affairs Committee. Claims were made that do not hold up to reality. It is time to correct the record.

During her testimony, Karen Meyers, a consumer lawyer serving in her capacity as an expert witness, cited specific findings and data from Illinois as a case study for New Mexico’s similar effort.

Such rate caps, Meyers argued, could not possibly reduce access to credit, like many in the industry forewarned, because new lenders were actually coming to Illinois after its rate cap took effect.

At best, this assertion is a fundamental misunderstanding of the data. At worst, the argument is disingenuous.

Here are the facts: In response to a Freedom of Information Act request filed by the Online Lenders Alliance, the Illinois Department of Financial and Professional Regulation released data showing more than 45 percent of the licenses held by Illinois installment lenders are no longer active after the rate cap bill was signed into law. This does not include more than 350 lender licenses that also expired.

In addition, the lawyer’s assertion that “67 new lenders opened” within the past year is misleading. Information released by Illinois clearly shows that almost half of the “new lender” licenses are actually duplicates.

The state’s own data identifies that these “lenders” are either not new to Illinois consumers, or the companies do not extend consumer loans to the public. In other words, they do not offer the short term credit that many consumers need.

Advocates claim that rate caps reduce the cost of credit.

They do not; they actually reduce the availability of credit, limiting options for those who cannot qualify for other lending products.

Inevitably, borrowers find themselves being shut out from banks and credit unions. A cursory academic analysis shows that the number of loans made to deep subprime borrowers decreased by 57 percent in the three months following the rate cap’s implementation.

For those who were still able to access credit, the average loan size in Illinois became larger and more expensive.

Furthermore, a survey of borrowers who had taken out specialized emergency loans prior to the rate cap found that consumers’ financial situations did not improve as promised, with actual declines in many instances.

Many of these former borrowers have been unable to access credit since the rate cap took effect, forcing them into worse alternatives like late bill payments, skipping urgent appointments or vital expenses, or pawning irreplaceable family heirlooms and other meaningful valuables.

The vast majority of borrowers said they want more options, including the option to return to their previous lender.

Rate cap advocates previously pointed out that New Mexico rescinded a strict rate cap in 1981 with concerns of rising inflation.

As New Mexico families see their already diminished household budgets being squeezed by rising prices, now is not the time to tie their hands with fewer options for short-term credit.

Telling them to work more is not a solution.

Policymakers should heed the data and take action before this damaging ban on specialized emergency loans goes into effect.

By Patrick M. Brenner

Patrick Brenner is the founder and president of the Southwest Public Policy Institute, a limited-government research institute and think tank focused on the southwestern United States. An advocate for open government, he leads the institute's government transparency and accountability efforts.

Leave a Reply

Your email address will not be published.