Originally published at realclearmarkets.com on June 21, 2023

In New Mexico, an interest rate cap on specialized emergency loans when into effect in January. Since then, big-bank promoters have endorsed the small-dollar short-term loan products offered by U.S. Bank, Bank of America, Wells Fargo, Huntington Bank, and others as alternatives. Recently, those same activists have thrown in support for the credit unions. The problem is that these loans from credit unions and big banks generally only exist on paper. How do I know? I tried applying for them. And it’s not just me. Others have reproduced the same results.

In March, the Southwest Public Policy Institute conducted a study where the consumer experience was emulated for big-bank small-dollar financial products. Recently, a follow-up study was completed taking the same model, with study participants Jack Radomski and Brandt Kringlie, and scaling the study to other states as well as including credit unions. The results were disappointing.

These specialized lending products are offered by small-loan companies. But that list of companies is shrinking, rapidly. The New Mexico Regulation and Licensing Department reported that the number of active licenses for small-loan companies decreased from 452 in June 2022 to 351 in March 2023, representing a 22% loss in lenders.

In lieu of a loan from a specialized emergency lender, Pew Charitable Trusts implicated that banks would step up. Of the three banks with branches in New Mexico currently “offering” the small-dollar loan product, none approved me for a loan. Since I couldn’t find a loan from a bank, I shifted to credit unions. Of the 15 credit unions we tested over three weeks in New Mexico, only two returned anything favorable: and one of those was just a conditional approval. That’s an 86% denial rate and includes credit unions from across the country, like Pentagon Federal Credit Union and Navy Federal Credit Union.

I also suffered a substantial decrease in my credit score from all of the hard inquiries. It was over 800 before I started this experiment. Now it’s at 706. With an average credit score of 682, many New Mexicans would fall into the subprime category if they experienced the same credit score reduction.

The only bright, shining example was Nusenda Federal Credit Union. Their application process was simple, transparent, and accessible. The rate was 17%. Repayment would occur in three payments over 90 days. Upon agreeing to the note and submitting the application, the loan funds were immediately available in my Nusenda savings account. It was a streamlined and hassle-free process. Great product. I highly recommend it.

But Nusenda was the exception to the rule.

And I am also the exception to the rule: I’m not categorized as unbanked or underbanked and I was already a member at Nusenda for over a year. That established relationship I have with set me apart. In Albuquerque, “a third of the households … do little or no mainstream banking, substantially higher than the national average.”

The reality is that the introduction of a price control like an interest rate cap is decreasing choice in consumer credit. Since Americans have depleted their COVID savings and inflation is still up, access to greater credit and liquidity choices is more important now than ever.

But don’t worry: Pew’s research suggests borrowers “choose other options such as asking friends, negotiating with debtors, or cutting expenses.”

Since the loan applicants who participated in our consumer emulation experiment were unsuccessful at applying for most of those theoretical small-dollar short-term loans, I guess they’ll have to resort to just “asking friends”.

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