Interest rate cap policies would create a less diversified and less inclusive economy

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Four in 10 Americans don’t have enough savings to cover a $ 400 emergency expense. With these alarming statistics from the Federal Reserve Board, it stands to reason that Congress and state governments should work in a bipartisan fashion to identify good public policies to improve access to credit for those who need it most. . At the very least, they shouldn’t push policies that widen the credit gap, making access even more out of reach.

The U.S. House Financial Services Committee, on which U.S. Representatives Dean Phillips and Tom Emmer sit, is considering a 36% rate cap. Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez are sponsoring legislation that would create a 15% national interest cap. States across the country, like California, Indiana and Ohio, are also debating rate cap legislation.

The “under-banked”

The segment of the population unable to cover emergency expenses is often classified as “underbanked”. People in this group know that they are unlikely to get the credit they need from traditional financial services, and they regularly turn to low dollar lenders and other alternative sources of credit to reach out to them. two ends in a financial emergency.

While researching for her book “The Unbanking of America,” Lisa Servon of the University of Pennsylvania found that consumers who turn to low-cost lenders for high-interest loans are making informed choices for their own sake. be personal financial.

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Small lenders are highly regulated businesses that offer diverse and accessible product lines tailored to people with less than perfect credit. Low-value lenders present one of the rare opportunities for people with damaged credit scores or nonexistent credit histories to establish top-notch credit scores and enter the credit community whose benefit economically advantaged people.

Servon and Aaron Klein, a member of the Brookings Institution, wrote that a national rate cap of 15% would be “likely to hurt the people it is designed to help, pushing the market away from low-credit consumers” .

Unintended consequences

Indeed, studies have shown that national and state rate ceilings on small loans would have unintended consequences. When policymakers impose artificial constraints on access to credit, loans to borrowers with means remain stable or increase, but credit “deserts” appear in low-income communities. There is a particularly disparate impact on access to credit for minority communities, and as the credit access gap widens, the economy becomes less diverse and less inclusive.

Patrick Rosenstiel

National and state rate caps would also impact traditional banks experimenting with low dollar lending options for their customers. Last year, US Bank became the first mainstream bank to enter the low dollar lending space. The bank’s simple loan product offers its existing customers an alternative to traditional payday loans whereby consumers can borrow up to $ 1,000 to cover emergency expenses. The loan has fees like traditional small dollar loans and must be repaid in three months. The US Bank’s simple loan alternative would be at risk because of the rate caps offered.

Americans, regardless of their income and ethnicity, deserve equal access to credit. There would be no merit in reforms in the small loan sector if the reforms were to limit access to credit and force consumers to seek unregulated credit or bounce a check, go bankrupt, get into debt on a credit card, or be forced into other even worse alternatives.

Consumers need protection from disreputable characters who use a consumer’s financial urgency to make a bargain. Minnesotans should call on Representatives Phillips and Emmer to ensure reforms do not limit access to credit and force consumers into despair.

Patrick Rosenstiel is Chair of the St. Paul-based Domestic Policy Caucus, a national organization whose mission is to support transparent public conversations on critical political issues at the local level.

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Correction: An earlier version of this comment has been corrected to show that Servan and Klein’s opposition to a tariff cap was specifically at a 15% cap.

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