Before the first month of 2023 was over, a raft of studies once again reinforced what we have always known: government attempts to “regulate” certain products in the name of “consumer protection,” “equity” and “justice” are flat-out disastrous for consumers, many of whom are people of color.
Not one, not two, not three, but four studies concluded this most obvious of facts. In so doing, these studies provide a veritable arsenal of proof that state and federal regulations don’t work and aren’t going to. While they talk a big game about “justice,” “equity” and “inclusion” in their push for an overzealous regulatory apparatus, the research demonstrates — once again — that if credit justice, credit equity and credit inclusion are the goals, the solution is to increase credit access, not to limit it.
“Consumer protection” activists have long argued that the government’s role is to protect consumers with subprime or nonexistent credit scores from credit products that these activists don’t like. And, when a financial emergency strikes — unplanned as they often are — “consumer advocates” argue these consumers are better off selling their bodily fluids, working triple overtime shifts, or begging for alms than taking out a loan.
So, they conclude, the state must enact a strict cap on the maximum amount of interest a lender can charge. Never mind that this defies commonsense and even a rudimentary understanding of how lending works and the costs associated with making loans and complying with regulations.
While young, Illinois’ experiment with this shows how harmful these policies are. When three economists examined the state of lending in Illinois after bureaucrats enacted a 36 percent interest rate cap in March 2021, they found “the interest rate cap decreased the number of loans to subprime borrowers by 44 percent and increased the average loan size to subprime borrowers by 40 percent.” They later determined that most borrowers were unable to borrow money when they needed it after the interest rate cap went into effect.
In Colorado, the first weeks of the year saw Attorney General Phil Weiser release a study of consumer lending to the General Assembly with similar findings. This study, which the General Assembly explicitly called for and authorized in the 2021 state budget, also found that rate caps reduce access to credit for consumers who need it, leaving consumers who experience a financial need with fewer — and usually worse — options with which to address it.
The American Consumer Institute concluded that “for borrowers, caps on interest rates ultimately mean they lose access to an essential source of credit they overwhelmingly approve of and support.” Furthermore, it found, “The problem is particularly acute for low-income Americans and other vulnerable members of society who depend on short-term loans for access to mainstream credit.”
The Urban Institute, a left-leaning think tank, found that the 2015 Military Lending Act expansion — widely used by activists as the justification for the 36 percent interest rate cap they want to force on the public at large — “did not lead to better credit and debt outcomes for service members most likely to be affected by this policy.” In fact, it found, “for the most vulnerable individuals — those with deep subprime credit scores — the policy may have had negative effects by limiting their access to credit.”
None of this is particularly new news, but it is emblematic of the Orwellian doublespeak activists rely on when discussing inclusion, equity, fairness and justice.
Only in the backward world these activists perpetually live in does “inclusion” mean barring consumers from accessing financial products. If these are the outcomes the government intended — cutting off consumers’ access to credit or forcing them to take out bigger loans than required — then they’re doing a fantastic job.
In the real world, “inclusion” in financial services means providing access to financial products and resources to people who might be excluded or marginalized — or those who can’t otherwise access financial products. It doesn’t mean cutting off their access to credit products. Similarly, “equity,” “fairness” and “justice” mean giving people a fair shot at accessing the products they need without discrimination.
One last note on the doublespeak front: We saw a bit of this when the Pew Charitable Trusts’ Consumer Finance Project trumpeted its findings that “six of the eight largest banks now offer affordable small loans.” While that may be true, the implication that it is somehow a panacea for the majority of the United States population who could not afford a $1,000 emergency expense is disingenuous at best.
Look no further than the fine print. On Bank of America’s “Balance Assist” product, for example, to even be eligible, consumers must have had a Bank of America checking account open for at least one year (or 2.5 years for those without a credit score). Then they must have a positive balance in all accounts and make regular monthly deposits. Then they have to not have an open Balance Assist Loan (and haven’t opened six Balance Assist loans in the last 12 months). And then, after jumping through all of those hoops, consumers still have to clear a credit check.
If these activists get their way, we can only hope that consumers don’t run out of blood plasma to sell so they can make ends meet when their car breaks down.
