In my first media appearance from the sleek new CEI studios at our offices in Washington, DC, I joined a great panel on the May 26 podcast of SPPI-TV, produced by the Southwest Public Policy Institute (SPPI).
The topic was “Solving the Rate Cap Puzzle,” and my fellow panelists and I discussed with host and SPPI President Patrick Brenner the destructive effects of state price controls on small-dollar loans. My fellow panelists were Todd Zywicki, professor at George Mason’s University’s Antonin Scalia School of Law; and Andrew Duke, Executive Director of the Online Lenders Alliance.
On the podcast, the other panelists and I stressed strong demand for small-dollar loans among the unbanked and underbanked, as well as people who need access to emergency loans, and the harms of restrictive rate caps enacted by states on proposed by lawmakers at the federal level.
Zywicki discussed how rate caps in past decades have led to illegal loansharking – in which the mafia and other criminals would use violence against those who couldn’t pay – in the 1960s and 70s. He noted that even some liberal politicians such as Robert F. Kennedy, Sr., figured New York State’s interest rate caps as a factor in the growth of the mafia, and urged that those caps be relaxed.
The panel agreed that newly enacted price controls on these loans in states such as New Mexico and Illinois could lead to the return of violent loansharking among other harms to those consumers the policies were intended to benefit. We noted the recent findings of harm of the New Mexico price caps in a recent report by Brenner and his colleagues.
In the SPPI report “No Loan for You,” Brenner and his colleague D. Dowd Muska documented a significant drop in small-dollar loan providers in New Mexico and the exit from the state of prominent national FinTech lender Afterpay after the enacted price controls on small loans last year.
In an excellent example of shoe-leather reporting as effective policy research, Brenner recounted his futile attempts to receive small-dollar loans at banks at which the liberal Pew Charitable Trusts declared such loans as being readily available. The experiences of Brenner casts doubt on the assertions of Pew and other proponents of price controls that banks will fill the gaps of small-dollar lenders chased away by price caps.
On the podcast, I noted that support for the price controls are driven by the distortion of a flawed measure of interest rates mandated by the federal government. I pointed out on the show, as I have in Forbes and a policy report for CEI, that the “annual percentage rate” mandated as a disclosure tool by the federal Truth in Lending Act, forces loans providers to quote a loan with a 15 percent interest rate for a duration of two weeks at the rate at which it would be if not paid back for a full year, which is 390 percent.
As I recently wrote in Forbes, “the specter of loans with a 300 to 400 percent interest rate – even though it is far in excess of what most borrowers pay – is wielded as justification for interest rate caps in several states.”