There seems to be no shortage of policy ideas proposed by Democrats in Washington that would harm taxpayers, limit consumer choice or interfere in America’s free market. Take a discussion draft of consumer-credit legislation released by House Financial Services Committee Chairwoman Maxine Waters, D-Calf., as an example that would do all three. It’s a proposal that purports to protect low-income Americans from high interest rate lending, but would actually cut them off from access to credit markets that can be vital for day-to-day life.
The committee’s proposal, titled the “Protecting Consumers from Unreasonable Credit Rates Act of 2019” is a particularly disastrous bill that attempts to lock millions of low to middle-income Americans out of short-term credit markets with government applied price controls. If enacted, the government would place a cap on the interest rate a short-term lender is permitted to charge a consumer who is seeking loan. As we’ve seen with nearly every price control, it can do substantial harm — especially to the most vulnerable of our society.
Short-term loans are already highly regulated at the state level, yet the businesses providing them survive because many customers prefer the hours of service and convenient approval that traditional banks may not provide. Insistent that they know what’s best for everyone else, proponents of federal legislation view small dollar short-term lenders as predatory institutions whose sole purpose is to keep their customers in an endless cycle of debt. They like to highlight high annual percentage rates — which is simply the rate of interest a borrower will pay over the course of a year due to compounding — as their evidence. While these short-term loans typically do carry a high APR, it is extremely rare for a loan to be outstanding for an entire year.
Short-term loans act as a cash advance that are paid back in full at the borrower’s next pay period. So while the loans may indeed carry a high APR, the vast majority of loans are paid back in a matter of weeks or months, not extended for an entire year. It’s misguided to paint an entire industry with a broad brush, and even worse to try legislate or regulate an industry out of business.
Contrary to some of the claims made by proponents of this legislation, small dollar lenders tend to help rather than hurt the people they serve. At a time when 50% of low-income families aren’t able to afford a $400 emergency expense, having ready access to providers of immediate credit could be life-saving. According to Pew Charitable Trusts, “69% used it to cover a recurring expense, such as utilities, credit card bills, rent or mortgage payments, or food; and 16% dealt with an unexpected expense, such as a car repair or emergency medical expense.” These are individuals who have nowhere else to turn to obtain a loan in order to pay an immediate bill.
Without this access potential borrowers may either have to miss a payment or default, or spend their efforts seeking an illicit, unregulated market for a loan.
And here, of course, is where taxpayers come in. Eager to ride to the rescue of a disaster scene they would create for consumers, most members of Congress who support interest rate controls also back schemes authorizing the U.S. Postal Service, or USPS, to engage in banking and even small dollar lending. These include Bernie Sanders, Kirsten Gillibrand and Alexandria Ocasio-Cortez.
Considering that USPS has run up massive losses for 12 consecutive years despite having a monopoly over mailbox delivery in the U.S., it is foolish to believe that this government-chartered entity could manage a banking network on a break-even basis, much less profitably. Small-dollar loans have high default rates, and would continue to be that way under USPS management unless qualifications were tightened. The latter outcome is politically unlikely. As Peter Conti-Brown put it in a report for the Brookings Institution, “It is difficult to imagine politicians, citizens and customers having the stomach to abide the collection on nonperforming loans when the collector is the government itself.” Thus, the USPS banking operation would either 1) require direct subsidies from taxpayers; 2) siphon cash from other USPS operations, hastening a taxpayer bailout of the entire postal system; or 3) induce the service to lobby for expansion into more “profitable” banking areas that would compete with the private sector. Pick your poison, but taxpayers would suffer the ill effects.
In addition to directly crippling access to credit for lower-income Americans, an interest rate cap would interject the federal government between providers and consumers. Bringing the government into any market transaction like this inevitably has an effect on consumers’ ability to access the market. Price ceilings on any good or service reduce supply, and access to credit is certainly no exception.
No third party can objectively state that lenders are charging consumers “too much” for their services. That’s a determination made by customers when they opt to decline loan terms. The interest rate cap empowers government to second-guess consumers — imposing their judgment on how prospective borrowers should value goods and services.
Congress has a long history of imposing regulations intended to help low-income Americans that end up hurting — and they are poised to do so with short-term lending. This a valuable way that low-income Americans can access credit markets when they have financial emergencies. For the sake of low-income consumers as well as taxpayers, we hope this idea — and its postal banking companion — stays out of the legislative hopper and off the floor of the House or Senate.
Thomas Aiello is a government affairs associate with the National Taxpayers Union, a nonprofit dedicated to advocating for taxpayers at all levels of government.