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Interest-rate cap policies would create a less diverse, less inclusive economy

Four in 10 Americans do not have adequate savings to cover a $400 emergency expense. With this alarming statistic from the Federal Reserve Board, it stands to reason Congress and state governments should be working in a bipartisan way to identify good public policy to improve access to credit for people who need it the most. At the very least, they should not be pushing policies that widen the credit gap, making access to it even more out of reach.

The U.S. House Financial Services Committee, on which U.S. Reps. Dean Phillips and Tom Emmer serve, is looking at a 36 percent rate cap. Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez are sponsoring legislation that would create a national 15 percent interest cap. States across the country — like California, Indiana, and Ohio — are also debating rate-cap legislation.

The ‘underbanked’

The segment of the population unable to cover emergency expenses is often categorized as “underbanked.” People in this group know they are unlikely to get the credit they need from traditional financial services, and they regularly turn to small-dollar lenders and other alternative sources of credit to make ends meet during financial emergencies.

In doing research for her book “The Unbanking of America,” the University of Pennsylvania’s  Lisa Servon found that consumers who turn to small-dollar lenders for high-interest loans are making well-informed choices for their personal financial well-being.

Small-dollar lenders are highly regulated businesses that offer diverse and accessible product lines customized for people with less-than-perfect credit. Small-dollar lenders present one of the few opportunities for people with damaged credit scores or nonexistent credit history to establish prime credit scores and enter the credit community that economically advantaged people enjoy.

Servon and Aaron Klein, a Brookings Institution fellow, have written that a 15% national rate cap would “likely to hurt the people it’s designed to help, driving the market away from consumers with low credit scores.”

Unintended consequences

Indeed, studies have shown that national and state rate caps on small-dollar loans would have unintended consequences. When policymakers place artificial constraints on credit access, lending to borrowers with means stays steady or increases, but credit “deserts” appear in low-income communities. There is an especially disparate impact on credit access for minority communities, and as the credit access gap grows wider, the economy becomes less diverse and less inclusive.

Patrick Rosenstiel
Patrick Rosenstiel
National and state rate caps would also have an impact on traditional banks that are experimenting with small-dollar credit options for their customers. Last year, U.S. Bank became the first mainstream bank to enter the small-dollar lending space. The bank’s Simple Loan product gives their existing customers an alternative to traditional payday loans whereby consumers can borrow up to $1,000 to cover emergency expenses. The loan carries fees like traditional small-dollar loans and must be repaid in three months. U.S. Bank’s Simple Loan alternative would be at risk under proposed rate caps.

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

Consumers need protection from unsavory characters who use a consumer’s financial emergency to make a windfall. Minnesotans should call on Reps. Phillips and Emmer to be careful to ensure any reforms do not limit access to credit and force consumers into desperation.

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 policy issues at the local level.


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

Comments (25)

  1. Submitted by Hiram Foster on 10/08/2019 - 10:08 am.

    I am all in favor of high interest rates caps just as long as bankruptcy is made easier.

    • Submitted by Britt Brooks on 10/08/2019 - 10:34 am.

      There are a number on new lending options for consumers like US Bank’s Simple product at 88% APR. Also products that help build credit or repair credit like Elastic and Net Credit at 10% per month. More competition drives changes. A rate cap of 3% per month only eliminates options for folks with bad credit.

  2. Submitted by Pat Terry on 10/08/2019 - 10:09 am.

    Payday loans are horribly exploitative and devastating to low-income people. This piece is offensive. These people are ghouls.

    • Submitted by Britt Brooks on 10/08/2019 - 10:38 am.

      The state should pass other options so consumers have more choices. I have lived in places where a line of credit for folks is helpful Believe me, when you are struggling, it is better to have some choice than no choice at all.

      • Submitted by Pat Terry on 10/08/2019 - 11:00 am.

        Nonsense. The vast majority of payday loan users (who are overwhelmingly poor) end up in far worse financial straits.


  3. Submitted by William Duncan on 10/08/2019 - 10:49 am.

    In the aftermath of the Housing Bubble collapse in 2008,
    the Federal Reserve gave hundreds of billions of dollars to big Banks and private equity like Blackstone at rates around 1% or less, so they could go buy up the wreckage of the Great Recession, for pennies on the dollar. Hence one of the reasons in the vast expansion of income inequality, the emptying out of rural America, poverty in the city. AKA, Neo-colonialism.

    Meanwhile, usury was condemned in the Bible and most every other religious tradition. The old world understood, if you let usury loose, eventually most people would end up slaves or debt serfs (See the $1.6 trillion in student debt, etc).

    We aren’t allowed to have that conversation here in America.

    • Submitted by Dennis Wagner on 10/08/2019 - 09:27 pm.

      Well WHD, sooner or later if enough topics come up we might find some common ground. What the article did not address is how the Fed. keeps lowering interest rates to supposedly help business and by default the stock market, a quick google indicates ~ $20T in cash sitting on the sidelines, (folks are holding cash vs investing) the point kind of goes like this, the fed keeps cutting interest rates, and who does it hurt worst? Teh small savers, mom, pop and the folks with small savings accounts, to the articles point, no problem putting people into life long financial servitude, and by the way, we’ll help you get there by paying you basically zero for your money but charge you what 88% for our money, looks like quite the rigged table we are dealing with here, and hate to say it, but it appears that it starts at the Fed and goes all the way through the system! Shouldn’t someone answer the question why a savings account gets maybe 1% but that loan with the “1% money gets what 15-20-30+% interest on the other side of the balance sheet? .

    • Submitted by Karen Sandness on 10/09/2019 - 09:33 am.

      Yes, usury used to be a crime.

      Back in the early 1980s, when interest rates were at record high levels, up to 22% on some credit cards, I saw a cartoon in which two men are sitting in a prison cell, and one of them says, “I’m here for charging 15% interest.”

  4. Submitted by Jon Kingstad on 10/08/2019 - 01:55 pm.

    The worst legislation in the past 50 years were the financial deregulation acts passed by Congress in 1980, and 1982, which preempted state usury laws. Another atrocity was the U.S. Supreme Court’s decision that allowed national banks in States without usury laws to offer usurious credits cards to consumers in States that had such laws. There needs to be a national law that re-establishes usury laws, or “interest rate caps” if you will and allows treble damage or double damage lawsuits against the offenders. People don’t need credit; they need money and the ability to save. How about requiring banks and other financial institutions to pay interest at 8-9% on savings accounts to encourage people to save, rather than spend money they haven’t got?

  5. Submitted by Peter Stark on 10/08/2019 - 03:13 pm.

    This article is meant to be ironic, right?

  6. Submitted by Charles Holtman on 10/08/2019 - 05:38 pm.

    The internets suggest that Mr. Rosenstiel is a public relations professional at the Ainsley Shea firm who has achieved great results for corporate clients seeking to become less burdened by excessive federal and state regulation, apparently including payday lenders.

    The “Domestic Policy Caucus” is a thin website with almost no content, not a name of a single person associated with the organization, and no address or telephone number. It features a very nice photo of smiling ordinary people of different skin colors and states that its mission is “to support transparent, public conversations on critical policy issues at the local level.” I take it that “transparent” is the key here.

    It would seem that for its “Community Voices” feature, MinnPost would do some minimal checking to confirm that an author is writing on a subject of interest from his or her own honest perspective as a member of the community, and not as a paid flack for placeless corporate interests intentionally unrevealed.

    • Submitted by Frank Phelan on 10/08/2019 - 08:40 pm.

      Yes, MinnPost should be embarrassed about this.

      • Submitted by Pat Terry on 10/09/2019 - 09:18 am.

        Minnpost seems to do no oversight whatsoever on its Community Voices pieces. It really undermines their claim to good journalism.

    • Submitted by William Duncan on 10/09/2019 - 07:35 am.

      Nice catch Charles,

      The Domestic Policy Caucus is clearly a front group for monied interests. The name implies at least a “think tank”, however the blog reveals it exist primarly if not solely to prevent caps on interest rates. Probably it is not a group either, but an “admin” who set up the website for the lawyers who represent the credit industry, and likely not even the big banks, but those making usurious loans to the poor.

      Predatory capitalism with a website masthead of smiling, diverse actors, a picture as likely bought, or taken form something unrelated. A fraud.

  7. Submitted by Paul Udstrand on 10/09/2019 - 08:34 am.

    Yeah… predatory lending is a ladder out of poverty for millions… Obviously the solution to low income is high interest debt.

  8. Submitted by Ray Schoch on 10/09/2019 - 10:31 am.

    I’d certainly endorse the notion that “Americans deserve equal access to credit” that Mr. Rosenstiel puts out there. Unfortunately, the rest of his argument, and thus the rest of the article, is fraudulent and offensive. As others have pointed out, no one gets out of debt or staves off bankruptcy through a loan with an 88% interest rate. It’s a prescription for fiscal disaster. Perhaps Mr. Rosenstiel is a bankruptcy lawyer simply trying to drum up business, but as fiscal policy, what he suggests is idiocy. More accurately, it’s a “feature” of a financial market controlled by monied interests, largely interested in padding their bottom line.

    • Submitted by Jonathan Ecklund on 10/09/2019 - 03:33 pm.

      It would seem that since working on Steve Forbes’ presidential campaign, Mr. Rosenstiel “successfully directed grassroots efforts across the West and Midwest to garner Senate support for U.S. Supreme Court candidates John Roberts and Samuel Alito.”

      One wonders who employs Britt Brooks and his astroturfing on behalf of the credit industry

      It’s absurdist, at the very least, to assume that the working poor could “enter the credit community that economically advantaged people enjoy” via his proposed predatory lending practices that further perpetuate cycles of poverty.

  9. Submitted by Tim Smith on 10/10/2019 - 10:31 am.

    The 15% cap is a very extreme and bad idea. It makes common and business sense that credit would be less available and those with good credit and low rates would havre their rate jacked up to make up the difference.

    • Submitted by Dennis Wagner on 10/14/2019 - 07:12 pm.

      So how does one square up to the FED dropping interest rates for the banks and the stock market, shouldn’t they be at free market driven rates like the rest of us mortals?

  10. Submitted by Paul Udstrand on 10/14/2019 - 07:59 pm.

    An economy that runs on income rather than credit isn’t a bad idea. We tried pretending that debt and credit can replace income, and we got a great big recession our of that assumption.

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