-Illinois Consumers’ Experiences After Rate Cap Clearly Demonstrate Rate Caps’ Negative Impacts-
ARLINGTON, Va. (September 7, 2023)—After Senator Dick Durbin (D-Ill.) introduced his latest attempt to implement a national 36 percent rate cap on consumer loans, Online Lenders Alliance Executive Director Andrew Duke issued the following statement:
“The latest effort in Senator Durbin’s perennial quest to implement a national 36 percent rate cap, which goes back more than a decade, would be a financial disaster for consumers who turn to innovative fintech providers for their credit access. Nowhere is this more clear than in Senator Durbin’s home state of Illinois, which implemented a 36 percent rate cap in February 2021.
“An academic study by three leading economists determined Illinois’ interest rate cap significantly decreased the number of loans to borrowers with lower credit scores who are often rejected by banks and credit unions. And surveys of actual borrowers who had previously used the small dollar loans that were forced out of the market as a result of the rate cap tell us the impact of not being able to access credit.
“Our survey found that most former short-term, small-dollar loan users have struggled with paying their bills since the APR cap took effect, and that a majority of borrowers indicated that they were unable to access credit at some point following the rate cap. It also found that when unable to obtain credit, consumers said they were left with poor alternatives, including late bill payments, skipping urgent appointments or vital expenses, or pawning valuables.”
A recent follow up survey of these consumers further documented their experiences. When asked to “describe what happened when you were unable to borrow money from a lender,” some of the responses consumers offered include:
- We go without food and probably have to not pay the electric bill in hopes we can get some financial assistance through the electric company or LIHEAP.
- I defaulted on student tuition/boarding payment due to paying 10 days late, which acquired large late fees. This stressed out my daughter unnecessarily which added even more stress to me.
- I lost a storage unit with a bunch of my possessions because I was unable to pay.
- Due to my credit score, the bank was unable to assist me with a loan.
- It started a foreclosure hearing on our home.
In a statement, bill co-sponsor Sen. Jeff Merkley (D-Ore.) talked about Oregon’s rate cap as motivation for his sponsoring the bill. However, Oregonians have faced a similar fate after a rate cap took effect in his state. As one study found, “restricting access caused deterioration in the overall financial condition of the Oregon Households. The results suggest that restricting access to expensive credit harms consumers on average.”
The Senate sponsors also invoked the Military Lending Act (MLA) as a model for this broad federal rate cap, but the data shows that the MLA has contributed to financial problems for servicemembers, not solutions. A study commissioned by the U.S. Military Academy at West Point found that access to small dollar loans had few adverse effects. In fact, the authors state that their results suggest that access to short term loans may reduce “the probability of an involuntary separation and improves credit outcomes in some subgroups.” In addition, a HarrisX poll found that “A majority of military households have been denied loan products and access to credit because of MLA.”
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About The Online Lenders Alliance
The Online Lenders Alliance (OLA) is the first trade association in FinTech. OLA is focused on credit inclusion, bringing together a diverse group of innovative companies who share a common goal: to serve hardworking Americans who deserve access to trustworthy credit. Our members are entrepreneurs, publicly-traded companies, lenders, credit bureaus, advertisers, lead generators, compliance professionals, and software developers who are leveraging technology to responsibly improve consumers’ financial health. Consumer protection is our top priority and OLA members abide by a rigorous set of Best Practices to ensure consumers are fully informed and fairly treated. For more information, please visit www.onlinelendersalliance.org.