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Usury ceilings hurt low-income families most (For Viewpoints, 10/12/08 Date published: 10/26/2008
CHATTANOOGA --Recently, several states have legislated interest-rate ceilings or otherwise significantly reduced consumers' access to expensive credit with the stated intention of helping low- and moderate-income borrowers. Presidential candidates, and at least one governor, are voicing concern and popularizing such legislation. Unfortunately, these efforts generally hurt the specific groups they were intended to assist.In the past 30 years, the democratization of credit has been one of the most powerful forces for economic progress by lower-income groups in the U.S. economy. In the 1990s, as interest rates continued their deregulatory trend begun more than 10 years earlier, the number of homeowners in low- and moderate-income communities grew by 26.6 percent, which was nearly twice the growth rate of homeowners in high-income areas. The greatest gains accrued to the least-well-off consumers primarily because the removal of price restrictions in credit markets benefits highest-risk borrowers the most. When interest-rate ceilings are imposed, they adversely affect the well-being of the very consumers they were intended to protect. For instance, in the 1960s, Washington state consumer loans from credit card companies were generally regulated at an annual rate of 18 percent. Believing that lower-income groups would be aided by lower rates, consumer advocates lobbied successfully for Unfortunately, the natural laws of supply and demand are not subject to repeal. At the lower 12 percent interest rate, the amount of credit demanded exceeded the amount supplied, and individuals with the weakest credit were the ones denied loans. Young earners, new families, individuals with unstable employment histories, students, recent divorcees, the elderly, and welfare recipients fell into this category. Those who benefited most from the reduced rates were those with the most wealth, the best jobs, and the highest probability of being able to repay their loans. The volume of credit flowing to wealthy individuals frequently is equal, or even greater, under severe interest-rate restrictions than under free-market conditions. Low interest-rate ceilings prevent lower-income individuals from effectively competing for funds; thus, a greater share of available funds flows to lower-risk--and therefore generally higher-income--loan applicants. CREDIT IS MORE EXPENSIVE
Date published: 10/26/2008
Where is the merit in charging the highest interest rate for borrowers that appear to be at risk of default? Seems like a formula designed to fail. Rates aligned to repayment ability rather than a FICO number might in fact result in fewer defaults.
Targeting a market disenfranchised from main stream financial services by onerous barriers to entry is, in my opinion, predatory, but I'm not a distinguished college teacher.
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