Chicago City Wire

Following the implementation of a 35% all-in rate cap in Illinois, a study co-authored by Mississippi State University Professor of Finance Tom Miller Jr. sheds light on the adverse effects experienced by subprime borrowers.

Miller's study highlighted a significant decrease in both the number of loans and the total amount lent to borrowers with low credit scores after Illinois’ imposition of rate caps.

The discussion surrounding rate caps and consumer lending regulations continues to evolve as policymakers grapple with balancing consumer protection and financial inclusivity. 

The results in Illinois are getting a second look as legislation regulating smaller lenders is pending in South Carolina. 

Miller suggested lawmakers considering such legislation should study the effects in Illinois.  

“As we found in our paper on the effects of imposing the 35% all-in rate cap in Illinois, there were fewer loans and fewer dollars lent to borrowers with credit scores below 600, i.e., subprime borrowers,” Miller told Chicago City Wire.

“Information to make decisions is critical for any consumer to help them make choices, in any market. Any attempt to inhibit information flow, by definition, makes consumers less well off.”

“Also, I am amazed at how banks and credit unions continue to get themselves exempted from legislation about consumer lending. Aren’t lenders lenders? If the banks and credit unions do not engage in any activities that this bill aims to curb, then there is no need to exclude them by law—they exclude themselves by their activity in the market. If they do engage in these activities, why is it okay for banks and credit unions to engage in these activities but not other lenders?”

Miller questioned the exemptions granted to banks and credit unions in consumer lending legislation, arguing that all lenders should be subject to the same regulations.

“First, attempts to limit access to credit have a centuries-long history,” Miller said. 

“It seems to me that the focus of these attempts is on consumer credit, i.e., credit not secured by real estate. Yet, mortgages represent a much bigger market, as do student loans and loans to finance vehicles. Second, it seems that the focus of some who want to restrict credit to those that are not “able” to make financial decisions about their own lives is, at times, condescending and mean spirited. I believe that people are in the best place to make decisions about their own finances and should be free to make those decisions—under full information, of course.”

Miller and Brandon Bolen, Assistant Professor of Economics at Mississippi College, along with Gregory Elliehausen of the Board of Governors of the Federal Reserve System, are the authors of a study titled "Credit for me but not for thee: The effects of the Illinois rate cap.”  

While policymakers may have had positive intentions in implementing the rate cap, the study underscores the unintended negative consequences for higher-risk borrowers with limited credit options.

Survey responses from small-dollar-credit borrowers in Illinois further corroborated the study's findings, indicating a deterioration in financial well-being following the imposition of the rate cap.

Others have challenged the purported benefits of Illinois' rate cap, arguing that it may drive consumers towards unregulated black market products, exacerbating economic instability for vulnerable populations.

Those such as Carrie Sheffield, a Senior Policy Analyst at the Independent Women’s Forum, have criticized the methodology of reports touting the success of rate caps, emphasizing the potential reduction in loan availability and the adverse impact on marginalized communities.

This debate has gained traction in South Carolina, where a similar bill aiming to regulate lenders, S-910, is under consideration.

S-910 proposes stringent regulations on installment and deferred presentment loans, potentially reducing consumer options and prompting lenders to exit the state.

Critics, such as the South Carolina Policy Council, argue that while the bill aims to protect vulnerable South Carolinians, its provisions could inadvertently worsen financial hardships and fail to address underlying issues.

Rather than passing regulations, the South Carolina Policy Council suggests prioritizing financial literacy initiatives and educational resources to empower consumers and improve financial decision-making.