NY FED ON RATE CAPS

The following information was released by the American Financial Services Association (AFSA):

A new post on the Federal Reserve Bank of New York's Liberty Street Economics blog acknowledges an old idea: usury limits, otherwise known as interest rate caps, don't work. The piece provides some interesting historical background on usury regulations, noting that "their recent resurgence on the consumer side was triggered by payday lenders' entry into the small dollar loan market in the mid-1990s."

The authors also lay out the textbook economic theory on interest rate ceilings and go on to describe a study they released late last year on the impact of caps that were enacted in Illinois, South Dakota, and North Dakota over the last decade. AFSA summarized that research here.

Reiterating our conclusion, the staff report demonstrates that if the goal of rate caps is to limit credit access to those who have the fewest financial options available to them while doing nothing to improve credit outcomes, then mission accomplished.