NY FED: RATE CAPS DON'T WORK

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

A recent working paper issued by the Federal Reserve Bank of New York, Less for You, More for Me: Credit Reallocation and Rationing Under Usury Limits, delves into the age old question of the efficacy of usury limits, i.e., interest rate caps.

The study focuses on three states (South Dakota, North Dakota, and Illinois) that implemented 36 percent all-in rate caps on many types of non-bank consumer loans between 2016 and 2022. It compares those states to a control group of seven states with no such caps. One of the key conclusions of this research is that:

"...lending to the riskiest cohort of borrowers decreased sharply under usury limits. These borrowers were unable to find lower cost loans from banks and credit unions, as proponents of rate caps may have expected. [Emphasis added]. Nor does delinquency risk for this cohort improve, implying the rate caps reduced credit access but not credit stress."

In sum, this research 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.