But capping interest rates is not a cure-all for debt-driven woes.
A 2018 World Bank study of interest rates on loans in other countries found that interest rate caps set below market rates reduced access to credit for low and middle-income borrowers.
Banks take on risk by extending credit to consumers, and that risk increases exponentially when a line of credit is extended to non-prime borrowers. There’s little benefit for banks to lend at low interest rates to the borrowers at the greatest risk of default.
“Why get into lending if there’s not a profit?” said Brian Riley, a director of credit advisory services at Javelin Strategy and Research. Once those profits are limited via an interest rate cap “it becomes an impractical market for credit extension.”
If the bill passes, experts say it’s likely that banks will have less incentive to extend credit to those without stellar credit profiles.
“As history makes clear, this [Sanders-Hawley] proposal would result in the loss of credit access for the very consumers who need it the most, forcing them to use less-regulated, more risky alternatives including payday lenders and loan sharks,” said Rob Nichols, president of the American Bankers Association in a statement.
Consider what happened after the passage of the 2010 Durbin Amendment, which capped the debit card interchange fees merchants had to pay to process the transactions. Sen. Richard Durbin (D–IL), who sponsored the namesake bill, successfully argued that those fees were too high and were unfairly penalized small businesses.
However, some follow-up studies found that to compensate for the overall decrease in interchange revenue, banks simply raised prices on other products, limited the availability of free accounts, hiked monthly fees and eliminated debit card rewards. So the net effect wasn’t lower prices and meaningful savings for consumers, which was the intended goal of the bill.
