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Op-ed Placement

New Lending and Credit Restrictions Will Hurt the Poor the Most

Originally Published in RealClearMarkets on 12/20/21.

Lower income Americans often live paycheck to paycheck and lack access to quick cash or credit in an emergency.

That can mean not paying the rent or going without meals or waiting for the next paycheck with only a few dollars left in the wallet. It’s a stressful and not that uncommon a predicament.

According to the Federal Reserve, more than one out of every ten American adults cannot cover even a $400 expense by cash or credit. Nearly 30% of Americans are unbanked or underbanked.

This means that millions of Americans can find themselves in a financial pinch and have to rely on unsecured personal loans to help them move forward. They run up their credit cards--if they have one--or in dire circumstances, rely on old-fashioned loan sharks. That’s rarely a good option.

To provide struggling Americans with more financial security to cover expenses, the Trump administration implemented the True Lender Rule. This rule sought to give small banks and credit unions the ability to partner with third parties to provide workers with loans and quick-cash liquidity when needed. The True Lender Rule gave regulatory certainty to minority and community banks seeking to provide safe and reliable credit to underserved communities.

Earlier this year, Biden signed a joint resolution repealing that rule. In doing so, Democrats further restricted access to financial services for working people and forced families to turn to more harmful options like bank overdraft fees, running up high-interest credit card debt, or borrowing against their car or home.

In some cases, they are forced to pawn off assets at low prices to get emergency cash.

Without access to short cash or credit, lower income families may face eviction notices or have their heat or electric power shut off.

The government has tried lending restrictions on short term credit before in the name of helping the poor. And they have had the opposite results as hoped for.

In 2006, the Military Lending Act (MLA) was passed by Congress. This federal policy capped interest rates on loans for active-duty members of the military at 36 percent. Payday lending stores were banned on military bases, for example.

While proponents of the MLA claimed it would help military members stay out of debt, it failed. A HarrisX poll found that twice as many service members are worried about paying their debts than before the MLA’s passage. Worse, fifty percent of respondents were denied access to loans or loan products because of MLA regulations.

Now Democrats are doubling down on their failed policies. Representative Chuy Garcia (IL-4) and Senator Jack Reed (D-RI) recently introduced the Veterans and Consumers Fair Credit Act of 2021 (H.R. 5974 and S. 2508), which would apply the lending standards of the MLA to every American.

But here is what the evidence shows clearly: Interest rate caps don’t lower the cost of borrowing--they restrict WHO can borrow. This means that working people who don’t have six-figure incomes or high credit scores will suffer.

Many reputable studies--including from the World Bank and George Washington University--find that in states with interest rate caps, borrowers with lower incomes and credit scores have less credit available to them and experienced more adverse consequences, including increased non-interest fees, as a result.

I doubt that Bernie Sanders or Elizabeth Warren or any of the White House experts have ever had to worry much about cash shortfalls. But minorities do. Surveys reveal that less than half of Black and Hispanic adults are confident in their ability to get credit from traditional financial institutions.

Depriving underserved communities of the loans they need is no way to help the poor. Maybe the Democrats should just ask families living paycheck to paycheck if they favor these new lending restrictions. I suspect they would be quite surprised at the answers they hear from the people whom they say they want to help.

Stephen Moore is Chair of the FreedomWorks Task Force on Economic Revival.