MONTGOMERY, Ala. — One Alabama Republican wants to increase regulations on the small loan industry and introduced a bill to cap the amount of interest they can charge. HB 321, which proposes a statewide constitutional amendment, was introduced by Rep. Bob Fincher (R-Rocky Branch) and would cap the rate of interest on consumer loans at 36 percent in a given year.
“No person should be subject to unconscionable interest rates authorized by government regulation,” the bill reads. “No church, charity, or community foundation should bear the burden of providing financial assistance because government-approved loan products are proven to be exploitative.”
Currently, the relatively free market allows lenders to set rates as they so chose, within certain guidelines. Across the state, interest rates vary widely from six to 400 percent. Owners of private businesses enjoy the right to choose how much they want to charge for access to their money, but now, the Republican sponsors want to take that right away.
Laws contrary to the free market are both morally and practically wrong. The government should not be in the business of telling people how they can sell their own money, and laws such as this often have negative practical effects.
Small loan regulatory policies have been favored by liberals at the national level, including former President Barack Obama and Sen. Elizabeth Warren (D-Mass.). The state bill is supported by the left-leaning Southern Poverty Law Center, which also lobbied against Jeff Sessions confirmation for U.S. Attorney General.
Stricter market regulations on small loan companies were initially put in place by the Dodd-Frank Act and the Consumer Financial Protection Bureau. D.C. liberals and these Alabama Republicans argue that high rates set by such lenders are “unreasonable” and trap downtrodden people in tremendous debt that they cannot repay. However, an analysis from Norbert Michel at the Heritage Foundation explained why such a claim is a faulty premise.
In his report, Michel asserted that it is not in a lender’s interest to be too predatory with rates.”If lenders build their business on collecting money from people who cannot make good on their debts, they will soon find themselves out of business,” Michel wrote. Furthermore, the Heritage analysis noted that less than one tenth of one percent of the number of annual payday loan customers lodged complaints with the CFPB, according to the official numbers from the bureau.
Since the state created an official database in 2015, 246,824 unique borrowers have taken out well over two million payday loans to pay for regular expenses. This does not even take into account the other consumer loans, lines of credit, and other financial products that would be affected by the new legislation.
According to a survey by Federal Reserve economist Gregory Elliehausen, over 85 percent of payday lending customers reported that they took out a payday loan in order to meet an unexpected expense. Daniel J. Smith, economist at the Manuel H. Johnson Center for Political Economy, found that the typical payday lending customer finds their circumstances especially difficult since traditional lenders and even close friends and family are reluctant–or unable–to make unsecured loans to them given their poor credit histories.
Essentially, more people benefit from such financial products than are harmed by them.
To paraphrase the great economist Milton Friedman, laws should be judged by their effects and not by their intentions. While the legislators in this case mean well, the law will hurt those who have the right to choose how to sell their money and those who desperately need that money for essential needs.
The free enterprise system and people’s freedom to choose are the reasons America became the envy of the world. A country cannot regulate its way to prosperity, and government action cannot – and will never – make America great again.
Fincher’s bill has been read for the first time and referred to the House of Representatives committee on Constitution, Campaigns, and Elections.
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