Abstract
On March 23, 2021, Illinois imposed an all-in rate cap of 36% APR. We use credit bureau data for Illinois and its neighboring state, Missouri, a state without any legislated interest-rate cap, to estimate the effects of the Illinois rate cap on unsecured installment loans. Using difference-in-differences-in-differences estimation, we find that the interest-rate cap decreased the number of loans to subprime borrowers by 38% and increased the average loan size to subprime borrowers by 35%. Responses to a survey of small-dollar-credit borrowers in Illinois who lost credit access suggest the interest-rate cap worsened the financial well-being of many of these borrowers. Legislators motivated by genuine public interest rationales might not recognize the harmful consequences of their actions for these higher-risk borrowers with few credit alternatives. Legislators might also be motivated by the benefits of the interest-rate cap for lower-risk borrowers. The interest-rate cap increased the number of loans to prime borrowers by 16% and the average loan size to prime borrowers by 7%.
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Notes
By including non-credit charges in calculating the finance rate, this all-in rate ceiling is more restrictive than the Truth in Lending rate ceiling.
The act, however, prohibits lending under a bank partnership model or using other structured entities designed to evade the law. The act extends to lenders operating outside of Illinois who make loans to consumers in Illinois (e.g., online lenders). It does not apply to Illinois residents who travel out of state to borrow.
Price regulations, like interest-rate caps, commonly have unintended consequences. Examples include unintended consequences in COVID-19 price-gouging laws (Chakroborti and Roberts 2023), healthcare price caps (Ramseyer, 2009), tax distortions to relative prices of alcoholic beverages (Gant & Ekelund, 1997), and wage restrictions (Propper & Van Reenen, 2010).
See Stigler (1971) for the seminal article on the theory of economic regulation, which specifically discusses the fixing of prices (e.g., interest-rate caps) as a government service demanded by interest groups.
Illinois residents are able under the law to cross state borders to receive an unsecured installment loan from lenders located in other states at a rate exceeding the interest rate cap. This action would likely increase the number of loans in border counties relative to interior counties in Illinois after the cap. We find no evidence that border county residents have more access to unsecured installment credit relative interior county residents in Illinois. Regardless, Illinoisians crossing state borders to access unsecured installment credit would increase the number of loans in Illinois, weakening the effects of the interest-rate cap and making our estimates of the effects in Illinois due to the cap a lower-bound estimate.
No-score borrowers represent a small fraction of the number of borrowers in the credit bureau dataset and cannot easily be classified as high-risk, low-risk, or no-risk borrowers. Therefore, they are removed from the dataset before performing any statistical tests, though their inclusion does not meaningfully change the results.
Percentages omit respondents who did not respond to the survey questions for race (17% of responses), gender (4% of responses), ethnicity (6%), and income (6%), respectively.
The survey did not ask borrowers to report their credit scores nor loan amounts. The average credit score and loan amount reported here are based on the average customer of the OLA institutions involved in the survey. We note further that this sample, as constructed, is not a random sample of all consumers, nor is it a random sample of subprime borrowers.
A previous publicly available working version of this paper reported a decrease in loans to subprime borrowers of 44%, which is the percent change relative to the period preceding the imposition of the interest-rate cap rather than the estimated counterfactual.
Deep subprime borrowers, those with VantageScores® below 500, are included in the Subprime borrower category. These borrowers lost 4693 loans, a 57% decrease.
Borrowers with VantageScores® below 500, or deep subprime borrowers, lost $1.97 million in total credit, a 26% decrease.
We calculate the quarterly average change in the number and average size of loans by taking the simple mean of the two post-treatment coefficients (i.e., Q2 2021 and Q3 2021) for each VantageScore® category.
Unless we explicitly state otherwise, statistical significance is not sensitive to the inclusion of exclusion of control variables, county fixed effects, or county random effects.
The percent change in each quarter is calculated as \(100\times \left({e}^{\beta }-1\right)\), where β is the estimate quarterly estimate presented in the second column of Table 6. We report the average quarterly percent change by taking the mean of the two quarterly estimates for each VantageScore® category.
It is also possible that the inability to small-dollar, convenient credit options might cause would-be borrowers to resort to criminal activity to obtain needed funds (see Barth et al., 2020).
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Acknowledgements
We thank Dan Smith, Ramon DeGennaro, Randall Campbell, Claudia Williamson Kramer, Tom Durkin, Carolyn Miller, Stephen Miller, Hilary Miller, David Silberman, Beau Brunson, Christian Whittle, Ge Wu, and participants at the 2022 Dr. Harold A. Black Academic Conference and the 2022 Southern Finance Association for helpful conversations, comments, and suggestions. We thank Zhuo Li for his thoroughness in providing research assistance. The views expressed are those of the authors alone and not those of the Federal Reserve Board, its staff, the Federal Reserve System, or any other individuals or organizations.
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Bolen, J.B., Elliehausen, G. & Miller, T.W. Credit for me but not for thee: the effects of the Illinois rate cap. Public Choice 197, 397–420 (2023). https://doi.org/10.1007/s11127-023-01087-4
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DOI: https://doi.org/10.1007/s11127-023-01087-4