With the kickoff of the state legislative session, things are moving fast in Olympia and one thing moving particularly fast appears to be a new effort at “consumer protection.” 

Pairs of bills are moving in each chamber that would likely ban almost all short term, small dollar loans. One set would accomplish this by preventing fintechs from making those loans in conjunction with banks where the bank isn’t the primary lender. Another would accomplish it by banning interest rates above 36 percent APR. While 36 percent APR sounds like a lot, the reality is that anyone who lends $500 to a borrower for two weeks and charges a $50 fee for doing so would be breaching that limit. The really fun part here is that the legislative push mimics one in Washington, DC—from members of the Squad. Yet here in Washington, a few Republicans are backing the push.

Sponsors of national rate cap legislation in the US House of Representatives include Rep. Chuy Garcia and Rep. Rashida Tliab, both Squad members. They also include lefty Reps. Sheila Jackson Lee and Rep. Mark Pocan. (It’s worth noting that Wisconsin Republican Rep. Glen Grothman was also a sponsor of this legislation in 2021, but rumor is he is not sponsoring it in 2024).

Sponsors of the federal-level Senate equivalent legislation include Sen. Jeff Merkley of Oregon and Sen. Sherrod Brown of Ohio, neither as far left as Sen. Bernie Sanders but both arguably sandwiched right in between him and Sen. Elizabeth Warren on the left side of the ideological spectrum.

So why are Washington State Republicans Rep. Robertson, Rep. Sandlin, Rep. Volz, Sen. Dozier and Sen. Boehnke pushing one or the other of these bills? It seems, shall we say, philosophically incongruous. It also doesn’t make sense in view of other states’ experiences.

Several other states have recently tried rate caps in particular, including Colorado, New Mexico and Illinois. There’s been plenty of research that shows that those laws and others like them have caused credit to dry up and/or pushed consumers to other pricey products like bank overdrafts. The theory is that banks will step in to fill the void and offer short term, small dollar loans at 36 percent APR or less, but that is not what is happening, and even advocates of these laws admit it. 

In New Mexico, Alex Horowitz of Pew Charitable Trusts who favored the state’s rate cap law, told the major newspaper that consumers who haven’t already been banking with a given bank for a long time “can’t get these loans… These are only for the bank’s customers.”

In Illinois, banks “did not materially increase the number of loans they made to subprime borrowers in the six months following the imposition of the 36% interest rate cap… An online survey of small-dollar credit customers in Illinois was conducted about nine months after the imposition of the Illinois rate cap. Nearly 80% of respondents answered that they would like the option to return to their previous lender, and more than 90% indicated that their previous loan had helped them manage their financial situation at the time of the loan. Most respondents reported being unable to borrow money (presumably from any source) when they needed it and could not pay one or more bills since March 2021. Further, nearly 40% of all respondents — and nearly 50% of minority and low-income respondents — answered that their financial well-being declined.” The authors of that analysis included Illinois in a category he dubbed “loan deserts.”

This is not very surprising since Jamie Dimon of JP Morgan Chase said in congressional testimony that even his very large bank that is able to take more commercial risks could not make short term, small dollar lending at 36 percent profitable, and that he would not engage in it for that reason.

This hints at the problem with the second bill under discussion—the one that would bar banks from being involved in offering a loan unless they are the primary entity offering the credit. Clearly, banks are not minded to do this at all, and particularly at a 36 percent APR cap. So if the bill covering this point passes, especially in conjunction with the rate cap bill, Washington will probably become a short term, small dollar loan desert—at least for people who don’t already have lots of banking relationships established and amazing credit scores.

It’s understandable that members of the Squad either would not understand this or would not care. It’s a lot harder to understand why Washington Republicans would be voluntarily lining up with these people, especially when the underlying facts make this look a lot less like actual consumer protection and a lot more like something that will just constrict credit.

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