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Report: Restricting access to “less-preferred” forms of consumer credit may lead to “unintended consequences”

Todd Zywicki

Todd Zywicki

Todd Zywicki and Robert Sarvis, professors at George Mason University, said in a recent report on consumer credit regulation that restricting access to “less preferred” credit forms has “serious unintended consequences.”

“Government regulators proposing restrictions on specific forms of consumer credit all too often ignore the reality of how and why consumers use credit,” the report said. “They also ignore lenders’ legitimate reasons for pricing their services as they do; consumers’ legitimate reasons for choosing the financing options they do; the risks consumers face when credit offerings are made unavailable to them; and the many consumers who use the particular forms of consumer credit responsibly and effectively. As a result, new laws and regulations on consumer credit have unintended consequences that frequently harm the very people they are meant to help by making credit more expensive and harder to obtain…”

The report said that restricting access to certain types of credit may force lenders to reduce their transparency and force consumers to substitute for the less-preferred types of credit. The restrictions also encourage banks to increase fees, harming low-income families that could be forced out of banking altogether as checking accounts become more expensive.

Consumers often use credit to the same purpose as businesses: to make investments that return value over time and to reconcile disparities between income and expenses.

The report noted that while credit products like title pledge lending and payday loans “appear to be expensive, consumers choose rationally in deciding whether to use these consumer-credit offerings and in deciding which particular offering to use.”

“Well-intentioned legislators and regulators assume that restricting particular forms of credit will lead to fewer bad financial outcomes,” the report said. “But this is misguided and can lead to worse, not better, outcomes.”

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