Professor Todd Zywicki at the George Mason University School of Law makes a a number of good points in the Wall Street Journal about how new federal limits on credit-card issuers have forced more Americans to go to payday lenders, pawn shops and local loan sharks in order to get credit. As regulations constrict credit, more and more Americans are…and will continue to be…pushed outside the traditional banking system. This is important and something that needs to be watched very carefully.
Here are Zywicki’s key quotes:
In a competitive market, regulation of consumer credit has three predictable types of unintended consequences. First, regulation of some terms of the credit contract will result in the repricing of other terms. Thus restrictions on the ability to raise interest rates in response to a change in a borrower’s risk profile lead card issuers to raise interest rates on all cardholders, good and bad risks alike.
But even if card issuers reprice some terms, they may still be unable to price risk efficiently under the new rules. This gives rise to a second type of unintended consequence: product substitution. Card issuers can’t price risk, so they issue fewer cards—pushing would-be customers to payday lenders and other nontraditional credit products.
Zywicki concludes: “Congress can pass all the laws it wants, but it can’t repeal the law of supply and demand and the law of unintended consequences.”