New York Fed Study Finds Rate Caps Reduce Credit for Riskiest Borrowers
6 reported
A recent study from the Federal Reserve Bank of New York examined the effects of interest rate caps on high-risk borrowers in states that adopted 36 percent caps between 2016 and 2022. Using household-level data from a major credit bureau, researchers found that loan balances for the riskiest borrowers declined substantially relative to counterparts in states without caps. Despite taking on less debt, these borrowers did not experience an improvement in delinquencies. The study analyzed credit changes in Illinois, South Dakota, and North Dakota, where only alternative lenders’ loan rates are capped. The findings align with predictions that rate caps may lead to credit rationing rather than lower costs for high-risk borrowers.
What’s reported
The study examined three states that enacted 36 percent rate caps between 2016 and 2022: Illinois, South Dakota, and North Dakota.
Data came from the New York Fed Consumer Credit Panel/Equifax, tracking quarterly debt and delinquency for a random subset of households.
Loan balances for the riskiest borrowers (lowest credit score decile) declined by about 8 percent after rate caps were enacted.
Delinquency rates (90+ days overdue) for the riskiest borrowers were essentially unchanged after rate caps.
Relative to control states, debt balances of the riskiest borrowers in rate-cap states fell by around $2,000 five quarters after caps took effect.
Banks and credit unions are exempt from the rate caps; only alternative lenders are affected.
Key figures
Gabriel Leonard, research analyst, Federal Reserve Bank of New York Research and Statistics Group
Donald P. Morgan, former financial research advisor, Federal Reserve Bank of New York Research and Statistics Group (now retired)
Thu Pham, research analyst, Federal Reserve Bank of New York Research and Statistics Group
Rajashri Chakrabarti, co-author
Lee Seltzer, co-author
