Low usury rates mean lead to one of two outcomes – fewer drivers or more buy-here, pay-here dealers.
That is the findings of a study conducted by Aaron Schroeder, a former economist with the Consumer Financial Protection Bureau, and Brian Melzer, an economics professor at Northwestern University.
Schroeder worked at the CFPB from 2011 to this January, focusing on fair lending analytics around auto lending.
He met Melzer when he presented some research to the Bureau and asked him to put together a team of students to study the impact of usury limits on ato financing.
Schroeder said the study found two things happen when states set low usury rates.
First is that when creditors are limited in how much they can price risk, they will turn away most high-risk consumers.
And second that those who can control both the financing and price of a car will adjust for lower usury rates.
“The incentives align with the results,” Schroeder said.
While this seems obvious, Schroeder said most usury rules are written as if financing is different from the transaction process.
Schroeder even had a real-life experiment to prove the findings in Arkansas’ usury rate. In 1980, the state set a usury cap of five points above the Federal Funds rate.
This had the effect of giving the state one of the lowest caps in the nation. National finance companies were exempt from the cap, but most chose to follow the state rules and avoid any problems with local regulators.
Buy-here, pay-here dealers, meanwhile, thrived in the state. The biggest example is America’s Car-Mart, a national chain based in Bentonville.
Arkansas has since raised its usury rate.
Schroeder said the lesson for regulators is they should look more at ability to pay off the contract rather than the interest rate.
between this and the current state of affairs there might exist a happy, or at least decent, medium. Instead, these baptists buy into the bootleggers' argument that only the biggest moat will keep out the bad guys.