The world of finance covers innumerable activities, but it could be reduced to two words: money management. Consumers rely on financial institutions and the policies that guide them every day. Unfortunately, it is often mistakes that attract attention. Banking crises, rate cap changes, and taxes drive home how important it is that these institutions function well. The consumer’s wallet is protected through policies that promote access and increased savings without creating unnecessary barriers for the consumer.
Consumers rely on debit and credit cards to make purchases. Policy plays a role in how these cards function. Unfortunately, current proposals could harm this market. Rate caps and interchange fee regulations are harmful to the consumer and the card issuers. Rate caps prevent the issuing institution from setting rates commensurate with the level of risk, while regulating interchange fees can increase fees associated with checking accounts and reduce program incentives.
In March, Senator Josh Hawley (R-MO) introduced a bill with Senator Bernie Sanders (I-VT) to cap credit card interest rates at 10 percent with the hope of providing relief to American’s with high credit card debt. Hawley called the average credit card interest rates of 28.6 percent “exploitative” while Sanders considered them “extortionary.”
However, using price controls to set credit card interest rates is a poor policy choice because it restricts the ability of the card issuer to set rates that reflect the risk of the borrower. Furthermore, interest rate caps restrict borrowers’ access by forcing card issuers to raise fees. Increased fees reduce card reward incentives and access to lines of credit, none of which help the consumer and can end up hurting low-income families.
Likewise, the Board of Governors of the Federal Reserve introduced a new rule earlier this year which would reduce and regularly adjust debit card interchange fees. However, even the Federal Reserve admits that manipulating debit card interchange fees “may make covered issuers’ checking account and debit card programs less attractive to consumers.” Furthermore, reduced profitability harms consumers because banks and credit unions will often look for ways to make up for the loss by increasing fees on checking accounts and removing other incentives for consumers.
Beyond everyday purchases, a well-functioning financial system can make life milestones like home buying a bit easier. For the average consumer, buying a house will be one of the largest purchases they will ever make. Overregulation in home buying can end up hurting the consumers it intends to help.
Such was the case in 2023 when the Federal Housing Finance Agency (FHFA) issued a mortgage rule designed to make housing more affordable. Prior to the rule, people with lower credit scores would pay higher fees and higher monthly mortgage payments if approved for a loan. This new rule allowed for those with lower credit scores to pay less in fees by removing risk-based pricing metrics previously used. To balance the system, those with higher credit scores saw an increase in fees and higher monthly mortgage payments. The increase was to help offset costs from defaults. This rule, in turn, punished the ones who were fiscally vigilant by shifting the additional costs.
The financial sector also helps businesses get started and ultimately serve their customers. Small businesses are the backbone of America and more people are starting small businesses. Starting a small business requires a loan, and that process should not create unnecessary hindrances or disparities in the process. Unfortunately, regulators often create needless roadblocks.
The Consumer Financial Protection Bureau (CFPB) released a rule in April 2023 designed to increase the effectiveness of the Equal Credit Opportunity Act (ECOA). Starting with good intentions, the proposed rule would replace the requirement that a borrower have their race and ethnicity cited by the lender on their paperwork through visual assessment. Instead, an application would now file this information separately. While this rule is awaiting finalized compliance dates, if enacted, the dual filing system would cost a significant amount of money to operate increasing the probability of raising interest rates, which would restrict small businesses.
The consumers’ livelihoods and families depend on policies that promote consumer protection without restricting access, creating unintentional disparities, or decreasing opportunity. Sometimes good intentions do not yield good results. From rate caps to home loan rule changes, consumers should be able to depend on policies that look out for their best interest.
Leah Locke is a policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, follow us on X @ConsumerPal.