More than one in three Americans cannot cover an unexpected $400 expense—such as car repairs or a medical bill—with the money in their bank accounts. Unfortunately, cash-poor Virginians may lose a valuable source of credit when they face a financial pinch if a new bill is enacted in Richmond.
Living paycheck-to-paycheck is a normal state of life for many households. However, increasingly more working-class and middle-income people find that after four years of high inflation on groceries, housing, and utilities, plus high interest rates that make car notes and credit card bills more costly, their paychecks and savings cannot cover a surprise bill or fine that needs to be paid quickly.
This is particularly true for Millennials and Gen Z, women, and racial minorities—groups who are overrepresented among the cash-poor class. Some cash-poor Americans have bank accounts, but many are unbanked or underbanked, have subprime credit, and cannot readily secure credit through traditional means such as banks and credit cards.
This was my family’s story growing up, as our family struggled on welfare and lived in sheds, motorhomes and tents, with my father occasionally pawning his watch to keep food on the table.
Fortunately, rather than just relying on pawn shops or worse, our free-market system has developed alternatives to increase people’s access to credit options, especially if they are not the prime borrowers. Consumers with bad or no credit can borrow using short-term loans, lines of credit, cash advances, and even Buy Now Pay Later options.
Financial technology companies (fintechs) also offer technology-based products for a variety of consumers seeking credit. Their online access (through computers and smartphones) make borrowing through an array of financial products accessible for consumers.
Smaller banks and community banks increasingly partner with fintechs to offer these online options in differing amounts, durations, and pricing to individuals seeking credit in their areas. In Virginia, more than 230,000 people avail themselves of fintech products provided by members of the American Fintech Council.
In a perfect world, everyone would have a rainy day fund and an ongoing relationship with a bank, pay all bills on time, and therefore be able to access loans in an emergency. Yet that’s not reality. People who have made suboptimal financial decisions are riskier borrowers and therefore cost more to lend to.
Our current system works to provide options to borrowers, including those with poor credit. However, S.B. 1252 could break these arrangements to the detriment of Virginians, particularly those with lower incomes. This bill would subject fintechs and other financial lenders to a 12% rate cap (in line with the state’s usury laws) and other regulations that would make it financially impossible to provide loans to people with poor credit.
Finance charges on loans reflect the fixed costs to provide a loan (such as checking credit scores, paying employees, underwriting, reporting, and compliance with laws), and the borrower’s ability to repay it. Higher interest rates enable lenders to recoup their costs, but if those rates are arbitrarily capped below costs, lenders will not offer them, leading to fewer financial products for consumers.
Banks working with fintechs are already heavily regulated by states and the federal government. Fintechs acting as service providers also face federal oversight and regulation including consumer protection laws.
Added regulations on these fintech-bank partnerships only increase complexity, uncertainty, and costs. This would drive fintech options out of Virginia.
Virginians’ need for credit does not disappear even when lenders do. When states impose limits on access to credit, consumers turn to costly alternatives that are more financially insecure and, in some cases, dangerous.
According to research by the Federal Reserve Bank of New York, after enacting a rate cap in Georgia, borrowers bounced 1.2 million more checks per year, paying an extra $36 million per year in bounced check fees. Complaints about lenders and debt collectors rose 64%, and more borrowers filed for Chapter 7 bankruptcy. Similar results occurred in North Carolina.
Illinois’s capping installment loans under $40,000 from non-bank and non-credit-union lenders at 36% was found to cut off high-risk borrowers’ access to credit, drove borrowing costs up, and left consumers worse off financially.
Historically, when usury laws drove responsible lenders out of town, black-market options emerged to fill the gaps and created entirely new public safety concerns.
The intentions behind SB 1252 may be to protect consumers. However, good intentions do not overcome negative outcomes. Governor Youngkin’s veto can halt this bill from taking effect and imposing new hardships on Virginians.
Fintech platforms enable vulnerable Virginia communities to participate more fully in today’s tech-heavy economy. We urge the governor not to take this away.
Carrie Sheffield is a senior policy analyst at Independent Women’s Voice, author of ”Motorhome Prophecies: A Journey of Healing and Forgiveness,” and leader of the NOVA chapter of Independent Women’s Network.
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