The Impact of Credit Price and Term Regulations on Credit Supply

UCC08-8: For centuries, legislated caps on loan interest rates (rate ceilings) have been advocated as a form of consumer protection in otherwise free market economies. More recently, restrictions on creditor collection practices and loan contract features have been added to the regulators’ list of tools for protecting consumers from abusive lenders and loans. Exactly why consumers require such protection from the forces of supply and demand in loan markets, but not in other markets, has always been vague.1 Some advocates of rate ceilings apparently mistrust or fail to understand the powerful pricing discipline imposed on lenders in competitive credit markets where alternative sources of credit are plentiful. Other advocates of creditor restrictions understand market factors very well, and favor the resulting curtailment of credit supply under restrictive rate ceilings as a means of “saving consumers from themselves,” and saving neighborhoods and society from the costs of individuals’ financial failures, and subsequent bailouts…