California’s Great Credit Rate Experiment: What Happened When the Limits Came Off?
Welcome to the Archive Dive, where we unpack critical historical tech and policy reports that shaped modern commerce. Today, we’re examining a crucial—and surprisingly relevant—report from 1991 prepared by the Legislative Analyst’s Office (LAO) concerning the temporary deregulation of consumer credit rates in California.
Titled the Report on Consumer Credit Finance Rates, this document was mandated by Chapter 479, Statutes of 1988 (SB 2592, Dills). This law created a three-year trial period (January 1989 to January 1992) during which the statutory limits on retail credit finance rates—limits established by the 1959 Unruh Act—were suspended. The LAO’s job was simple: analyze what happened to credit rates during 1989 and 1990, and advise the Legislature on whether to reimpose the caps in 1992.
The findings reveal a fascinating snapshot of competition, market response, and regulatory arbitrage, providing essential lessons for policymakers grappling with finance laws even today.
Key Takeaways from the LAO Report (1991)
- Rates Immediately Exceeded the Old Cap: Prior to deregulation, the standard cap was 18% APR for balances up to $1,000. During the trial period, rates commonly clustered higher, with nearly half of major retailers surveyed adopting a rate of 19.8 percent APR.
- Competitive Alignment: The majority of rates charged by retailers on installment accounts immediately matched the rates charged by unregulated bank cards (like VISA and MasterCard), suggesting that the market, in general, operated through a competitive process.
- Regulatory Ineffectiveness: The report concluded that reinstating the caps would be largely futile. A significant portion of the credit market is already exempt from California’s rate regulation, including all bank cards and a growing number of major retailers who issue credit from out-of-state.
- Recommendation: Continued Deregulation: The LAO strongly recommended that the previous rate limits not be reestablished. Instead, they argued for continued deregulation, coupled with targeted measures to address specific concerns like poor information and extremely high rates.
The Economics of Deregulation
The report first dove into the basic economics of consumer credit, differentiating between bank cards (unregulated), retail installment accounts (store cards like Macy’s), and retail installment contracts (closed-ended loans for specific items, like a TV). Only the latter two were subject to the Unruh Act limits.
When the caps were lifted, rates moved quickly. The LAO confirmed that retailer finance rates ranged broadly from 18% to 24% APR, but the tight clustering around 19.8% was the dominant trend among major stores. Smaller retailers also generally moved above the old 18% limit.
Did Consumers Get Worse Off? The Profit Puzzle
A key finding was the difficulty in determining the true impact on consumers. While finance rates went up, the LAO noted that this alone does not mean retailers increased their profits or that consumers were necessarily harmed. Retailers have several levers to compensate for credit costs: adjusting finance rates, adjusting merchandise prices, and tightening or loosening credit availability.
The data did not allow the LAO to draw a definitive conclusion on profit levels because comprehensive data on changes in credit availability and product prices were unavailable. However, the fact that rates clustered tightly suggests either healthy competition pushing rates toward a true cost level, or alternatively, "price leadership" where institutions simply follow the lead rate-setter.
The Availability and Information Problem
While most consumers had ample credit options (through multiple bank cards and store accounts), the LAO identified a key failure in submarkets: low-income, inner-city, and rural environments often had severely limited access to credit. Crucially, the LAO noted that limiting credit rates will not solve the availability problem; if anything, it could make credit harder to obtain for riskier borrowers.
Regarding information, the report found that disclosure was a persistent issue, particularly with complex retail installment contracts where the rate might vary based on customer history or payment period. Buyers often focused only on the monthly payment, encouraged by sales managers, rather than the true interest rate.
The LAO’s Conclusion and Path Forward
The central argument for continued deregulation was regulatory reality: if California restored the Unruh Act limits, the policy would only apply to a shrinking fraction of the total consumer credit market. This would put California-regulated retailers at a massive competitive disadvantage while having minimal effect on overall credit pricing, given the dominance of exempt bank cards and out-of-state issuers.
The LAO rejected the idea of simply restoring the old 18% cap, calling the levels "inappropriate" and noting the inflexibility of fixed rates in a fluctuating market.
Instead, the report advocated a balanced approach: permanent deregulation paired with targeted actions:
- Prohibit Truly Excessive Rates: Implement a high ceiling—such as the 25% limit seen in New York State—to guard against predatory lending without interfering with normal market operations.
- Establish Stricter Disclosure Standards: Require retailers to clearly list their range of interest rates in advertisements or applications to solve the consumer information problem directly.
Why This Matters Today
This 1991 report serves as a foundational analysis for any modern debate on regulating consumer financial products. It highlighted the limitations of state regulatory power in a nationalized credit market and underscored a crucial policy lesson: broad, outdated caps often fail to achieve their goals, instead creating uneven playing fields. The LAO's focus on transparency (disclosure) and targeted protections (a ceiling on "excessive" rates) remains the blueprint for effective financial regulation. The trial period showed that credit rates will find their market level—and in California in 1990, that level was firmly near 20% APR.
This analysis proves that when regulatory limits are suspended, the market moves quickly to establish a new equilibrium, often mirroring unregulated sectors. For tech innovators in fintech and digital lending today, understanding these competitive baselines and the underlying policy pressures on disclosure and access is critical for sustainable growth.
Source Report: Report on Consumer Credit Finance Rates: Pursuant to Chapter 429 ...
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