Gov. Mike Dunleavy recently vetoed a bill passed by both chambers of the Alaska Legislature that would have capped interest rates at 36% on small consumer and business loans up to $25,000. He made the right call.
Proponents of the bill claimed it would help vulnerable consumers by protecting them from exploitative lenders, but it would do just the opposite. This bill’s harmful policies especially hurt poor and marginalized families and would have pushed them into unregistered, exploitative financial black markets.
However well-intentioned, this troubling bill, SB 39 / HB 132, would severely restrict access to consumer and small business credit in the Last Frontier. The bill would have altered the Alaska Small Loan Act by slapping a 36% rate cap on all loans up to $25,000 (both consumer and commercial) and implementing a test that would restrict community banks from partnering with third parties to expand lending.
Credit cards are powerful vehicles for financial inclusion in the United States, and this bill would have made financial services less inclusive. Credit cards are highly regulated financial products, and by removing access to them, families are forced to tap into other markets, including pawn shops and off-the-books loans (which can be very unstable and with far higher interest rates than credit cards or other more regulated products) and other methods to fulfill their needs.
I’ve seen this in my own life, as my parents struggled to keep our family with eight children afloat and my dad often weighed whether to pawn his wedding ring or watch to feed us. We existed in the financial shadows, where Alaskans would slip further down if this bill is signed into law.
A “banking desert” is a census tract without a physical bank branch within a certain distance from its population center or within the tract itself. As a geographically expansive state — the biggest in America — Alaska has many rural areas with banking deserts, and this bill would have exacerbated the desert problem.
The Philadelphia Fed reported among census tracts with majority Alaska Native populations, an astonishingly high 46.4% of residents live in banking deserts — a figure more than 12 times the national average.
Underserved populations rely on accessible credit for emergencies. If Dunleavy signed this bill, their access to vital credit options would be severely restricted and banking deserts would grow. About 99% of businesses in Alaska are small businesses, and this bill hurts small businesses when they instead deserve support.
Risk-based lending — financial firms pricing lending proportionate to the risk assumed from a customer — is harmed by rate caps. Risk-based lending empowers consumers to build credit and improve their financial health. A 36% cap does not reduce borrowing cost; it simply limits who qualifies for credit based on risk and pushes people into riskier situations, including pawn shop loans.
What can be confusing when talking about rate caps is APR calculations disproportionately affect short-term loans, making their costs appear artificially high. For example, according to the Bank Policy Institute, a 3-month, $100 loan costs banks $35 to issue, resulting in a 140% annual percentage rate — making such loans unviable under a 36% cap.
Fintech-bank collaborations — which the bill also targeted — bridge gaps in traditional credit markets, allowing underserved communities to use structured loan products. These partnerships operate under well-established regulatory frameworks supervised by state and federal regulators. According to a Morning Consult survey, fintech loans improve borrower credit scores, particularly among lower-income, black, and Hispanic consumers.
Alaska’s debate doesn’t exist in a vacuum, and other results foretell what would likely happen if Dunleavy signed this bill. In March 2021, Illinois enacted a 36% interest rate cap. By 2024, lender licenses decreased by 64%, meaning fewer financial choices for fewer borrowers.
Researchers with the Federal Reserve System’s Board of Governors hypothesized that Illinois’ move would cut credit availability for higher-risk borrowers. This proved correct as these borrowers — more likely to be minorities, women, and low-income people — struggled to improve their financial lives after the Illinois law.
These economists’ paper, titled “Credit for me but not for thee,” compared results from Illinois with a control group in a neighboring state, Missouri, without a rate cap. They found “the interest-rate cap decreased the number of loans to subprime borrowers by 44 percent.”
This means fewer poor families able to solve their credit needs. Negative outcomes ensued, including utility shutoffs, late payment fees, and forfeiting emergency expenses.
Most borrowers reported to researchers “they have been unable to borrow money when they needed it following the imposition of the interest-rate cap. Further, only 11 percent of the respondents answered that their financial well-being increased following the interest-rate cap, and 79 percent answered that they wanted the option to return to their previous lender.”
Alaskans deserve better than to have their financial lives imperiled by troubling new laws. Dunleavy’s veto protects Alaskans and offers stability for the future.