Friday, February 15, 2013

Payday Lending & Common Ground Among Faith Conservatives & Progressives

In Austin, one of the issues the legislature will be grappling with is a bill to strengthen regulation of the payday and auto title loan industry. Regulations stronger than those passed during the last legislative session. 

For instance this insightful post written by Eric Weinmann in a conservative blog making virtually the same argument we 'progressive' faith leaders have been making for some years now...our faith traditions call on us to take a stand against the exploitation of the economically vulnerable.

CitySquare is working with allies from across the state who are committed to seeing that consumers, many of whom are poor, who are being exploited by the usurious practices of this industry. We always welcome more allies and as with all issues they come from unexpected places.

We don't have to agree on everything to be right, together on some things....

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Payday Lending: Why Conservatives are compelled to Oppose Usury

In 2012, lobbyists for the payday lending industry strived to become the largest campaign donors in Austin. The reason: many state legislators and local municipalities are evaluating limitations to payday lenders by capping interest rates. In Texas, a number of cities have placed restrictions and the Texas Legislature made some restrictions in the last session. The industry argues such a move will significantly curtail their business. At any given time, 12 million Americans have payday loan debt. My initial reaction was to side with the payday lenders, supporting their right to loan money at the interest rate of their choice.

I have since changed my mind.

After thinking about the issue, I have decided that Texans should reject usury. Specifically, conservatives should be at the forefront of this sentiment, as our values reject usurious lending.

About Payday Lending

Payday lending allows consumers to borrow relatively small amounts of money – usually under $1000 – with a repayment date of their next payday. In exchange for this short-term loan, consumers pay high interest rates, typically between 500% to 700% annual interest. This works out to about $17 - $18 in interest per every $100 borrowed every two weeks.

Many jurisdictions have intervened, capping interest rates. There are 12 states which have fully outlawed payday lending. The list includes both the red states, such as Arkansas and Georgia and blue states such as New York and Maryland.

Three states and the District of Columbia have placed interest rate caps on payday loans. Arizona, hardly a left-wing state, has placed a 36% interest rate cap.

Pro-Lending

A number of groups and individuals have made persuasive arguments: First, lenders argue that payday loan customers have no other place to turn for emergency credit due to bad or no credit history. Next, lenders argue that the high interest rates are necessary. Default rates on payday loans are high, often 10 to 20 percent. Lenders contend they must charge high interest rates to compensate for the bad debt on their books. This may be true, but high interest rates contribute heavily to that default rate. For those without a banking relationship, this serves as a less expensive option than multiple overdrafts.

Usury

While the arguments for payday lending are compelling, my faith and commitment to values have caused me to side with tighter regulation. Anyone with a Judeo-Christian belief system should reject usurious interest rates.

The book of Leviticus specifically forbids usury and describes it as a grave sin. In a sense, the Old Testament directly addresses the debt structure of payday lending. In Mark, the scripture describes a loan payable over 30 days. Linked to the Babylonian Talmud, the “fair” rate of interest is 20 percent. This sets a precedent: high interest rates are immoral.

Faith instructs us that charging people exorbitant interest rates in times of desperation is wrong. Instead, we are taught that loaning money should be of mutual benefit. For example, when you take a mortgage or a business loan, both the lender and the business person hope to generate a profit from the transaction. However, in payday lending, creditors know the advantage is one sided.

I don't mean to overwhelm with biblical text. That's not the full point. The lesson is, no matter your view on religion, these stories serve as a guide for moral action: high rates of interest are not right and this notion is supported by the belief system this country was founded upon.

Deception is not a Free Market Principle

Free market principles rely on transparent business practices. If business were built on deception, it would be impossible for free market to operate and for actors to make the best choices. The free market depends on individuals being able to conduct self-interested activity. If facts are obstructed intentionally, this evaluation becomes impossible.

The industry suggests that payday lending is a short-term debt financing option. This is not true. Industry reports show the average payday loan customer takes nearly a year to pay off their debt. This adds up to usurious rates of interest. Most payday stores incentive their employees through bonuses to keep customers indebted by rolling over outstanding balances for longer and more expensive terms. However, lenders are reported to make repayment terms and loan amounts in ways that do not make this clear at the point of purchase. This deception often takes advantage of the most financially illiterate. As such, good decision making is dissuaded and often make opaque.

Real Solutions

The best way to solve this problem, other than Arizona-style interest rate caps, is through financial literacy. Instead of pushing indigent people in their time of desperation to usurious lenders, we do far better in the long run to encourage banks and credit unions to create checking and savings alternatives for nontraditional customers. This includes secured credit cards, “second chance” checking and small consumer loans offered banks – at much lower interest rates. Much like Washington, the debt culture of consumers has detrimental impacts. It’s important that consumers understand the risks and terms of the decisions. Deception and usury violates the values social conservatives embrace. It is for that reason that I have changed my mind. I am glad to see the majority of the Republican-controlled Texas Senate agrees as well.

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