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March 29, 2010

Rachel Anderson: The dangerous nature of usury

Recently, at "Call & Response," Dan Rhodes called for a revival of the concept of usury in light of an economic crisis linked to abusive lending. James Howell raised questions about the application of usury prohibitions in a modern financial system.

The condemnation of usury in Christendom grew out of the Christian mission of charity, steeped in the Hebrew Bible. In the middle ages, practicing usury would get you excommunicated.

Over against such harsh punishment, James Howell makes the appealing suggestion that we drop the whole conversation about interest and go straight to building homes and offering financial education classes. But I think there is more to be discerned from the ancient witness about the nature of lending itself.

In Biblical times, the people of God believed there should be limits on the relationship between lenders and borrowers. Most frequently, that limit was expressed in terms of prohibition against interest, especially interest charged to fellow countrymen and to the poor (Exodus 22:25, Leviticus 25:35-37, Deuteronomy 23:19, Psalm 5:5).

Biblical prohibitions against usury suggest that there is something unique about the relationship between borrower and creditor. Credit relationships are often a mix of pure business, charity, and empowerment. If I need money to pay my rent or put food on the table, the person with money to lend has a great deal of power over me. If I need credit to get ahead -- to pursue an education, start a business, or own a home -- that transaction is inherently a wager on the future.

The dynamics of desperation and possibility make credit relationships ripe for exploitation. It should not be surprising, then, that lending abuse is real today, just as it was in Biblical times. In many states, payday lenders continue to charge over 300 and 400% interest rates that typically require families to take out new loans to pay off previous ones. At the auto dealership, the financing portion of the sale can become a cover for extra cost -- as some dealers receive kick-backs from lenders in exchange for pushing higher cost loans than what the buyer qualifies for. “The New York Times” reported recently on trade schools that promise enrollees rosy career prospects but leave graduates with a heavy debt burden that outstrips their actual earnings.

The unfortunate reality is that in addition to the well-intentioned bankers that Howell mentions, there are also those who abuse the power of credit.

For most of America’s history, states’ traditional usury laws limited the most abusive forms of lending. Sidestepping traditional usury limits is a phenomenon of the 1970s and 80s. It helped create incentives for financial institutions to offer an array of problematic credit offers -- from payday loans to high-cost student loans -- whose function was not to empower households but to make quick cash and ensnare borrowers in debt.

The difference between a good and a bad loan is that in a good loan the lender succeeds when the borrower succeeds. The loan principal is repaid on time and with interest. In a bad loan, the lender benefits from the borrower’s misfortune, reaping extra fees through penalties, defaults, and loan rollover. In the hands of unscrupulous businesses, credit can dig a debt trap destroy households.

The Biblical and ecclesial tradition is not blind to the unfortunate, darker side of lending. Nor should we be.

Rachel Anderson works for the Center for Responsible Lending in Washington, DC. Join in religious actions on foreclosure prevention and financial reform at CRL’s Faith & Credit page.

In Bible | Usury

25 Comments

banker mindsets

I don't think I want to "drop the conversation." But the conversation must take place with bankers not merely among ourselves.

And it's never an individual banker who makes an abusive decision, but very large corporate processes that are quite blind to individual bankers or borrowers... and there's also this (and I can't believe I sound like I'm defending capitalist profiteers, which I really am not...): the widest gulf between the Bronze Age, when usury was indeed an awful idea, and 2010, is not economic, but theological. In the Bronze Age, lenders and borrowers - even the worst of them - suspected there was a palpable accountability to a God for their actions; for business people (and the borrowers!) in 2010, a god of any kind simply does not peek above the horizon of their thought world when they are handling or mishandling financial matters.

So, a prophetic word to them may as well be spoken in Ugaritic.

bad definition of a bad loan

Your definition of a bad loan is wrong. Banks mostly lose money on bad loans - the fees and penalties simply limit the amount of losses. These are only "extra" profits if the borrower is somehow able to turn it around and eventually pay back most if not all of the principal. This doesn't usually happen.

A much harder scenario is this: Say you are actually a scrupulous banker, but since you are a large bank, you need to provide guidelines to several hundred loan officers about how to approve a loan based on any application you want to design. How do you do it? How do you know a person will pay you back?
Then, what do you tell your hundreds of loan officers to do when they are each dealing with hundreds of defaults? Mass forgiveness? If you get a reputation for that, then you're a sucker who will attract unscrupulous borrowers (yes, those exist also).

The false dichotomy here is one of a "good" lender who forgives debts and a "bad" lender who imposes penalties for non-payment. It is not nearly that simple when you are talking about big banks and mass lending. The scale is a big, big problem. That is why I advocate the use of local community banks.

Usury

This is a very fine article. Your Scriptural references are good, but there are many more. In the Psalms the just person is one who turns down bribes and does not extort the poor. Justice is measured by how the poor are treated etc. Here in Mississippi I am engaged in social justice ministry. I belong toseveral groups. The NAACP and others here are fighting the payday loan, robbery without a gun. Your piece only adds to our cause. Keep up the fine work.

Theology of Work Project

I very much appreciate the discussion these articles have generated. As it happens, the Theology of Work Project (www.theologyofwork.org) will soon begin researching the topic of financial arrangements (of which lending is one). We could use input. In particular, we could use input from people who have both theological and economic/financial education and/or experience. The articles and comments in this series show how critically important it is to bring these two disciplines into serious dialogue. These discussions are beginning to do just that.

If anyone knows of world-class papers or books on this topic, I would be delighted if you would send me an email with the titles and authors. This is really exciting stuff.

William Messenger
Executive Editor
Theology of Work Project

Alternative Lending

I'm in total agreement with your assessment of lending in O.T. times and today.Here in Kansas City we attempting to create an alternative to payday Loans it's called "Small Dollar Loan Program" (SDLP)Its mission is to provide low income Kansas City area citzens with a convenient, fairly-priced option for small dolar loans that will improve the financial conditions of those residents who regularly use fringe alternatives and those who, due to damaged credit, have been relegated to high cost, debt perpetuating products. We are well on our way to making this happen.

This is a community based initative involving dozens of metro church groups, social leaders from several not-for-profits, services agencies, foundations, banks, and is being led by Communities Creating Opportunities (CCO) and the federal Deposit Insurance Corporation (FDIC).

The financial strain on the vulnerable members of our society creats a downward finanical spiral, the negative effects of which are well document.

I agree with Dr. Howell that

I agree with Dr. Howell that many of abusive financial transactions are the result of larger corporate systems. Who makes the decision and whether or not their hands are tied within a corporate or economic structure does not seem as important as our shared responsibility to help shape the landscape in which these decisions are made.

Banking has never been completely insulated from moral and public considerations – from the insurance that banks receive through the FDIC, to policing for fraudulent and deceptive practices, to the usury limits that were in place in most states just four decades ago (and still apply, in part, to the residents of 15 states and members of the U.S. military).

I don’t see a reason for people of faith to withdraw our moral concerns about lending abuse at this phase of history, though we do have to adapt them to the realities of our market.

Jesse makes a good point in clarifying the term “bad loan.” In this context, I meant the term more loosely as an “immoral loan” – one in which the lender profits more from the borrower’s indebtedness than from his timely repayment. Unfortunately, revenue derived largely from penalty fees, penalty interest rates and other charges is becoming increasingly common. One example is the credit card industry. Prior to the recent credit card reform act, credit card companies charged an average penalty rate that was 16.9 percentage points higher than the regular rate if a borrower were just one or two days late. This penalty rate is far higher than would be necessary to simply offset increased risk. As these non-traditional revenue streams become more common, the lenders’ incentive to underwrite loans (extend loans based on a borrower’s ability to repay) diminishes and lenders instead have reason to extend more credit than people can ever repay.

informative post

I highly appreciate this informative post. Keep it coming!

Thanks
Saeid

best debt consolidation companies

No matter what type of debt you have accumulated, there is some debt consolidation management program out there that will provide you with
the perfect solution to your problem. You just need to look hard enough to find it. Thanks for the article!

Usury

When we are rewarding companies for issuing credit cards to people who should not receive them and for encouraging people to borrow by having large credit limits, by allowing them to charge monster rates of interest, something is wrong. Usury laws serve as a cap to aggressive banking practices. When the profits are so large that they mask the losses and allow taking advantage, it is morally, if not legally wrong. The Rotary 4 Way Test is a foregone conclusion for Wall Streeters and far too many bankers. What happened to the thought that if you invest your money with us, we will help you become financially well off? When did it become, give us your money so we can steal it?

Sorry for the outburst but I am out here in the trenches dealing with the people that put their information in the ftc.gov calculator and it comes back saying "you will not be able to pay this debt off in your lifetime".

By condoning companies jacking up interest rates to make up for their own stupidity losses and thereby cause people to fail to pay back their loans, the meltdown of our financial system should not be unexpected.

James Montgomery
http://jamesmontgomerylaw.com
http://thesanantoniobankruptcylawyer.com

Debt

Love all the differing views. Unfortunately the recession has shown that people are very careless with their money which has resulted in debt towering over them.

Financial Education or Helmet-less Bikers

I’m neither a scholar nor a theologian (in the event one could be a theologian without being a scholar), and I just want to contribute an observation as a lawyer trying daily to help clients out of impossible debt situations: in Florida there is a law permitting motorcycle riders to ride without a helmet. The theory goes, if an adult chooses not to be safe and wear a helmet while riding, it’s their choice to undertake such a risk. Or, why legislate what is clearly common sense and an interest in protecting oneself. Perhaps something similar can be said for usury laws: if an adult chooses to enter into a contract with such absurd terms, knowing the terms to be absurd and understanding what they mean, so be it – why legislate common sense? Just like with the helmetless riders, things seem to work themselves out – most wear helmets, the few that don’t take their chances and live or die by their choices. Here’s the main difference though (well, a main difference, anyway): motorcycle riders undergo mandatory education and classes before being able to (legally) ride a bike, in which the repercussions of helmetless riding are drilled into their head, so to speak. Where is the mandatory financial education in America? Where is any financial education?

http://byrnelawgroup.com
Consumer Law Help

It's a good parallel

Especially because arguments about individual freedom often overlook communal costs. It's not only the individual helmet-less rider who pays when she gets hurts, it's often the rest of us, when her health insurance isn't enough to pay her medical bills and the rest of our Rx costs go up to cover her. So too with credit cards, we all suffer when our neighbors go bankrupt--penalties don't only fall squarely and precisely on individual heads. As Christians we obviously know this to be the case, given our calls to love neighbor and the collective nature of the body of Christ (both currently and potentially): there is no lone individual. But much political discourse in this country works to mask this fact.

Personal Responsibility

I don't think we're in this financial mess solely because of predatory lending, I think this mess was caused by predatory borrowing also. Let me explain what I mean. My wife and I was in the market to purchase a home and we were working with an agent that was recommended to us by a friend. When I filled out the form with the correct income that my wife and I make, the guy told us that we can fake the income so that we can be approved for a larger amount, which will help us get a larger home.

I told the agent no thanks and my wife and I walked out of his office. You see, a lot of people were misrepresenting their incomes on these loan applications. When the bill came due, they wondered why they could not afford the mortgage.

I'm not the smartest person in the world but I know a con when I see one, and that agent was not thinking about our best interest, he was looking to make a bigger commission. And just to let you know, the friend that recommended that agent to us, lost his home because he could no longer afford the mortgage.

Christian Lending and Borrowing

I see the term Biblical thrown out as a term of comparison and that is good because it is the divine word of God. However, what I don’t see here what is the important word about God said about Christian Lending.

Ezekiel 18:13 (NIV)
13 He lends at usury and takes excessive interest. Will such a man live? He will not! Because he has done all these detestable things, he will surely be put to death and his blood will be on his own head.

Luke 6:34 (NIV)
34 And if you lend to those from whom you expect repayment, what credit is that to you? Even ‘sinners’ lend to ‘sinners,’ expecting to be repaid in full.

Exodus 22:26 (NIV)
26 If you take your neighbor’s cloak as a pledge, return it to him by sunset,

We also need to think about what God has to say about borrowing

Proverbs 22:7 (NIV)
7 The rich rule over the poor, and the borrower is servant to the lender
Before we as Christians lend or borrow we need to think and pray on these things.

Unite Bikers Against Drugs, http://ubadbiker.com

The Fun Factor of Rewards Programs

Unless you’re a savvy rewards credit card shopper that’s done his or her homework, then you might end up feeling like a kid again or worse yet, a fool. Remember dropping quarter after quarter into the machine trying to get that cute little stuffed animal only to end up with a little plastic finger ring and empty pockets. If lucky, you might have gotten that irresistible toy after all, but it probably cost you way more than it was really worth. With games, I guess the idea is “fun,” and if you get rewarded that’s even better. But with rewards credit cards, is the “fun factor” worth your hard earned money?

Eloquently expressed views.

Eloquently expressed views. Personally, I think both parties are responsible in part- yes the loans are dodgy, but that probably could have been weeded out with a bit of research.

Empathy and Compassion

Though I am not a Christian I do believe that some values are universal and in this case I do agree with the Christian viewpoint. The economically strong should rescue the weak by supporting the Usury. When your child or other loved one had to undergo a life-saving operation and you the only loan offered you was by a predator you would have no choice.

This is no more stark than in third world counties where exploitation of the financially vulnerable is rife. Of course there are those who get debt unnecessarily, but even those deserve some protection. Otherwise we would not need governments.

Credit Card Debt

Credit cards are an usury type of business, without this then they would not be in business. But like all successful businesses, where do you draw the line? How much profit is enough profit? Unfortunately there are some businesses that are never satisfied and this can lead to predatory credit cards, mortgages, etc...

I think credit cards can be a wonderful tool if used properly, but when they are mishandled they can turn your world upside down.

Thanks for the post and thought provoking discussion.

Proverbs

Luke 6:34 (NIV)
34 And if you lend to those from whom you expect repayment, what credit is that to you? Even ‘sinners’ lend to ‘sinners,’ expecting to be repaid in full.

One who reads into this proverb will understand why the USA is in such a bad economic situation. It just goes to show all of us to reach out and help restore the Lord in our children and our schools.

Credit Cards are very dangerous

These credit cards are extremely dangerous to teenagers who have no experience in the real world. They think they can charge now and pay later, but when the time comes, they either have no money, or don't want to throw away their money on bills but on normal things like going out and having fun. Then when they realize they need, they're in denial making it even worse and destroying their credit scores completely.

The last two years

The last two years have been bad for both lending institutions and borrowers.
It was common practice for years leading up to the recession to extend loans with high interest rates to anyone, students, part-time workers, and people with below satisfactory credit scores.
The average American household was in $15,000.00 credit card debt.
Buy now and pay later was the norm and still is with some Americans.
What has happened is that now we have many people that have been laid off from or lost their jobs and can no longer even afford to make their interest payments, let alone their principle payments.
So the interest mounts and soars out of control and beyond any kind of realistic proportion, to a point that it can never be paid off.
Bankruptcies have increased. Divorces have increased. Suicides are on the rise, and the news is telling us that the recession has been over for months.
There are lessons to be learned but most are too late. Where is the financial education for our children and their children going to come from?
Not our churches, not our schools, and maybe only in our homes.
When we can not even educate people enough to control their weight and eating habits how can we expect them to take control of their borrowing practices and financial health?

The first business loans

The first business loans possibly date back to ancient Greece.One of the most important services offered by Greek bankers was the lending of money to finance the carriage of freight by ships.They also lent money for mining, and construction of public buildings.

Interesting

I found your blog and the comments very interesting. I have never thought of banking being around for so long but there again greed has. And we talk about the rich man in the bible. Just really havnt thought about it in todays terms
Lindy

Wow that was unusual. I just

Wow that was unusual. I just wrote an incredibly long comment but after I clicked submit my comment didn't appear. Grrrr... well I'm not writing all that over again. Anyway, just wanted to say wonderful blog!

You say tomato, I say tuh-ma-to

Very illuminating post. I wonder, though; does it really matter what we choose to call the reason why so many banks screwed so many people over? Whatever the name is, it will always exist. This is what men do: we try our best to take advantage of other men.

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