Last time, we talked about how Graves and Peterson’s study on payday loans and the Christian right made false claims regarding whether the short term loan product targets the poor or minority groups. Now, let’s continue our look at Lawrence Meyers‘ critique of a very flawed treatise against payday loans with his exploration of how the authors misstep in their views regarding whether it is usury that should be condemned by the Christian right.

Usury and Christianity

As a refresher, here are a few key Bible scriptures through which the Christian right claims that usury is condemned:

Exodus 22:25 - “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shall thou lay upon him usury.”

Ezekiel 22:16-16 – “In thee have they taken gifts to shed blood; thou hast taken usury and increase, and thou has greedily gained of they neighbors by extortion, and hast forgotten me, saith the lord GOD. Behold therefore I have smitten mine hand at thy dishonest gain which thou hast made, and at they blood which hath been in the midst of thee. Can thine heart endure, or can thine hands be strong in the days that I shall deal with thee? I the LORD have spoken it, and will do it. And I will scatter thee among the heathen, and disperse thee in the countries, and will consume thy filthiness out of thee. And thou shalt take thin inheritance in thyself in the sight of the heathen, and thou shalt know that I am the LORD.”

Ezekiel 18:8-17 – “He that hath not given forth on usury, neither hath taken increase, that hath withdrawn his hand from  iniquity, hath executed true judgment between man and man, hath walked in my statutes, and hath kept my judgments, to  heal truly; he is just, he shall surely live, saith the Lord GOD.”

However, there are Old Testament passages that appear to permit Hebrews to make interest-bearing payday loans to non-Jews, but not to fellow Jews. Jesus Christ’s ministry later led Christians to believe that loans with interest were verboten. However, the Renaissance and Protestant Reformation cured this malady. This is apparently when Christians discovered how to run a business that was both honest and profitable (not just the former). Religious leaders began to question whether interest was indeed valuable. John Calvin, Martin Luther and others said that only out-of-control interest was wrong. Pope Paul II even went on to approved pawnshops in 1461, so there has historically been a place for money lending in Christianity.

So what’s Graves and Peterson’s main problem?

Meyers concedes that taking advantage of the poor has never been good for PR or business. Thus, it wasn’t good in the church’s eyes. But the inherent flaw in the authors’ argument is that payday loans harm the consumer, without presenting sufficient evidence to back up their claim. There have been numerous unbiased academic studies that suggest that payday loans actually help consumers, so the author’s need to do better than opinion to make a counterclaim. They need evidence. However, I can sympathize with their dilemma a bit here, as conclusive studies that show payday loans as a weapon against society do not exist.

Meyers points out that “consumer behavior and true rates of on-time repayment demonstrates the product’s value.” There are no comprehensive studies of payday loan borrowers, but perhaps it is telling that 154 million such transactions occurred in 2008 (according to Meyers). This could indicative that consumers prefer this choice over other options.

Religious leaders know good business when they see it

The Bible is a fan of commerce. It is neither holy, Godly, nor intelligent to shut businesses down because of a voice in one’s head. Only when there is overwhelming demonstrable harm can a reasonable stance be taken against payday loans in this way. Since many consumers support the product, shutting the industry down would send who need borrow money but are perhaps struggling with their credit to less desirable alternatives.

Meyers is also flabbergasted by the authors’ failure to pin down how payday loans are usury in the modern sense. He points to this article, which clearly illustrates that payday loans do not fit the definition. So, as the authors pose, “If the Bible so clearly and forcefully condemns usury, one would hypothesize that political jurisdictions with a traditional, conservative Christian perspective would adopt law reflecting this Biblical value.” Well, wouldn’t one?

Yes, but it just doesn’t happen. Meyers attacks this position. “The hypothesis that Christian political jurisdictions would adopt laws reflecting Biblical value is false if lawmakers do not consider payday lending to be usury,” he says.

CLICK HERE to continue reading…

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It’s interesting that 12 people took the time to vent their “moral outrage” over changes in the Ohio payday loans industry. Interesting, in that it wasn’t until the 13th person commented on Sheryl Harris’ Cleveland Plain Dealer editorial that they noticed something wacky.

Here it is. The numbers have been left the same to preserve the editorial integrity of the source material:

So when payday lending was legal last year, CheckSmart customers paid $575 to walk out the door with $500 in cash.

Under the new licensing scheme, CheckSmart customers pay $575 to walk out the door with $500 in cash.

Shocker!

Sure, it must be a typo, but let’s move on.

If you didn’t already know, payday loans have been banned in Ohio. This ban came not only during a recession, but during a time when Ohio’s state of budget affairs was among the worst in the nation. Unemployment is high; kicking out legitimate businesses is a bad idea.

Harris draws our attention to House Bill 545, which she says was “supposed to help consumers by creating a Short-Term Loan Act that gave borrowers at least a month to pay off loans. More importantly, the new law was supposed to drive down the costs.” The crux of the argument Harris and people like her use against the payday loan industry is that the APR for a loan would be a “jaw-dropping” 391 percent.

But that’s not what’s really jaw-dropping!

What’s truly jaw dropping is that we’re expected to eat and like the spoon-fed rhetoric that payday loans are annual loans! Right-thinking people must stand up for the intellectual honest and stamp out these deceptively mild distortions of the truth. Sure, if a payday loan could be extrapolated out over an entire year, 391 percent in annual interest is possible. However, since they are two-week loans that charge $15 in many locations, You’re looking at 15 percent paid in interest, on top of the principal. For a short-term loan that is often given to clients with less than perfect credit, that is both a bargain and a price point that helps shelter lenders from risk.

What does Harris coo about, in honor of the misguided law? She yearns for a 28 percent APR, which would even one-up the supposed cap President Obama wants to put on payday loans at 36 percent APR. With Obama’s APR, the lender profits to the tune of $4.14 for a $300 loan made to a consumer. How is that anything other than insanity for a business? Furthermore, what kind of insanity afflicts people who think that today there are religious reasons for not charging interests on loans (they essentially coined the term “usury” and gave it boogieman status… similar to what was done to hide the original meaning of the word pagan… now it’s considered evil in the public eye, goat horns and all… it originally meant “country dweller” or “rustic”).

Facts are simple here. Payday loans help all sorts of consumers, particularly those who need emergency cash that can’t wait until their next payday. Few banks or credit unions offer micro loans, particularly for customers with less than perfect credit. Thus, the loans fill a need in society.

Recently, a package of payday loan legislative proposals was heard by the House Financial Institutions & Insurance Committee. According to blogger House Democrats, these Department of Financial Institutions-regulated short-term loans have spawned a host of potential new bills. House Democrats is nice enough to provide links to early reports on the hearings here and here. Here’s what’s on the docket:

• HB 1310, regulates collections contact
• HB 1425, which simply prohibits cash advance (why bother with the rest, then?)
• HB 1684, limits all outstanding loan balances to less than 30 percent of a borrower’s gross income
• HB 1685, would add a 60-day repayment option
• HB 1709, minimum term 60 days, reduces fees may not exceed 10 percent of principal, and sets up an installment plan
• HB 1805, limits borrowers when a payday lender has loaned them $700 in the previous 30 days
• HB 1806, sets an aggregate loan limit of $700
• HB 1807, prohibits faxless payday loan rollovers within 24 hours of repayment
• HB 1851, requires that borrowers be made aware of payday loan alternatives

Church has invaded state

One of the main complaints some have against payday loans is that the rates exceed state usury laws. First of all, that’s using the oft-discredited and completely inapplicable method pretending that payday loans> are annual loans. They aren’t, no matter how much lipstick you put on that pig of an idea. Furthermore, the whole idea of usury laws is a holdover from a time when religion unabashedly held power over world governments.

The world has become a bit wiser, but the influence is still hard to shake. Finally, opponents claim that when the loans were first made legal, nobody knew that people would use them more than occasionally. Really? Then set up a database and place reasonable limits on how much consumers can borrow. Do not play big brother for them, or you will face eventual revolt and anarchy.

Payday loan supporters favor choice

It would be a gigantic mistake to ban the payday loan. When people have options, according to these folks, they can make better decisions. Considering that these are basically two-week loans, consumers must show discipline in order to repay on time. And guess what? Studies show that most do (as much as 90 percent)!

Related articles

• Cap payday loan costs, board urges (thestar.com)
• Media Advisory: Canadian Payday Loan Association Available for Comment on the Government of Ontario’s Advisory Board Report on Payday Loan Rates (newswire.ca)
• Payday Loan to Meet your Expenses (personalmoneystore.com)

Online payday loans are a relatively new way for consumers to obtain the short-term cash they need during emergencies. While these loans have been popular with the general public,  critics claim that the cost of payday loans in general is excessive and requires low rate caps. These critics believe that low rates will lead to a greater percentage of loans being funded and a lower rate of loan default.

However, in a study entitled “The Effects of Usury Laws: Evidence from the Online Loan Market” by Stanford University’s Oren Rigbi, we see empirical evidence that just the opposite is true. Borrowers who experienced a low cap did not produce the results the critics would have expected.

Using the latest online tools for analysis

Using data from a lending marketplace Web site called Prosper.com, Rigbi draws a connection between interest rate caps, the probability of faxless payday loan funding, how much a consumer requests and the chance of payment default. Borrowers studied on Prosper.com faced different caps ranging from six to 36 percent in Rigbi’s study, then a “behind-the-scenes change in loan origination” caused rates to normalize at 36 percent in all but one state of borrower origin.

Rigbi found that higher interest rate caps actually

increased the probability that a loan was funded, especially if its borrower was risky and had been previously just “outside the money.” I do not find that borrowers change the loan amounts that they request or that their probability of default rises.

Interest ≠ usury

Indeed, even though common usage in the West is to equate the two, the true definition is rather different.

As he stages the sides of the argument, Rigbi clearly delineates how opposed the two sides are. Opponents argue that capping interest removes high-risk borrowers from being able to obtain payday loans or even establish a credit history. Those who support the cap feel it ultimately “reduces the interest rates a given borrower pays because lenders have market power.”

At this point, Rigbi instructs readers to consider (traditionally) how interest rate caps affect credit markets:

First, higher caps should make lending to higher risk borrowers profitable. That is, higher caps may result in credit being extended to borrowers who were previously denied credit. Second, because the riskiness of a loan depends on its size and not just the identity of the borrower, higher caps may cause a given borrower to request larger loans. Third, higher caps may increase the probability that borrowers default on loans, particularly if the caps were “protecting naive borrowers from themselves.”

Yet the payday loan study results break with tradition

Rigbi finds that the largest increase in payday loan funding occurred for consumers with less than perfect credit. Furthermore, they do not request larger loans when the cap was higher or default more often. This seems to fly in the face of the oft assumed necessity for governments to be responsible for their own populace by levying heavy consumer protections. That, critics feel, is the only way consumers obtain a fair price for credit. However, based on this study’s findings, higher interest rates did not produce negative results, but profitable ones for lenders and positive outcomes for borrowers of payday loans.

Jeremy Bentham

If you missed the beginning, CLICK HERE.

Yet as Peterson and Graves see it, there is some divergence. Some Old Testament passages appear to state that Hebrews were permitted to make interest-bearing payday loans to non-Jews, but not to fellow Jews. Later, the understanding of Christ’s ministry led Christians to believe that all interest-bearing loans were to be banned. This held until the Renaissance and Protestant Reformation, which is apparently when good business sense began to develop. Religious leaders questioned whether banning all interest was a good idea. John Calvin, Martin Luther and others suggested that only excessive interest was a problem. Pope Paul II even approved pawnshops in 1461.

What they do about payday loans

By the 1980s and early 1990s, a trend had developed in the American banking establishment where loaning to low and moderate income consumers was severely restricted. As a consequence, Congress adopted the Community Reinvestment Act at http://www.ffiec.gov/cra/, which required them to increase their efforts in these underserved and unserved communities. The success of the Act has been somewhat unsuccessful. As there was a definite demand for microcredit like payday loans, businesses began to open their doors to popular acclaim.

According to Peterson and Graves, Christian leadership began at this time to ally itself with a variety of business interests, perhaps remembering what their Renaissance and Reformation fathers had discovered about the need for operating capital. The result is splashed across the pages of the authors’ study – payday loan stores in the “Bible Belt” are found at a much greater density than anywhere else in the country.

Not surprisingly, as this happened, American legal response to faxless payday loans became more favorable. Why? First, the Supreme Court gave banks the authority to export high interest rate limits from across the country as it favored said banks. Second, inflation caused interest rates to rise. Rather than create temporary exceptions to antiquated usury rules, some state legislatures repealed payday loan rate limits altogether. Most of these states were located in the same “Bible Belt.”

A “Defense of Usury”

Customer satisfaction levels, loan prevalence and the flexibility of payday loans have made them a popular product for consumers, despite the lip service religious groups and supposed non-denominational activist organizations pay against them. Aside from the facts of Peterson and Graves’ study, there exists a classic treatise by English philosopher and financial reformer Jeremy Bentham. Bentham argues in favor of usury as a part of free trade and financial freedom, where the market dictates the price. The authors point out that Bentham’s ideas about usury have been hotly debated ever since the document appeared in 1787. Policymakers, judges, businessmen and academics are more suspicious of tight regulation of interest on products like the payday loan than they have ever been, in large part thanks to the forward thinking of Bentham. While the debate may never disappear completely, perhaps the actions of the Christian Right when it comes to supporting payday loan companies in their communities is the clearest indication of where they stand. Like anyone else in need of a small amount of cash in an emergency, they use  payday loans, too.

Photo: commons.wikimedia.org

In the academic study “Usury Law and the Christian Right: Faith Based Political Power and the Geography of the American Payday Loan Regulation,” Christopher Peterson of the University of Utah and Steven Graves of California State Northridge show via collected empirical data that there’s something quite surprising about the distribution of payday loan businesses throughout America.

The proverbial “Christian Right” has traditionally been among the most vocal opponents of the product, which they consider to be usurious in the most pejorative modern definition (for the original definition, look here… usury may not be what you think it is). However, Peterson and Graves find that no fax payday loan companies tend to concentrate in high densities in conservative Christian states, particularly in relation to the number of traditional banks. In fact, whether or not there was a conservative Christian presence was shown to have a much greater impact upon the density of payday loan businesses than race or poverty levels (two of the primary weapons well-funded hatchet groups like the Center for Responsible Lending try to use against the industry).

What they say about usury

In one form or another, payday loans have been around for some time. Historical records speak of them in ancient Mesopotamia. Contracts and receipts were recorded on clay tablets. Lenders used the lunar cycle as a tool in establishing short-term loan due dates. The more abusive lenders who refused to deal in a civil manner with delinquent borrowers were essentially what prompted societies to consider loan pricing. The Babylonian and Roman Empires each had highly structured rate limits on various types of lending.

In the Bible, there are numerous Scriptures cited by the Christian Right as being against lending. A few of them are as follows (King James translation):

Exodus 22:25 - “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shall thou lay upon him usury.”

Ezekiel 22:16-16 – “In thee have they taken gifts to shed blood; thou hast taken usury and increase, and thou has greedily gained of they neighbors by extortion, and hast forgotten me, saith the lord GOD. Behold therefore I have smitten mine hand at thy dishonest gain which thou hast made, and at they blood which hath been in the midst of thee. Can thine heart endure, or can thine hands be strong in the days that I shall deal with thee? I the LORD have spoken it, and will do it. And I will scatter thee among the heathen, and disperse thee in the countries, and will consume thy filthiness out of thee. And thou shalt take thin inheritance in theyself in the sight of the heathen, and thou shalt know that I am the LORD.”

Ezekiel 18:8-17 – “He that hath not given forth on usury, neither hath taken increase, that hath withdrawn his hand from  iniquity, hath executed true judgment between man and man, hath walked in my statutes, and hath kept my judgments, to  heal truly; he is just, he shall surely live, saith the Lord GOD.”

CLICK HERE to continue reading and see how the Christian Right deals with the payday loan in practice.

Payday loans are a form of consumer microlending, typically made in small amounts ranging from $100 to $1,500. These short-term loans are used for a variety of reasons, most common among them being when people need to take care of emergency expenses that a budget fails to cover. They have helped many families and individuals to avoid greater financial trouble by keeping their budget afloat until their next pay period.

Critics of the product frequently cite the expense as being problematic. However, the value of speed, convenience, discretion and having access to small amounts of credit that banks and credit unions do not otherwise provide are consistently overlooked by this argument. If a customer has less than perfect credit, the value of conveniently placed outlets (online, in person or via telephone) for no fax payday loans cannot be overstated.

The term “usury” has been attached to payday loans by some, and this argument typically stems from directions given in religious texts. Hinduism, Buddhism, Judaism, Christianity and Islam express varying degrees of objection to usury, but what is usury? The standard definition is “the practice of charging financial interest in excess of the principle amount of a loan.”

Give payday loans for nothing, why don’t you!

Adam Smith, the "Father of Modern Economics," supported charging interest

If we assume the previous definition of usury to be true, it becomes easy to laugh at the complete impracticality of the anti-usury movement in a capitalist society. If a legitimate business that aids consumers by making no fax payday loans available is forced to give this money without charge, customers will only have to repay the principle balance. There is no risk protection for the lender under this model, and since we do not live in a Utopian society where everyone is trustworthy enough to repay their debts (a virtue that numerous religions praise), risk protection is necessary. That is what interest achieves, in a sense. That is what keeps payday loan businesses from closing their doors and placing hundreds of thousands of honest, hardworking people out of a job. It is an engine of trade/exchange that keeps capitalism moving.

Arguments in favor of traditional usury are plentiful

Ethically, usury is defendable. The concept of “negative liberty” argues that restricting trade (in the case of payday loans, when the borrower voluntarily enters into a contract with the lender) hinders free will. Eighteenth century French philosopher Claude Helvetius gave voice to the concept this way, where the man in possession of negative liberty is free to make his own decisions:

The free man is the man who is not in irons, nor imprisoned in a goal, nor terrorized like a slave by the fear of punishment

In practical terms, welfare economics also explains the necessity of traditional usury. This type of economics looks at social welfare, or the overall well-being of society. Charging interest leads to profit, which is necessary for business operation, payday loan or otherwise. This solves the economic calculation problem by distributing resources (money, in this case) appropriately so that commerce can continue. Profit earned via interest meets the definition of dividend in the sense that by paying things like business expenses and employee salaries, the profits payday loan businesses make are invested back into the business, which can then continue to serve the public at a high level. Perhaps those who criticize usury on religious grounds could benefit from added perspective. Times are different now from when the texts originated; capitalism was thousands of years away, and current economic conditions were foreseeable by no man, woman or child.

Defending against risk

Charging interest in a competitive debt market is unavoidable if both profit and protection against borrowers who default are to occur. Incidentally, the Community Financial Services Association (CFSA) states that “researchers and state regulators consistently report that 70-80% of customers use payday loans between once a year and about once a month.” Thus, a statistically significant portion uses the loans sparingly. Moreover, since loan rollovers are either prohibited or severely limited nationwide, “borrowing from Peter to pay Paul” is both difficult to accomplish and statistically insignificant in frequency.

Interest and the free market

A significant movement supports the connection between just interest and a free market capitalist economy. Numerous Austrian economists believe this. They also believe that a free market will help set fair price. This would exclude excessive government regulation on rates, whether they be for payday loans or otherwise.

What would Shylock do?

To an honest citizen who cares about the well-being of others, it would be ridiculous to suggest that the violent repayment method suggested by Shakespeare’s Shylock is appropriate. However, there needs to be checks and balances in place like profitable interest if payday loans will continue to operate as a business. Numerous academic studies suggest that if the service were to be absent, consumers would turn to more dangerous alternatives. Interest is essential.