People Before Profits: Getting Serious About Usury

One common legal tradition of many cultures and religions from antiquity to the near-present has been to prevent those that loan money to others to charge unjust or excessive rates of interest (“usury”). According to the Jewish prophet Ezekiel: “He lends at interest and takes a profit. Will such a man live? He will not! Because he has done all these detestable things, he is to be put to death; his blood will be on his own head.” (Ezekiel 18:13)

The Quran provides a similar warning hundreds of years later in the Surah al-Baqarah 2:275, placing usury as a “Greater Sin.” “Those who swallow down usury cannot arise except as one whom Shaitan (Satan) has prostrated by (his) touch does rise. That is because they say, trading is only like usury; and Allah has allowed trading and forbidden usury. To whomsoever then the admonition has come from his Lord, then he desists, he shall have what has already passed, and his affair is in the hands of Allah; and whoever returns (to it)—These are the inmates of the fire; they shall abide in it.”

Cultures as diverse as Babylon and Rome had definitive laws to reign in usury. The surviving code of Hammurabi (c. 1772 B.C.) regulated interest and the Roman rate was generally held to 8% on loans through much of its heyday. The statute from the era of the Emperor Justinian (c. 533 A.D.) held well into the 16th century well after the Roman Empire itself crumbled.  Greek commentators Plato and Aristotle also considered usury to be unjust and unnatural since money should only be used to exchange goods not simply for gain. When the pagan Greeks deregulated earlier laws governing usury, some of those unable to pay were sold into slavery.

Dante Alighieri’s Inferno continues the tradition of denouncing usury when Dante (the character) and his guide Virgil tour the various circles of Hell. He finds that usurers are placed lower than murderers because, as Virgil explains, the sin of fraud is worse in God’s eyes than the sin of violence because it can and does lead to a lack of trust and enmity between people, and then potentially society as a whole.  The poet Dante really strikes the key chord regarding usury that all societies have tried to address. Namely, that usury takes advantage of those in need by placing further economic burdens on them for economic gain. To avoid hostility from those who would become destitute and then potentially desperate, bitter, and violent, we must prevent others from taking unfair gain from their fellow citizens. Those from a faith-tradition carry this ideal further in that we should do all we can to assist our neighbors, expecting no monetary benefit in the process.

The founding of the American colonies and later the United States ushered in a new era in governance and how nation states might be organized and function. One break with tradition that did not occur in the American experiment, however, was its common view of usury. During the colonial period and the founding, most local and national laws placed interest rates at no more than 6%-8%. What did occur at an accelerated pace as America grew was a combination of the ideas of the Enlightenment and the rapid changes of the Industrial Revolution.  As the Western world began to prosper, more personal autonomy was sought. This included the idea that persons could express and hold whatever views they liked, have a say in how their governments were run, choose their own lifestyles and mores, and use their wealth how they saw fit. While many of the goals and objectives of the Enlightenment have been laudable, increasing emphasis on self and the rights of the individual have inevitably meant less concern over neighbor and the rights of others.

By the early 20th century “salary lenders” (an obvious pre-cursor to today’s payday-lenders) had begun to take advantage of weakening usury laws to push interest rates well past 10% and pursue exorbitant fees, sometimes creating  the equivalent of modern day slaves of their clients. As part of the Progressive movement’s goal to fight corruption, break-up monopolies, enact fair labor laws, and begin conservation work, efforts were made to stop predatory lending practices. Progressives were successful in turning the tide through measures like the Uniform Small Loan Law in which citizens could receive a loan at a reasonable rate, and without excessive or hidden fees or penalties while they paid it back.

The pendulum swung back to the usurers in the late 1970s when the Supreme Court made a decision in Marquette National Bank of Minneapolis v. First Omaha Service Corp. In that case Minnesota had tried to prevent an out of state credit card issuer from charging its own home-state rates of interest to Minnesota customers. If this was allowed to take place, it would effectively prevent Minnesota from defending its usury laws. The Court agreed that such was the case, but ruled that it was for Congress to issue a remedy. The result then became a classic “race to the bottom” as Congress did not act and some enterprising states like Delaware and South Dakota, during a period of national recession, essentially threw out reasonable usury laws, and lured the banking industry to their states by offering low corporate taxes as well. This outcome meant thousands of jobs and revenue for the state that welcomed credit card companies, but also, as the banking industry became more interested in the credit market (a process beginning in the late 1950s), it looked to make the most profit where usury laws were the most favorable to them. Looking back on the de-regulation of credit markets two decades later Diane Ellis wrote an analysis in the Federal Deposit Insurance Corporation (FDIC) paper Bank Trends [1] pointing out that while  deregulation opened up the availability of credit to some who might not have been able to receive it previously, it also increased the risks for borrowers (due to lenders being able to charge the highest rates their issuing state would allow), as well as increased bankruptcies nationwide.

There is little doubt that the most notable and pernicious usurers in the United States today are payday and auto title loan companies. Some of these lenders make loans at up to 400% with collection expected at the client’s next payday. Aside from the exorbitant rates, payday lenders are similar to credit card issuers in constructing an array of fees and other penalties that are often unclearly made known to borrowers. What is the difference between the infamous loan sharks of organized crime and payday lenders? Payday and title loan companies may not literally break your leg for non-payment, but they can cause repeated economic injury once a desperate borrower gets behind and becomes indebted over a long period of time. Payday lenders are also notorious for locating in the most vulnerable, economically depressed locations or where military service members are in high concentration to take advantage of those who are transient or don’t have a good understanding of banks or credit unions.  The Center for Responsible Lending [2] has monitored Payday Lenders for many years.  A recent partnership with religious organizations concerned about the most odious type of usury has developed into the group Faith & Credit. Some church bodies have spoken out specifically against payday lenders. Dr. Barrett Duke of the Southern Baptist Convention’s Ethics & Religious Liberty Commission referred to predatory title loan lenders as a “debt trap” [3] in a document from earlier this year.  Elsewhere Bishop Joe Vasquez of the Catholic Diocese of Austin testified to the Texas legislature on behalf of a bill which would prevent predatory lenders from loopholes in the state’s anti-usury laws. [4]

A positive development occurred in 2010 with the passage of the Credit CARD Act, an all-too-rare bipartisan action by Congress. According to the bill’s text it intends “…fair and transparent practices relating to the extension of credit under an open end consumer credit plan…” [5] The main purpose of the Act was to rein in and clarify, in plain English, how credit card companies charge customers, especially in regard to fees, costs, and risks.

The following year Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act which created the new Consumer Financial Protection Bureau (CFPB).  The CFPB will have a fair amount of oversight, but in some areas its role may be limited. It will have a far-reaching jurisdiction, however, covering mortgages, credit cards, overdraft loans, payday and auto title loans, auto loans, private student loans, pre-paid debit cards, credit reports, debt collectors, and arbitrators. Hopefully, the CFPB will result in clear and understandable rules and fees, monitoring, transparency, and limits on fees and forms of security
The Talent-Nelson Amendment in 2010 reduced the cap to 36% on loan rates permissible to military families (one of the most sought –after markets of predatory lenders). While that rate is still higher than people of good will should accept, Senator Richard Durbin’s “Protecting Consumers from Unreasonable Credit Rates Act” legislation introduced in April would bring all borrowers into the 36% camp. Unfortunately it appears Durbin’s bill will die in committee.

One remedy would be to resurrect some of the Uniform Small Loan Laws (USLLs) enacted beginning in the Progressive Era in reaction to the Salary Lenders of that period. As formulated by the Russell Sage Foundation, the USLLs did indeed allow select lenders to charge high interest rates in comparison to contemporary usury laws, but in return those loan companies had to adhere to strict transparency rules. Regulated in this manner, lenders could make loans to poor persons in financial distress with much less risk that those persons would end up in financial slavery to the firms.

Ultimately we need state and Federal laws that institute caps, or controls on fees and costs. The National Consumer Law Center makes the argument [6] that capping rates “results in payments that consumers have a decent chance of being able to pay” and that a cap “gives lenders an incentive to offer longer term loans with a more affordable structure and to avoid making loans that borrowers cannot afford to repay.”

What can ordinary Americans do to protect the most vulnerable members of society and defend the common good against those that seek to unfairly profit when others are in need? First, parents need to instruct their children and model good behaviors related to saving and spending responsibly. Second, schools—particularly colleges welcoming in freshmen classes—should offer workshops on credit and loans. Third, we need to tell our elected representatives that we want them to enact and enforce laws against abusive lending and usury. Fighting usury will improve the quality of life in our communities and protect the common good.

Kirk G. Morrison

Kirk is the Chairperson of the National Committee for the American Solidarity Party

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