May 26, 2015

Is Payday Lending Predatory? A Response to Russell Moore and the ERLC

By In Articles, Economics, Society and Culture

Everyone is all about coalitions these days, huh? Recently a convention’s commission organization joined a coalition at a conference. That is, the Southern Baptist Convention’s Ethics and Religious Liberty Commission announced at a conference last week that they would be joining a coalition to end “predatory” lending. The announcement was part of a press conference last week on capitol hill. Russell Moore, the president of the SBC’s ERLC, commented that “payday lending is a form of economic predation and grinds the faces of the poor into the ground.” Barrett Duke, ERLC vice president for public policy and research, spoke saying “these companies refuse to operate in a responsible manner, government intervention is crucial” and arguing that “God is not an economic darwinist.”

At its launch, the coalition announced that “individuals should manage their resources responsibly and conduct their affairs ethically, saving for emergencies, and being willing to provide support to others in need,” and also that “churches should teach and model responsible stewardship, offering help to neighbors in times of crisis.” So far so good. Church’s need to be well governed with qualified elders to teach and shepherd, and competent deacons who may serve, provide, and teach good stewardship to the church members and those they come in contact with. Unfortunately these things never stop there, let alone address proper ecclesiology. There last stated principle is that “Government should prohibit usury and predatory or deceptive lending practices.” Isn’t that always the  rub with social justice. It’s usually rather anti-social. While the article’s announcement initially gives lip service to Churches teaching and modeling to its member responsible stewardship (on which I’ll comment below) the clear thrust and end goal is legislative regulation.

“Exploitive.” “Predatory.” They “target” the poor and “lure” them into a “debt trap.” According to Russell Moore they grind poor people’s faces in the gravel. The humanity! They’re literally curb stomping them in the street, bodies are everywhere, cats and dogs living together, mass hysteria!

It’s hard not to be against predatory loans, or against just lending. It’s kind of like being against The Patriot Act or the USA Freedom Act. How can you be unpatriotic and against freedom? Yet let’s approach this from a praxeological perspective first. That is, an analysis from the perspective of human action and the rational choices of individuals (even if only rational to them).  What makes these short-term payday loans “predatory”? Why do individuals take these loans? How are they “targeting” the poor?

First, the Faith for Just Lending Coalition claims these Payday loan companies are preying on the poor by charging unjust interest rates and fees. Of course this begs the questions, what is the just interest rate for a loan? We must look to the basics, what is the interest rate and why do people get loans? The interest rate may be rightly described as the price of money. In the case of a loan it is the cost of money now versus money in the future. People seek loans when their rate of time preference favors a certain amount of money now as opposed to the future. The loan takes place then when a second person has saved or acquired a certain amount of money  and prefers to give up that money for the sake of more money later. It is essentially that of supply and demand for money, just like any other good. The more I prefer money now the higher interest rate I’m willing to accept on a loan. The more money I have now, the less I wish to use it for now, and the more likely I will have all of it returned to me the lower the interest rate I am willing to lend my money out for. Just as a high priced good is an indicator of relatively low supply to a higher demand and a lower price is a higher supply to a relatively low demand; so the interest is an indicator of loanable funds, risk of default, and the demand for a loan. If the interest rate for a $1000 loan is 10%, then the price of that loan is $1,100 of future money. The loan then can only occur when both parties are satisfied with the terms of the trade and see no better option, because of course if there was one they would take it.

Let’s consider then the specific circumstances of these payday loans. Those of the Faith for Just Lending coalition say the interest rates charged by these companies are outrageous. It is well documented and publicized that these business have been “caught” charging as much as 240-300% APR interest rates! Outrageous! How could good Christian Libertarians be against ending predatory lending.However the actual mechanics of a payday loan show this to be a misrepresentation.  A payday loan is a “paycheck advance” or a “deferred deposit” in which a postdated check is given by the borrower for a short-term two to four week loan, usually in the amount of one to two weeks pay for that individual. At the end of the loan period the check held by the lender is cashed on its stated date. The typical fee for these loans is $15-20 per every $100. Of course if this is compounded and quantified over a one year period it comes out to 240-300%. However this is absurd to use a misleadingly high APR on $50 loan fee for $250 two week loan. Thus a two week payday loan is not appropriately characterized by an annual percentage rate. Consider this example from a libertarian economist. If I were to use Uber for a ride to the airport it may cost me $15 dollars. That’s quite a reasonable price if you ask me. However if I were to use it to go to my hometown of Saint Paul (from St. Louis) the cost would be in the thousands! Does this mean Uber is profiteering or price gouging? Of course not, that’s not its intended purpose.

There are several things to consider here and thus to conclude that government regulation would be futile.  Why are these people subjecting themselves to such high interest rates? Quite simply because it is the best option out there, this is the best option for cash now on the market. We know this because no other banks or companies are making these loans  to this group of people for less, otherwise they would take it. In this trade of money now for money later, like any other trade, both parties must gain or they would obviously refuse to participate. The people who take these loans are those who are unable to access regular banks and avenues of consumer finance because of bad or no credit. They are simply too risky, which is evident by how often they default even on these small loans. Hence high interest rates are used by companies to make such risky loans profitable despite frequent defaulting.

Isn’t it immoral that these companies are using huge fees to make gross profits off the poor? Yet if payday lending is so profitable, why isn’t everybody doing it? Payday lenders do not have a monopoly on the micro-loan market. Where then are the companies and banks racing into the ghettos to get their portion of the market share.The obvious conclusion is that Payday Lending is not really that profitable. One study finds that the Payday loan companies are lucky to have even a 7.63% profit margin,  less profitable than pharmaceuticals, railroads, mining – or even regulated gas and electric utilities.  The reason there is relatively little other short-term loan entreprises offering lower, competitive, and non “exploitative” interests rates and fees is simply because it is in fact too risky and simply not very profitable. These payday lenders are the banks for the unbankable. They give uncollateralized credit to high risk borrowers that no one else is giving them.

Now considering the charge that these companies “target” the poor and “pop up” in poor neighborhoods. It is of course true. In the same sense that dollar stores and thrift stores “target” poor neighborhoods. Why on earth would these companies locate themselves in a rich suburb where people do not live paycheck to paycheck, everyone has access to 3.25% interest loans, or simply have no need for a loan. Why is that Tiffany’s Diamonds does not have a store on Florissant Avenue in Ferguson? Probably for the same reason Chris Ruth’s doesn’t have a dollar menu. Why use the word “target” as if these companies had poor people in scopes lined up for firing practise. In fact it should be plainly obvious that these payday loan companies are in fact the only ones doing anything for these people. No bank, charity, or mutual aid has offered an alternative or a lower price and are we going to punish or outlaw the one group actually doing something?

What about the debt trap or the debt cycle that these lenders put the poor in. Payday loans encourage borrowing and bad stewardship they say. Lower income earner become set in a vicious cycle of borrowing and paying interest with more borrowing. Debt becomes a lifestyle. Surely the humanitarian heart inside the libertarian feels something to end this poverty cycle. Yet only the government and progressive social justice activist could think that forcing lower interest rates will lead to less borrowing and debt. What will discourage a debt lifestyle more–high interest and fees or low interest?  Perhaps then these moral busybodies should be advocating for higher interest rates! “These soulless lenders are making debt way too affordable for the poor! They must be stopped! Raise the interest rates! Don’t hate, raise the interest rate!” Hmmm, that one doesn’t sell as well.

Russell Moore and his coalition are awkward situation of having only three options:

1)They may abolish payday lending entirely.Of course, this means bureaucrats getting together defining what exactly constitutes a payday loan, along with a three letter agency to enforce it. However even this fails. As several states and counties have seen regulation on Payday lending coincidentally corresponded to a surge in title-loans, craigslist loans, internet and peer to peer lending. Hardly an improvement. There is another option still for the poor, the black market. Few are advocating this position since such loans are often taken out to avoid eviction or repossession and can then serve a vital market (dare we say, humanitarian) function.

2)In the name of taking down gross profit from payday lenders they may artificially force lower interest rates. This is the most common and populist approach being lobbied. Two methods may be used for this approach. They may either simply force lower interest rates and cap fees, or they may do this and require these companies to give loans to certain lower income demographics. Pushing interest rates artificially  down will have the same effect as eliminating payday loan companies. Legal stipulations artificially lowering interest rates simply make loans to the poor too risky and pushes money lenders toward less risky loans, to those are more well of.  The results then are still that of the first option. The second method is of course of that of Fannie and Freddie Mac, Urban Reinvestment Act, and Affordable Housing approach in which mortgages were required to be given at lower interest rates to those who could not afford it. We all know how well that went. More people bought houses than otherwise would not have, and who could not afford it, and millions of foreclosures happened. It was a complete disaster. The effects of forcing lower interest rates and forced high risk loans will of course lead to increased borrowing and the very debt traps they are warning us about. Which brings us to the third option.

3) In the name of dissuading the poor from taking Payday loans they may artificially force higher interest rates. 300% must not be high enough. If you are of the Dave Ramsey variety and despise payday lending more as it is part of a culture of debt, then what do you think lowering the interest rates, fees, and penalties will do about the number of borrowers or how much debt is leveraged? Of course the reality of social justice activist sitting on capital passionately arguing for higher interest rate charged to the poor is laughable.

We should not look to the main proprietor of financial foolishness to instill responsible stewardship. The debt economy is the result of an inflationary central bank whose main purpose of existence is to sustain the federal government’s debt and to benefit the politically connected users in the beginning at the expense of those who see this currency last.  Fiat money has cultural consequences. The Federal Reserve is trickle down poverty. It is the tampering of the scales  of purchasing power in favor of those who have earlier access to the money all the while it loses its value until “your silver has become dross” (Isaiah 1:22). The poor simply find each new day and each new year that the little they had can buy less and less. It is an inflationary central bank that inculcates in its citizens the uselessness of savings by example and by incentive. Inflation disincentivizes savings for the poor and teaches them, as the Keynesians really believe, that they must spend now  or it will be gone, the uselessness of thrift. The entire system itself, not just its effects, are against thrift, against saving, against patience, against wisdom, and against God’s law.

It is not so much then that libertarians are not humanitarian enough, or that we two kingdom types don’t want the church involved in social justice, it’s just that their social justice is rather anti-social and rather unjust. They don’t mean let’s serve, teach, and help build up our local communities to avoid debt, have good stewardship, and understand microeconomics. What they mean is “let’s get our hands on the state’s monopoly on the use of force to coerce others into behaviour we approve of or makes us look good.” This isn’t cooperation, its control. It’s not service, it’s power. True social justice is peaceful, cooperative, mutually beneficial, and preserves property rights and personal freedoms. Political Intervention for economic problems is a great way for people to feel like they did something without having to sweat, serve, produce something of value, be generous, do the work of deacons, and all that other silly stuff. “No” they say “what we need is programs, coalitions, legislation, committees, petitions, and regulations!”

The Faith for Just Lending Coalition had it right in the beginning. The Church needs to help its members and those it comes in contact with to manage and steward their resources wisely. Of course this is why the apostles instituted the office of deacon. They are to take care of the physical needs of the people. Proper church government, qualified elders teaching and preaching and competent deacons serving and assisting, is what the Southern baptist convention may want to focus on before advising the state government. Ecclesiology, though less fashionable today, is a more appropriate emphasis and answer for the church.

 

Written by Brian Jacobson

Brian Jacobson works as a quality technician for a manufacturing company in St. Louis, Mo where he lives with his new bride. He studied biblical and theological studies at Reformation Bible College under R.C. Sproul in Orlando, FL. He’s an Old-School Presbyterian who enjoys the simple means of grace, Machen, and living the high life on a budget. Follow him @briankjacobson on Twitter.