by Lawrence Meyers

Third in a series of articles about the payday loan industry

One of the favorite claims of payday lending opponents is that payday loans are “usurious”. We often see this claim made by the ignorant, though well-meaning, members of various “Interfaith Coalitions”. The religious groups just love to band together to attack the moneychangers, as if we were somehow still ensconced in Biblical times.

Well, it’s the 21st century now, folks. Time to clue in. Payday loans aren’t usury, whether you define it with a standard secular dictionary or even pull from Scripture.

Here’s the definition of usury from a random Google search:

“An exorbitant or unlawful rate of interest”

Let’s take “unlawful” first. States that permit payday loans also specify the maximum allowable fee and/or interest by statute. As long as a payday lender makes a loan within those amounts, the loans are lawful and therefore not usurious. And, as it happens, legitimate payday lenders, which comprise of 99% of the industry, follow those exact laws.

Let’s define “exhorbitant”, per the same dictionary, as “greatly exceeding bounds of reason or moderation”.

We must ask what “reasonable” means in the world of short-term unsecured credit.

If a lender charges a price he deems reasonable that the borrower thinks is unreasonable, the borrower will not take out the loan. After all, if lenders charged 2600% APR, or $100 per hundred borrowed, they would not get any customers. It’s called “pricing oneself out of the market”.

If the borrower wants a price he deems reasonable that the lender thinks is unreasonable, the lender will not make the loan. After all, if lenders charged 36% APR, or $1.38 per hundred borrowed, they would get many customers….but the lenders would go out of business within a month because they would not generate enough revenue to make up for overhead and defaults.

So we know that 2600% is too high and 36% is too low. So what is “reasonable”?

It’s obvious. Ready? Here’s the earth-shaking news. We define “reasonable” to mean “that price that both the lender and borrower agree upon so that a transaction occurs”. Most call this “the free market”.

Since hundreds of millions of transactions have occurred in payday loan stores across the nation, both sides must obviously think the transaction is reasonably priced, or they wouldn’t undertake it, per the analysis above.

Therefore, the interest rate is reasonable, and therefore not exorbitant.

Thus, we see that payday loan rates are NOT usurious because the rate of interest is both LAWFUL and NOT EXORBITANT.

End of story. Usury claim debunked.

Now, some opponents will shout, “But borrowers have nowhere else to turn, so of course they take the loan at whatever rate they get handed!”. Well, that’s not true. Perhaps they have an employer, friend or family member they can borrow from. Perhaps they can choose to delay a bill payment, work with a creditor, or bounce a check. But they didn’t select those options, did they? They WILLINGLY chose to take out a loan.

What a shock this must be to people like Ann Rasmussen, the former policy director of the Virginia Interfaith Center. Then again, I tried corresponding both with her and her pastor and they refused to engage me in debate. I guess the old adage, “I’ve made up my mind, don’t confuse me with the facts” applies here.

But perhaps Ms. Rasmussen and her peers aren’t interested in what dictionaries say. Maybe they live their life by Scripture, so they look only to Scripture in regards to this issue. If you visit their website, which I will not cite here because of the ridiculous, time-tested falsehoods and illogical arguments it presents, they ask us to make a “faithful pledge”. It starts with the harrowing words, “USURY IS WRONG”.

No kidding. It is wrong. It’s terrible.

But payday loans do not constitute usury as I have just proven, so that invalidates the rest of the pledge. In the world of logic, once the premise is undermined, the entire argument is toast.

Be that as it may, they also announce that “this is a moral stand, not a political campaign”, which struck me as odd considering the very next sentence reads, “Let government decision makers know that no one should be charged more than 36% APR on any loan.” Funny, I thought hypocrisy is condemned in a few places in the Bible. Oh well, pick what you like and move on, I suppose. Plus, there’s that old saying that you can’t legislate morality. But I guess you can try! After all, Dubious Dick Durbin is attempting to do just that by introducing a federal rate cap of 36% APR.

The Center also presents a “Scriptural Foundation” for wanting to put that payday loan-killing 36% APR cap in place. Now I’m not usually one to bring religion into economics or politics, but they started it, so they deserve a response. I’ve edited their text for space and relevance:

“Nehemiah, Governor of Judah, had compassion for the Hebrew people who had returned to Jerusalem from Babylonian captivity. They were a crushed people. Nehemiah defended and protected them. After learning they were forced to borrow money on their fields and vineyards to pay the King’s tax, he was outraged. He brought charges against the nobles, saying, “The thing that you are doing is not good” (5:9). “Let us stop this taking of interest,” (5:10), and persuaded them to restore all that they had exacted from their fellow people.

[Nehemiah] demonstrated his love for God and for his fellow human beings by not allowing people in higher positions of power to take advantage of the poor. The Church’s work to protect and advocate for the poor and marginalized continues today. Payday lending preys upon financially vulnerable people directly and it indirectly undermines the church’s work, outreach, and contributions to poor and low-income people.”

See, if you parse the text of Nehemiah 5, you find Ms. Rasmussen’s myopic interpretation fails to place blame where it is due – on the King. The Jews were oppressed due to the taxes they had to pay the King, not due to the interest they were being charged! This is a common tactic among payday loan opponents — place the blame where it isn’t due. If you are caught in a “cycle of debt”, they claim it’s the Lender’s fault, without ever placing some responsibility on the borrower for using the loan irresponsibly.

It’s also worth noting that Ms. Rasmussen cherry-picked an obscure translation for Nehemiah 5:10. Most Biblical texts actually translate that verse as “I pray you, let us leave off this usury”, and not, “Let us stop this taking of interest”.

It seems Ms. Rasmussen’s agenda is to condemn the taking of interest in any circumstance. I’d suggest that without interest-bearing loans in today’s society, no loans would ever be made, and nobody would own a home, car, or much of anything else. Perhaps Ms. Rasmussen would prefer we wear tattered robes and live in mud huts in the desert, as well.

That being said, the parable here is that the Jews were truly powerless and starving, while being charged interest on loans for the fields where they worked their food. In this particular scenario, I’d say (as Nehemiah did), that this practice was indeed taking advantage of the poor.

However, much as Ms. Rasmussen wishes an analogy exists between the parable of Nehemiah and payday loans, none exists. Payday loans, when used and offered responsibly, don’t take advantage of anyone. They help people bridge financial gaps. When used irresponsibly, the fault lies with the borrower, unless the loan was made irresponsibly. In that case, the lender bears responsibility as well, but not all of it.

Any lender who makes a loan to someone truly poverty-stricken, who already owes other lenders and/or does not have any chance to repay the loan, is being irresponsible. But since 94% of all payday loans are paid back on time, I’d say that situation rarely exists in the payday lending space. What lender wants to make a loan to someone if they don’t have a reasonable expectation of getting their principle back?

With a 36% cap, payday lenders will be put out of business. This includes companies like First Cash Financial Services (FCFS), EZCorp (EZPW), Cash America (CSH), QC Holdings (QCCO), Dollar Financial (DLLR) and the venerable Advance America (AEA) This has been demonstrated ad infinitum. Ms. Rasmussen and others need to understand that this will only drive the people they purport to be helping to more expensive options (bouncing checks, unregulated offshore lenders, real loan sharks).

It continually amazes me that these people will accept the existence of God on faith, yet refuse to accept basic economic truths about supply and demand, which have hundreds of years of verifiable, solid evidence behind them. It isn’t that hard to figure out. Demand will not vanish if you take away an option. People will be forced to use other methods. Yet when confronted with these realities, opponents stick their heads in their ideological sandboxes – simple to avoid being proven wrong about something. A little humility in the face of the Lord is a good thing, if you ask me.

So why not just leave it up to consumers to decide what to do? After all, the Christian faith places a great deal of import on the exercise of Free Will, as one can only accept Christ by exerting it. Conversely, the ceding of control of one’s actions to another source is a trick of Satan. I therefore find it strangely ironic that Ms. Rasmussen exhorts people to turn their personal credit decisions over to “government decision makers”.

Hmmmm….legislators as tools of Satan. Maybe we’re onto something there.

Full Disclosure: At the time of writing, Lawrence Meyers was long shares of EZCORP, and held April call options on Advance America and EZCORP. Lawrence Meyers is a former writer for the Motley Fool, and is President of PDLCapital, a private equity firm (www.pdlcapital.com). This article is only an expression of the author’s opinion, may contain inaccuracies, and is not a solicitation to buy or sell any security. All readers are advised to consult with a financial advisor prior to making any investment. The author may be contacted at pdlcapital@earthlink.net  

Also, be sure to pick up a copy of the author’s first published book, Teacher of the Year: The Mystery and Legacy of Edwin Barlow

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