Payday loan crackdown vs. the freedom to get dangerously into debt: Don Pittis

The moral objection to exploitative lending is no flash in the pan. Prohibitions on the practice go back to the founding documents of the globe's great religions.

But even as parts of the world become more secular, there appears to be a growing backlash from government and from industry against the business of charging poor people high interest rates for desperately needed loans. 

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A new push from the U.S. Consumer Finance Protection Bureau to crack down on payday lending is drawing new attention to an old problem. In a release last week called Consumer Financial Protection Bureau Proposes Rule to End Payday Debt Traps, the CFPB outlines some new laws that the payday loan industry says would threaten its business model.

While the rules are secular, they are supported by such hardly radical groups as Catholics, Jews, Lutherans and Presbyterians and hundreds of faith communities that are part of an economic watchdog called Jubilee USA Network.

"Nobody should take out high-interest loans that can make a bad economic situation even worse," Jubilee executive director Eric LeCompte said in a news release Friday.

The industry group representing payday lenders is outraged and says the CFPB's plan, which could come into effect next year, has the potential to "annihilate" the business.

Spokesman Dennis Shaul called it "a staggering blow to consumers as it will cut off access to credit for millions of Americans who use small-dollar loans to manage a budget shortfall or unexpected expense."

Moral divide

He pointed the finger directly at groups like Jubilee.

"From the beginning this rule has been driven — and in some instances written — by self-proclaimed 'consumer advocacy' groups who have sought to eliminate payday lending," Shaul said.

Jubilee, on the other hand, only says that some, but not all payday lending is predatory. But the group makes no bones about the fact that, while it likes CFPB's proposal, it's just a start.

"Some payday lending is actually predatory lending," LeCompte said. "Predatory practices must be discouraged and these rules are a good first step."

The key new rule supported by the religious anti-poverty group that sticks in the craw of the industry is a requirement that lenders must be able to show that a borrower has enough income to repay the loan while still meeting basic living expenses such as food.

Effectively that would allow the lenders to hand out money to anyone who truly needs it on a short-term basis until their cheque arrives in the mail. But they would not be allowed to lend to people for whom repayment would push them into starvation and homelessness. 

Nanny state?

The lenders group sees two problems with this. One is that doing all that research would be prohibitively expensive. The other is that it infringes on the right of individuals to make their own decision on whether to borrow or not. Effectively, it is a nanny state rule. 

"It ... sets a dangerous precedent for federal agencies crafting regulations impacting consumers," the lenders group says.

But religions have been slamming the practice for much longer. In Islam, the concept of riba is still alive. Many Christians and Jews have heard of usury, which goes back thousands of years to the Old Testament. Hinduism and Buddhism have also historically condemned lending for interest.

"Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase," from the book of Leviticus is only one of several very specific prohibitions against such profitable lending. 

In the past several hundred years, bankers have managed to work their way around the religious rules, as economics defined interest as the essential price of having something now and paying for it later.

In Canada, payday lending is controlled by individual provinces. Last month, Alberta proposed cutting payday fees by almost half, but as in the U.S., lenders complained it would cut into their business and drive borrowers into the hands of unscrupulous loan sharks.

Avoid where possible

The Canadian government's Financial Consumer Agency has plenty of advice on payday lending, essentially boiling down to avoid it at all costs. 

The trouble is that money is hard to live without, and people desperate for money now sometimes have trouble seeing that taking out a payday loan they can't repay only moves the problem a few weeks or months into the future. And due to the crippling charges, payday customers are self-selecting. Borrowers who can do so will find cheaper sources of money. 

From a business point of view, there are few things as profitable as serving desperate customers who can't resist. Britain's opium trade was built upon it. The tobacco and gambling industries continue to earn their purveyors a healthy return.

And whether or not you are religious, the difficult question remains a choice between the freedom to exploit and be exploited versus state intervention to reduce a moral injustice.

Follow Don on Twitter @don_pittis

​More analysis by Don Pittis