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

The moralobjectionto exploitative lending is no flash in the pan. Prohibitions on the practice goback to the founding documents of the globe's great religions.

But even as parts ofthe world becomemore secular, there appears to be a growing backlashfrom 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 calledConsumer Financial Protection Bureau Proposes Rule to End Payday Debt Traps, the CFPBoutlinessome new laws that the payday loan industry says would threaten its business model.

While therulesaresecular, they are supported by such hardlyradical groups as Catholics, Jews, Lutherans andPresbyterians andhundreds of faith communitiesthat 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 directorEric LeCompte saidin a news release Friday.

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

SpokesmanDennis 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 groupmakes no bones about the fact that, while itlikes CFPB's proposal, it'sjust 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 thata 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 trulyneeds 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 lendersgroup seestwo problems with this. Oneis thatdoing all that research would be prohibitively expensive. The other is that it infringes on the rightof individuals to make their own decision on whether to borrow or not. Effectively, it is a nannystate rule.

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

But religions have been slamming the practice for much longer.In Islam, the concept of ribais still alive. Many Christians and Jews have heard of usury, whichgoes 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 Leviticusis 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, aseconomics 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 proposedcutting payday fees by almost half, but asin the U.S., lenders complained it would cut into their business and drive borrowers into the hands of unscrupulousloan 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 peopledesperate formoney 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 desperatecustomers who can't resist. Britain's opium trade was built upon it. The tobacco andgambling industriescontinue to earn their purveyors a healthy return.

And whether or not you are religious, the difficult questionremains a choicebetween the freedom to exploit and be exploitedversusstate intervention to reducea moral injustice.

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More analysisby Don Pittis