The Sin of Usury
Recently, on the Call & Response blog, Dan Rhodes called for a revival of the concept of usury in light of an economic crisis linked to abusive lending. James Howell raised questions about the application of usury prohibitions in a modern financial system.
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The condemnation of usury in Christendom grew out of the Christian mission of charity, steeped in the Hebrew Bible. In the middle ages, practicing usury would get you excommunicated.
Over against such harsh punishment, James Howell makes the appealing suggestion that we drop the whole conversation about interest and go straight to building homes and offering financial education classes. But I think there is more to be discerned from the ancient witness about the nature of lending itself.
In Biblical times, the people of God believed there should be limits on the relationship between lenders and borrowers. Most frequently, that limit was expressed in terms of prohibition against interest, especially interest charged to fellow countrymen and to the poor (Exodus 22:25, Leviticus 25:35-37, Deuteronomy 23:19, Psalm 5:5).
Biblical prohibitions against usury suggest that there is something unique about the relationship between borrower and creditor. Credit relationships are often a mix of pure business, charity, and empowerment. If I need money to pay my rent or put food on the table, the person with money to lend has a great deal of power over me. If I need credit to get ahead -- to pursue an education, start a business, or own a home -- that transaction is inherently a wager on the future.
The dynamics of desperation and possibility make credit relationships ripe for exploitation. It should not be surprising, then, that lending abuse is real today, just as it was in Biblical times. In many states, payday lenders continue to charge over 300 and 400% interest rates that typically require families to take out new loans to pay off previous ones. At the auto dealership, the financing portion of the sale can become a cover for extra cost -- as some dealers receive kick-backs from lenders in exchange for pushing higher cost loans than what the buyer qualifies for. The New York Times reported recently on trade schools that promise enrollees rosy career prospects but leave graduates with a heavy debt burden that outstrips their actual earnings.
The unfortunate reality is that in addition to the well-intentioned bankers that Howell mentions, there are also those who abuse the power of credit.
For most of America's history, states' traditional usury laws limited the most abusive forms of lending. Sidestepping traditional usury limits is a phenomenon of the 1970s and 80s. It helped create incentives for financial institutions to offer an array of problematic credit offers -- from payday loans to high-cost student loans -- whose function was not to empower households but to make quick cash and ensnare borrowers in debt.
The difference between a good and a bad loan is that in a good loan the lender succeeds when the borrower succeeds. The loan principal is repaid on time and with interest. In a bad loan, the lender benefits from the borrower's misfortune, reaping extra fees through penalties, defaults, and loan rollover. In the hands of unscrupulous businesses, credit can dig a debt trap and destroy households.
The Biblical and ecclesial tradition is not blind to the unfortunate, darker side of lending. Nor should we be.
Rachel Anderson works for the Center for Responsible Lending in Washington, DC. Join in religious actions on foreclosure prevention and financial reform at CRL's Faith & Credit page.