Religious ethics clash with loan practices
As easy money becomes the norm in the US, borrowing habits raise more ethical concerns.
"If there be among you a poor man ... thou shalt open thine hand wide unto him, and shalt surely lend him sufficient for his need, in that which he wanteth" (Deuteronomy 15:7, 8).
That's the way the King James version of the Bible defines the morality of lending. But the ethics of lending is a problem older than the Bible - and one still struggling for resolution.
Democratic presidential nominee John Kerry has brought the issue to the forefront by proposing a sweeping ban on a series of "abusive" loan types that he says are costing consumers in the United States upwards of $9 billion a year. If passed by Congress, the Kerry plan would require lenders to print loan terms boldly in plain language; to end high prepayment penalties; and to curtail high-rate short-term lending that he says unfairly targets military families.
Given current levels of indebtedness in the US, some say it has never been more urgent for society as a whole to tackle questions about the ethics and legality of lending practices.
In 2003, the average US household with at least one credit card carried three times more credit-card debt ($9,205) than in 1990, according to analysts at CardWeb.com. Yet the nexus of contemporary lending trouble, according to the Center for Responsible Lending, is in mortgage rip-offs. Its analysis shows 2.1 million households give up more than $6 billion in home equity each year in financing deals that include high up-front fees, prepayment penalties on sub-prime loans, or financed insurance.
Predatory lending practices are another phase of the problem. "Payday" lenders extend $300 loans to people who struggle two weeks later to pay back the $350 that's then due, says Mark Pearce, executive vice president of the Center for Responsible Lending in Durham, N.C.
"We see people who have borrowed $300 and have paid $3,000 two years later in fees," says Mr. Pearce. "We think that's predatory lending because the intent of the product, the design of it, is to trap people in their most desperate moments."
Yet closer regulation of lending practices is not necessarily the kindest solution. Society's moral duty to those in need is to let the market provide ample access to capital, argues Jamie O'Brien, an instructor in business at Notre Dame University. While he supports state usury laws that cap interest rates, he argues that some high-interest loans are necessary to cover a lender's risks and shouldn't be regulated to the detriment of the would-be borrower. When lenders can't charge higher rates to high-risk consumers, he argues, such would-be borrowers will simply not get the credit they seek.
"As a Christian, I believe we should all help our fellow man or woman however we can," Mr. O'Brien says, adding that in ideal cases repayment is not expected. But often, he says, "When a legal protection is put in place, either capping rates or fees, costs will be passed on to customers and you're going to see a lot of people forced out of the market."
Unethical lending practices threaten the health of the whole system, say some financiers. The Mortgage Bankers Association, for example, favors a national standard to protect consumers in borrowing. "Abusive lending is fraud, pure and simple," said Association chairman Robert Couch in an Aug. 27 statement. "Ridding the industry of abusive lending is a high priority for us, as it threatens the very basis of the best system of supplying housing capital in the world."
Many of the world's major religions address the question of lending. Most view lending as moral only if the lender is sincere in desiring to help meet the borrower's essential needs - rather than helping the borrower to indulge in capricious desires - and also if the lender helps the borrower move toward self-sufficiency.
"There should be no gain except to help the other human being," says Sheikh Yassir Fazaga, imam at the Orange County Islamic Foundation in Mission Viejo, Calif., and a lecturer on Islamic business ethics. Islam prohibits charging interest, he says, because lending is ordained to be an act of charity, not a business for profit.
For Jews, lending can be either a noble act of charity, as when the lender charges no interest, or a matter of legitimate business, according to Esther Jungreis, an author on Jewish values and president of Hineni, a Jewish outreach organization. Lending charitably is so central to the Jewish mission, she notes, that communities often establish a "gemach" where Jews can borrow as they need and repay in a dignified manner.
"It's not just getting bread on the table that matters. It's maintaining the dignity," Ms. Jungreis says. "Our faith commands us that anybody who is in trouble you try to help rather than be a scavenger.... Don't make a profit on his pain. That is predatory in our concept."
Among the practices Kerry deems "deceptive and abusive" are loans structured so the first payments cover only interest, leaving borrowers with the entire principal to pay off in full at the end of the term. Kerry also has pledged to ban the practice of hiking interest rates for credit-card users who incur credit problems with another company, such as a utility.
Not all religious leaders buy into the Kerry proposal. Some do not agree that such codes should be mandated by law. But most do agree that no principles are more basic to fairness than those of truth telling and full disclosure to clarify each party's responsibilities.
"The [greatest] possibility for transgression is in dressing up the product to make it seem like it will solve all your financial problems," says Rabbi Perry Raphael Rank, president of the International Rabbinical Assembly of Conservative Judaism and editor of a pamphlet on Jewish business ethics. "We have to make sure we're not ever crossing over into a deal that could hurt rather than help."