Regulating payday loans promotes human flourishing

| Kathryn Mollen | February 13, 2014 | 1 Comment

payday-loanRecently, Pope Francis has denounced usury as contrary to human dignity and a “dramatic social ill” because it takes advantage of another person in desperate financial situations.

Usury, or the practice of lending money at exploitatively high interest rates, has become increasingly widespread over the past decade as families struggle with economic insecurity. And, though most states have laws regulating usury and capping excessive interest rates, these laws do not necessarily address all exploitive and abusive lending practices.

If laws and regulations fail to address all abusive lending practices that exist, then we as Catholics must oppose usurious practices that exploit people’s financial problems for profit.

In Minnesota, payday lending is a growing industry practice that requires prudent regulation.

In this sluggish economy, many people have been living paycheck to paycheck and have turned toward payday lending as a way to get by. A payday loan is a small, two-week loan that is meant to cover a borrower’s urgent needs such as rent, mortgages, utilities or medical payments.

Payday loans are marketed as short-term, quick and easy ways to help borrowers get to their next paycheck. All borrowers need to do is prove they have a bank account and a job. The typical borrower, however, is generally unable to pay back the loan in two weeks and will return to the lender to take out another loan. Upon doing so, the borrower is charged an additional fee.

On average, a borrower will return nine to 10 times a year to a payday loan shop. According to the Joint Religious Legislative Coalition white paper on payday lending, Minnesota law allows borrowers to take out back-to-back loans that, when repeated multiple times, lead to staggering fees and make payback impossible.

Ninety-nine percent of payday loans are made to repeat borrowers who have become stuck in a lending trap from which they are unable to climb out. The problem is obviously not in the loan itself, but repeat borrowing that the practice encourages. By design, payday loans trap consumers in a downward spiral of debt.

As Catholics, we need to ask ourselves if that type of business practice is harmful to our community, and, if so, what can we do to change the laws regulating payday lending. St. Thomas Aquinas wrote that the purpose of a law is to lead citizens toward virtue and goodness. The law, he reasoned, is a moral teacher that plays a central role in how we order our lives in our businesses, relationships and communities.

Currently, laws surrounding payday lending do not encourage healthy business practices. The mere presence of a willing lender and willing consumer does not make a practice right or promote human flourishing.

Fortunately, there will be a bill brought before the Legislature this session that aims to better regulate payday loans by capping the number of these loans a borrower can take out and ensuring that a borrower has the ability to repay the loan, among other provisions. This reform to lending practices in our state will create a set of laws that encourages businesses to participate in healthy lending practices and will ensure that borrowers can take out loans without getting stuck in too deep a debt trap.

In his recent apostolic exhortation “Evangelii Gaudium,” Pope Francis condemned what he calls economies of exclusion and inequality. In essence, he says we need to re-evaluate economies that encourage competition and survival of the powerful at the expense of the powerless. True and healthy economic growth needs to encourage relationships of solidarity and friendship within our businesses.

Therefore, it is necessary for us as Catholics and Minnesotans to support laws that encourage, rather than discourage, healthy business practices such as the current proposal to limit usurious practices in payday lending.

Mollen is the policy and outreach coordinator for the Minnesota Catholic Conference.

Category: Faith in the Public Arena

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