The ancient evil of usury
Everyone from philosophers to prophets to the fathers of modern economics has condemned charging poor people high interest, but the practice is flourishing in California
Chicago gangster Samuel “Wings” Carlisi held the esteemed position of “boss of all bosses,” a title once held by the legendary Al Capone, according to federal court records. Carlisi was the top man in the Chicago Outfit crime syndicate, a group that dominated organized crime in the Windy City in the late 1980s and early 1990s.
The federal government caught up with the Outfit in 1992, taking down Carlisi and nine other members for their roles in the illegal gambling and loan sharking operations. In his ruling to uphold the convictions, appellate court Judge Terrance Evans described the gang’s unique debt-collection methods:
“[T]he crew prided itself on its effective debt-collection practices and held its bookies personally responsible for their customers’ past-due accounts,” wrote Judge Evans.
One delinquent borrower, Anthony Pape, was told “not even God was going to help him.” Reciting from the trial record, Judge Evans noted that, “Another of Carlisi’s heavies threatened to beat the completely bald Pape until his head turned so black and blue people would think he had hair.”
Another customer who was late on his payments, Michael Huber, desperately pleaded to reschedule payment terms with his unorthodox bankers. “Less than pleased, one of the crew’s enforcers checked Huber for a wire and threatened to mess him up,” wrote Judge Evans. “Huber was so frightened that he defecated in his pants.”
While the Chicago Outfit may have been a bit heavy-handed in its debt-collection practices, the interest rate the crew charged for a loan was a bargain. A bargain, that is, compared to the fees charged by the numerous payday loan outfits in Sacramento and throughout the state.
Carlisi and company extended short-term credit, or “juice loans,” for fees that pencil out to an annual interest rate of 260 percent. The Outfit may be disappointed to learn that they were working for chump change. Had they waited a few years, and then come out West, they could have become payday lenders and made some real money.
Although the gratification of physically collecting a loan isn’t allowed, in California it’s perfectly legal for a state licensed payday lender to charge up to 5,474 percent annual interest in this rapidly expanding niche lending business.
Usury is defined as the act or practice of lending money for interest above the legal or socially acceptable rate. The term seems archaic and mostly irrelevant in the deregulated, free-market world of payday loans. And it is even harder to fathom that for most of its history, the word referred to the practice of charging any interest in excess of the principal amount of a loan.
Historians trace the practice of usury back approximately 3,500 years, and for the vast majority of that time, it has been repeatedly condemned, scorned and prohibited for moral, ethical, religious and economic reasons. Since well before biblical times, lending money for profit has been essentially forbidden by the tenets of Christianity, Judaism, Islam, Hinduism and Buddhism.
The oldest known references to usury are found in the Vedic texts of ancient Hindu religious manuscripts dating from 1,500 B.C., which defined usury as any loan that required the payment of interest. Around 500 B.C., the Hindu lawmaker Vasishtha instituted a special law that forbade the higher castes of priests and warriors from exploiting the lower castes by charging interest for a loan.
But by the second century A.D., and continuing to the present day, a reasonable fee for a loan was allowed, and the Indian definition of usury was modified to mean interest charged above the prevailing socially accepted range.
The ancient Western philosophers—including Plato, Aristotle, both Catos, Cicero, Seneca and Plutarch—all condemned usury. Aristotle argued that “a piece of money cannot beget another,” because money was barren, or sterile, and therefore breeding money from money was unnatural. The philosophy was reflected in the civil law of 340 B.C. republican Rome, which outlawed interest altogether.
In Islam, the criticism of usury was well established during the prophet Mohammed’s life and reinforced by his teachings dating back to early 600 A.D. To this day, the prohibition of interest is a well-established working principal integrated into the Islamic economic system. Modern day Islamic financial institutions structure lending transactions by entering into risk-sharing contracts with borrowers where return is based on the outcome of the venture or investment, rather than a predetermined rate.
Jewish and Christian usury doctrines were based on biblical scriptures from the Old and New Testaments. In the Old Testament, Exodus 22:25 states that “If you lend money to any of my people with you who is poor, you shall not be to him as a creditor, and you shall not exact interest from him,” and a similar admonition is found in Leviticus 25:35-37.
Christian doctrines incorporate the same Old Testament passages, and add Christ’s command from Luke 6:27: “But love your enemies, and do good, and lend, expecting nothing in return.” Later, Saint Thomas expanded on Aristotle’s views, and reinforced the idea that since the function of money is that it is a medium of exchange, to use money for the sole purpose of compiling more, was an unnatural use of currency.
In 1515 the Catholic Church formally objected to usury because it constituted unearned income. “This is the proper interpretation of usury when gain is sought to be acquired from the use of a thing, not in itself fruitful (such as a flock or a field) without labor, expense or risk on the part of the lender,” decreed the church.
Over time—to accommodate the expansion of capitalism, commercialization, international trade and other economic factors—a pro-usury counter-movement began to take hold. And the Western definition of usury gradually shifted from one referring to any loan with an interest charge to one referring to a loan with an exorbitant interest rate.
In 1918, the Catholic Church issued Canon 1543 that modified its position on usury, and allowed charging interest on loans at a rate within the confines of civil law, provided the rate was moderate.
While it is tempting to dismiss restrictions on interest rates as impractical, outdated, and irrelevantly rooted in religion, today’s most strident free-marketeers may be surprised to learn that Adam Smith, despite his image as the father of the free-market capitalism and his advocacy of laissez-faire economics, was an advocate of usury law.
Although Smith opposed a complete prohibition of interest, he was in favor of the imposition of an interest rate ceiling. And the noted 20th-century economist John Maynard Keynes endorsed government control of lending rates “by statute and custom and even invoking the sanctions of the Moral Law.”
Throughout the ages, usury has been denounced for exploiting and oppressing the poor and lower classes, causing the inequitable distribution of wealth, and corrupting the natural world and social relations. Usury has also been equated with economic instability, as exaggerating the economic cycles of recession and recovery, as a cause of inflation, and as a precursor to the periodic financial crashes.
In California, usury is prohibited by the state constitution and other laws. Essentially, state law sets the maximum allowable rate of interest at 10 percent per year for a loan used for personal, family or household purposes.
But like any law interfering where there is money to be made, loopholes—or “exemptions” in legislative jargon—are rampant. Banks, pawnbrokers, real estate brokers, mortgage companies and a long list of other money lenders are exempt from usury law, but their interest rates are still controlled by the state Financial Code and other restrictions.
The loophole sanctioning payday lenders was created by the Legislature in 1997, and the loans were also given a specific exemption from Financial Code rate restrictions. Since that time, more than 2,000 payday loan outlets have opened.
Mike Van Winkle, spokesman for the California Department of Justice, said a permit to become a payday lender costs less than $100. Van Winkle says the permit would only be denied if the applicant has a previous felony conviction involving fraud, dishonesty or deceit.
According to industry figures, over 1 million payday loans are made each month, and one company making a significant chunk of those loans is the Oakland-based California Check Cashing Stores, Inc.
The company has several stores in the Sacramento area, and a February 23, 1999, internal employee memo obtained by the SN&R from the California Check Cashing Stores branch on Sunrise Boulevard explains the sales pitch for a typical loan:
“When a customer calls or asks how much a PRA (payroll advance) costs, we MUST tell them the rate AND the annual percentage rate. Since this really depends on the number of days the PRA is outstanding, there is no single answer. Therefore we must tell them an example. Whenever anyone asks about the rates, the response must be: THE RATE FOR A PRA IS 15% OF THE AMOUNT ADVANCED, THE CORRESPONDING ANNUAL PERCENTAGE RATE FOR A TYPICAL 14 DAY LOAN IS 391%.”
Not surprisingly, the “example” employees are required to give potential customers reflects the lowest possible annual percentage rate available, which only applies if the loan is outstanding for the maximum allowable term of two weeks.
Since the loan due date is determined by the customers’ payday, many loans are repaid in substantially less than two weeks. Another employee memo reveals that the actual range of interest will vary from a minimum of 391 percent to a maximum of 5,474 percent, the rate for a one-day loan. And the annual percentage rates are only disclosed if specifically requested by a customer from a store employee. The loan fee schedule posted in the store lobby refers only to the flat rate charged for each loan, a fee of $7.50 for each $50.00 borrowed, up to a maximum loan of $250, which costs $37.50.
Consumer advocates and other critics of the industry want to rein in the extortionate fees of payday lenders. The Consumers Union and the American Association of Retired Persons supported a bill by state Senator Don Perata, SB 898, which would curb a number of the abuses associated with the lenders. That bill was killed last week in an Assembly committee.
During a phone call two weeks ago seeking comment, California Check Cashing Stores CEO Jonathan B. Eager said he wouldn’t be available to talk until July 11, which turned out to be the day after Perata’s bill was killed.
In a brief phone conversation, Eager took issue with the label that the bill was “killed,” noting that it had been placed in suspension pending further study, not to return until next year at the earliest. He also wouldn’t address the historical views of usury, but maintained without elaboration that, “We would like to see some meaningful reform.”
His industry is supporting Assembly Bill 1581, which is widely regarded as blatantly self-serving. Chief consultant to the Assembly Banking and Finance Committee, William George, prepared an analysis of AB 1581 for the committee and has strong opinions about the bill, and the industry in general.
“Payday loans are a sad fact of life prompted by actual or perceived economic necessity arising from acute real need, concupiscence, profligacy or ignorance. The bills’ [consumer] protections provisions … are palliatives and should better be ensconced in the Code of Illusory Benefits. The yield on these loans is inordinately out of proportion to the lender’s risk,” wrote George in his analysis of the bill.
George labels the payday loan business “hideous,” and speculates that payday lenders may be deficient of conscience: “They should be embarrassed. I can’t understand how people can even be in this business.”
He said the Perata bill is better, but still doesn’t go far enough: “The bill I would like to see would do away with them.”
Robert J. Waste, a professor who chairs the Department of Public Policy and Administration at Sacramento State University has a similar opinion: “The best thing that I can say about payday loan firms is that these guys are parasites. The worst thing that I can say about them isn’t printable in a community newspaper. In an industry famous for making money off other people’s sorrows, these firms are bottom of the barrel. The Legislature should be investigating shutting down these so-called ‘businesses.’ ”
The payday loan industry counters that they are providing an important service by allowing the poorest of citizens—those who can’t get loans from traditional banks—make ends meet when times get tough. As accepted as that argument may be today, it has historically been categorically rejected.
In his 14th-century epic masterpiece, The Divine Comedy, chronicling an imaginary journey through Hell, Purgatory and Paradise, the Italian poet Dante put usurers into the same circle of hell as the inhabitants of Sodom and others engaged in acts of unnatural vice. And Saint Bernardino of Siena was famous for his passionate sermons during the 15th century denouncing the universal sins of witchcraft, sodomy and usury.
They may have had a point—after consummating a loan with almost 5,000 percent interest, it is hard to imagine a payday loan borrower not feeling at least some posterior discomfort. And if history can be trusted, the community at large will eventually feel the same pain.