Whatever Happened to Usury?

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While the subject of usury used to be a hot topic in moral theology, the Church has not had much to say on the subject over the last couple hundred years. The Catholic Encyclopedia article on Interest ably sums up the current situation:

In our day, she [that is, the Church] permits the general practice of lending at interest, that is to say, she authorizes the impost, without one’s having to enquire if, on lending his money, he has suffered a loss or deprived himself of a gain, provided he demand a moderate interest for the money he lends. This demand is never unjust. Charity alone, not justice, can oblige anyone to make a gratuitous loan (see the replies of the Penitentiary and of the Holy Office since 1830) . . . . In practice, however, as even the answer of the Sacred Penitentiary shows (18 April, 1889), the best course is to conform to the usages established amongst men, precisely as one does with regard to other prices.

Periodically, however, someone will suggest that the Church’s teaching on usury needs to be revitalized. Recently following a link from Darwin’s wife led me to the blog Siris, whose author Brandon has written a number of posts on the subject. Brandon differs from a lot of internet anti-usury warriors I have encountered in the past in that he actually seems to know something about the Church’s teaching on the matter (as opposed to trying to reconstruct a theory of usury from scratch, or simply relying on Belloc’s erroneous treatment of the subject). Brandon’s 2009 post on the legitimate grounds for charging interest (what are called “extrinsic titles” to interest) is quite good as a primer, and my only real objection with Brandon’s treatment is that he doesn’t seem to realize some of the implications of what he writes.

For example, here is Brandon discussing the justification for interest taking known as the “praemium legale”:

Moral theologians and philosophers who were dealing with the problems of the emerging banking industry began to realize that the common good was genuinely improved if you had people who were willing to lend to those who for some reason needed to borrow. Thus lending was to that extent a civic activity that should be encouraged, at least within certain bounds. So it was occasionally suggested that the government, when it saw that lending needed to be encouraged, could allow a certain amount of interest on loans generally in order to provide an incentive for engaging in the risky and occasionally expensive business of lending. Obviously there were some people who thought that this was just giving the store away; but those who proposed it as a legitimate title to interest seem typically to have regarded it as a fairly restricted thing, and it’s easy enough to see why. If you are trying to encourage actual lending, you can’t make the incentive to lenders so great that borrowers no longer want to borrow, however desperate they are. You need to find a level of incentive that won’t be a serious disincentive for borrowers. Since the point of the whole title is to serve the common good, you can’t have an incentive that in general leaves borrowers worse off — for instance, it would be self-defeating from the point of the common good law serves if you gave the lenders an incentive that regularly drove borrowers into bankruptcy and poverty. To be a just exchange, a loan has to leave both lender and borrower better off, allowing, of course, for the fact that sometimes unforeseeable events can make this impossible through no real fault of either the lender or the borrower. The tendency of the loans has to be in some way to the benefit of both parties, because only if your lending system has general tendency to improve everyone’s life can it be said to be conducive to the common good, and it is only to the extent that lending is conducive to the common good that praemium legale can be a title to interest.

We want to allow some profit on lending, as otherwise people won’t want to lend, which will harm the common good. But we don’t want interest charges to be too high, as then people won’t want to borrow, which again will harm the common good. As it happens, economists long ago discovery a method whereby we can ensure that both parties to a transaction will tend to be better off; it’s called voluntary exchange. Let lenders decide what rate of interest to offer and let borrowers decide what rate to accept. Lenders will not offer a rate unless they believe it will be profitable to them, and borrowers will not accept a rate unless they believe it will be beneficial to them. Whatever rate they agree to, therefore, will tend to be mutually beneficial.

But if you accept this, then one needn’t spend a lot of time worrying about whether or not particular particular interest charges are just. The market will weed out excessively high interest charges. Nor do you need to worry about ensuring that lenders make enough profit to incentivize lending. Market forces will ensure that they do. And when you realize that, the Church’s nonchalance about contemporary interest taking makes perfect sense.

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  1. “The market will weed out excessively high interest charges…”

    Only, it doesn’t.

    Credit card companies are doing tremendous damage to individuals and families through their usurious practices. The interest rates, already high, go up as the ability to pay goes down. The instruments themselves are pushed on those least able to manage them and, should calamity befall the card-holder, they will mercilessly scalp him or her.

    I’m usually a big proponent of market-force control but I think you are WAY off base here. There simply is no justification for claiming moral freedom to extend credit to those who are not credit-worthy and then jack up the interest rates as they get farther and farther into debt.

  2. Usury? Still alive and well at your local bank or anywhere on Wall Street. 30% on some credit cards. But hey you can get 2% interest on your CD. As Gordon Gekko said, “Greed is good.”

  3. The problem with freedom in markets as in freedom in anything else is that some people use it badly. Credit card companies engage in predatory lending practices, using data analytics and fine print to devise profitable traps for the unwary. And there will always be a segment of the population who, whether through ignorance, irresponsibility, bad luck, or a combination of all three fall into these traps. I think legal restrictions are necessary because it simply isn’t true in practice that the market will weed out excessively high interest charges, if by ‘excessive’ we use a common-sense conception of fairness rather than insisting that ‘fairness’ and ‘what happens in markets’ are everywhere and always the same. I think it’s fine to debate the tradeoffs of freedom (access to credit) v. protection (banning certain fees, payment structures, etc.) in individual cases; but I don’t think it makes sense to say that all legal restrictions on credit arrangements are unnecessary for the common good (if that is what you are saying).

  4. The price one pays for obtaining an unsecured loan Joe. I have seen “pay day” loan places that have annual interest rates that work out to 469%. I usually encounter them as I am preparing bankruptcy petitions for individuals. Once a bankruptcy petition is filed, my bankruptcy clients usually are deluged with credit card apps because they now have a good debt to income ratio and the companies know they can’t do a chapter 7 for eight years.

    One secret of credit card debt that most people are generally not aware of, is that outside of major urban areas, and often not there, credit card companies usually will not provide a witness to prove up their claim at the time of trial. This will lead to a motion to dismiss without prejudice. The debt is still there, but the credit card company has no judgment and therefore cannot garnish wages, place liens on real estate or bring the debtor before a court on a citation to discover assets to compel seizure of assets to pay the debt or the entry of a monthly payment order. Most credit card defendants could successfully fight a credit card lawsuit if they simply show up in court, and deny the claim, (they usually have no way of knowing if the credit card company has computed the amount they owe correctly) and request a bench trial. However, most of them do not show up and the credit card companies obtain judgments by default.

  5. I think unsecured lending provides a valuable service for people who have a sudden emergency, a transmission goes for example, and lack the funds to meet the emergency. Additional regulation simply makes this type of lending unavailable to more people. To those completely over their head in unpayable debt, bankruptcy is an option that is far more painless than most people realize. To those who can manage a lump sum payment of 20-25 percent, most credit card companies will settle for that after a debt is not paid on for six to twelve months, although the debtor will pay income tax on the amount of the debt forgiven.

    Most people are able to handle the credit given to them, and to make broad policies based on the minority who cannot would be a mistake.

  6. Most people are able to handle the credit given to them, and to make broad policies based on the minority who cannot would be a mistake.

    I suppose I’m conflicted on this. I’ve heard of credit card companies acting outrageously in certain cases, raising interest rates 10-20% on balances after one missed payment for borrowers who have outstanding credit. It seems to me that there is an information asymmetry between consumers and credit card companies regarding the structure of these debt payments. It would not upset me to see some of these practices proscribed in a world where we had intelligent legislatures, rather than people with no background in finance/economics responding to interest group pressures drafting the laws. I think that, in theory, it would be possible to craft credit restrictions that best served the common good; in practice, I think they are unlikely to be correctly identified by the political process, and that legislatures should be very cautious.

  7. The type of debt that draws my ire John Henry is student loan debt. Here we have vast sums being lent to young, inexperienced people and every cent of it is non-dischargeable in bankruptcy. If a default occurs, the collection charges tacked on are obscene. There are programs that limit monthly payments for debtors in distress, but the loans loom over them for decades, effectively destroying their credit, with no way of getting out from under other than repayment. This is an area that needs drastic reform, as does the entire higher education “industry” in my opinion. If my wife and I were unable to pay for our son’s college, he would be incurring loans of around 15 k a year. His law school loans would probably tally at least 30 K a year. Sending young people out into the world with that type of debt on their back, from which there is little relief except payment over decades, is madness as a social policy.

  8. Don, are you saying that a judgment is not enforceable on unsecured debt? That a credit cannot garnish, place a lien or otherwise collect in the event the court grants a judgment against the debtor? As for bankruptcy, having been there and done that (more than 20 years ago), i can state unequivocally that it is not the “easy way out.” First there were the lawyer fees, then the court approvals, then the worst: the stigma that follows. You can’t get credit for years. That black mark stays for a long time on your credit rating.

    Having fought it out with debt collectors and having agreed to a court-approved stipulated settlement, I now question the wisdom of paying anything back because of the outrageous interest rates and junk fees that have since accumulated, along with the fuzzy math that creditors use to figure what a debtor owes.

    So, my question is: What perils do I risk by simply suspending payments and letting them get a judgment, as they threatened to do in the first place? If the judgment cannot be enforcement, other than the “stain” on my already blotted credit history, what inducement exists for me to pay the debts off.

  9. “Don, are you saying that a judgment is not enforceable on unsecured debt?”

    First they have to get the judgment Joe. Most credit card companies simply will not provide a witness to prove up their case at the time of trial.

    “First there were the lawyer fees, then the court approvals, then the worst: the stigma that follows.”

    Lawyer fees in my area Joe average about $1200.00 for a Chapter 7, which includes the filing fee of $299.00. Most of my clients have no difficulty obtaining credit as long as they are employed and most of their pre-bankruptcy debt is being wiped out in bankruptcy. Actually their problem not infrequently is too much credit being granted to them.

    “What perils do I risk by simply suspending payments and letting them get a judgment, as they threatened to do in the first place?”

    A debtor should always make a creditor prove up their case at trial. Often times they can’t. Social security is not subject to garnishment even if a judgment is obtained. A judgment would allow a lien to be placed against any real estate owned by a debtor.

  10. I of course do not give legal advice over the internet Joe, since there are too many variables depending upon factual circumstances, and laws vary from state to state. My observations are general in nature and I am not telling anyone reading my comments to take any particular action based upon them. As always, the best course of action for anyone with a legal question is to consult an attorney in their area, preferably one who does not charge for an initial consulation.

  11. Blackadder,

    I think Brandon’s focus was not so much regulatory (given that he admitted that most legal lending in this day and age was at least justifiable under tradition Catholic understandings of usery) but moral — along the line of, “If you are a lender, what considerations should you be taking into account in not over-charging interest.”

    Overall, I take your point that the market provides a reasonably good mechanism for determining interest rates that are fair, since given time and information there you should be able to get to an interest rate which is pretty close to the lenders cost of servicing the type of borrowing you are. That said, one could imagine situations where the market would allow a lender to charge more interest than is “fair”, perhaps based on some sort of market distortion or information asymmetry, and it seems to me that in that sort of situation the moral stricture would kick in. (Example: If I am a lender and for some reason know that a particular person is a good risk — as in, unlikely to default — yet also know that he is going to have a hard time proving that to the other lenders available to him, it would be wrong of me to take advantage of my information asymmetry to charge him an excessive rate of interest given what I know but other people don’t.)

    Of course, the ironic side not in this regard is that there will be the most opportunity for usury in the least free market situations — because that is where it is more likely that people won’t be able to find other alternatives to an unfair rate.

    I suppose there’s also the question, which market theory doesn’t deal with: Are there situations where from a moral point of view one should simply refuse to give a loan rather than offering one at an appropriate rate, because the borrower is such a high risk that and in so much trouble already that a fair rate would be ruinous.

    It seems to me that at the level of regulation, this is probably a bad idea because often people will try to secure loans even when this would be ruinous to them, and if you make it so they can’t do it legally they may turn to an illegal source which would be far worse. However, at a personal level I could see it as being a good idea in certain situations for a lender to encourage someone to look at options other than another loan rather than just making a loan at the appropriate rate.

  12. I understand, Don, and thank you for your general advice. State laws governing lending practices vary for one thing. In Wisconsin, where I live, you MUST get individual creditor OK every time you change a payment under a Debt Management Plan. I had a DMP, under which I kept 4 creditors at bay at lower interest rates. Then I ran into further financial problems exacerbated by unexpected medical bills and was forced to seek lower monthly payments under the DMP. Long story short: Because the DMP was managed by a third party out of state and the necessary approvals from each creditor took more than 30 days to arrange, each one declared the DMP null and void and demanded that I adhere to the original terms. So instead of 9% interest, I was back to 29.9.

    For weeks I wrote letters, made phone calls to ask forebearance, etc., and never got anywhere so I said screw it, sue me. Which 2 of them did. So I go to court to answer and the lawyers in each instance separately get on on the horn from another location with a court-appointed mediator and we work out a stipulated settlement to avoid judgments. Me, being the honest chump that I am, I agree to pay most of the debt back and am warned that if I fail to keep up payments, then judgments will be entered. And since I don’t want to go back to court and face a judge who I am certain will side with the creditors, I figure I better pay. But if I don’t and they get judgments, what’s the worst that could happen? I’m on Social Security only, and my wife and I previously had separated our finances, community property laws notwithstanding (they can be overwritten by executing a separate legal agreement). So they can’t get a lien on her house since I don’t own it.

    It still galls me that the creditors “won” but I am having second thoughts about the stipulated settlementbecause I’ve gone many extra miles and they haven’t. I mean, if Chase is out $1,200 because of me, will they suffer? Other than my conscience, what obliges me to keep making payments?

  13. John Henry,

    I suppose I’m conflicted on this. I’ve heard of credit card companies acting outrageously in certain cases, raising interest rates 10-20% on balances after one missed payment for borrowers who have outstanding credit. It seems to me that there is an information asymmetry between consumers and credit card companies regarding the structure of these debt payments.

    Though the flip side is that there’s an information asymmetry between the credit card companies and the consumers too, which the consumers don’t necessarily want to solve. For instance, how many people would want to call up their credit card companies and say, “Hey, just so you know, I’m thinking of getting divorced and so my wife and I are both running up consumer debt right now in hopes of pushing it off on the other in the settlement,” or “Just wanted to let you know there’s a lot of talk about layoffs right now at work.”

    A lot of the more frustrating things that credit card companies do are an attempt to get more money out of people who start showing danger signs before it hits the point where it’s too late and they take a loss. I agree with not wanting things to be too chaotic, so it seems like there’s a balance to be struck, but most of the time if their options are cut, they just charge everyone more to spread the risk and deny credit to the people who are most marginal — which sends them to much more unsavory places like payday loan sharks.

  14. I think we are letting credit card companies off the hook too easily. Case in point:

    My wife pointed out that our Amex was at 27%. We hadn’t missed a payment and my wife pays the bills. She just hadn’t noticed it had gone up from 6% to 27 % on $3000 in debt with a limit of $8000.

    We are hardly a credit risk.

    I called when making a cup of tea. It was very hard to get hold of someone who could answer my questions. All I wanted to know is what had changed to warrant the interest rate increase. Each level kept saying ths same thing “we periodically reasses the interest charges…” and bucked the question as to who made that assessment to some other department.

    After 15 minutes of irritation, I got hold of a supervisor in the department supposedly in charge of such assessements and, when I got the same “periodically reassess” answer, I told him to close the account, cancel the card, and that I would send them a check for the full amount that day.

    He tried to talk me out of it but I insisted and hung up.

    I carried my tea to the living room and in the 20 feet of travel, the phone rang. A different Amex representative was on the phone, asking me “what can we do to get you back as a customer. You’ve been a good customer for so many years…” (Apparently not good enough to be treated fairly though.) I told her that I couldn’t think of anything that would change my mind and she offered to reopen the account with a 3% interest rate.

    15 feet. 24% interest rate change. That’s all that change.

    I’m sorry Don. I don’t think there is any way to dress up these usurious charlatans as other than a despicable, loathesome blight on the economic scene. They differ from their Pay-day Loan cousins only in the cost of their clothes. Underneath, they thrive on taking advantage of human misery and that, my friend, is the very definition of immoral.

  15. “I’m sorry Don. I don’t think there is any way to dress up these usurious charlatans as other than a despicable, loathesome blight on the economic scene. They differ from their Pay-day Loan cousins only in the cost of their clothes. Underneath, they thrive on taking advantage of human misery and that, my friend, is the very definition of immoral.”

    No, they differ vastly in the amount of per annum interest they charge, and in the fact that their loans are completely unsecured. Often pay day loans get titles to vehicles to secure the debts and voluntary wage assignments to allow garnishment of wages without judgments. Credit is a product like anything else. If you don’t like the product on offer, you go somewhere else. Most local banks will give unsecured loans to people with good credit on better terms than most credit cards. However, they will also be more aggressive in their collection efforts if the loan goes South than most credit card companies. As for taking advantage of human misery, if unsecured loans were not available to most people, I do believe that the total amount of human misery would greatly increase as people would not have the funds to meet emergencies.

  16. It’s not so much that I want to defend the behavior of credit card companies — which is often incredibly frustrating and at times somewhere between predatory and incompetent — but at the same time, once one gets a card, they basically agree to lend us large amounts of money, at our convenience, without asking us further questions. That’s a pretty amazing level of convenience by historical standards.

    And if we don’t want to deal with their games — a simple approach is simply not to take their money. (If we feel we can’t forgo this, then it would seem that at a minimum they’re better than the alternatives.)

  17. I’m certainly out of my league on this topic (like so many others; but, that’s why I read this blog: to learn).

    I tend to come down on the “interest is usurious” side, but not too strongly. But, I think that this is a symptom of an economy that is controlled by corporations that are no longer tied to a location, those that are so big that they can afford to make a few customers mad.

    I understand economies of scale, and how larger corporations can result in greater efficiencies. But, they become impersonal. And, that’s not better.

  18. “I’ve heard of credit card companies acting outrageously in certain cases, raising interest rates 10-20% on balances after one missed payment for borrowers who have outstanding credit.”

    That happened when I moved. Excellent credit. In the move forgot to let the company know. When the bill came and when I finally got to it it was late. Got a notice that they were increasing my interest rate. Called and cancelled the card. Done.

  19. But if you accept this, then one needn’t spend a lot of time worrying about whether or not particular particular interest charges are just. The market will weed out excessively high interest charges.

    I actually very much agree with this, on three conditions: that there is relatively little coercion, that there is relatively little fraud, and that we aren’t operating under emergency conditions. It won’t be true of a Mafia-dominated lending market, nor will it be true of a market in which external factors are causing borrowers to go into desperate panic, but it will be true if one has in place a high-trust lending system operating under standards that make for calm and open negotiations for loans. Whether a given case of lending is a matter of just exchange depends a great deal more on what happens during the negotiation than on the particular numbers decided; and, in fact, the interest rates in banks founded by St. Bernardino and his associates would have been well above anything a bank could charge today, because the risk was so much greater. The importance of negotiation doesn’t really come out in the extrinsic titles post, but that’s because it was primarily trying to show the kinds of interest that moral theologians had argued at length that a non-usurer could still charge; the post also uses relatively uncontroversial examples, which by definition are fairly conservative in character, whereas negotiation would at times get into much more complicated and controversial territory (hence the need for serious negotiation). The moral theologians who did the work on the theology of usury had as their main targets three groups of lenders: (1) people who acted as if lending itself, rather than the negotiation over the loan, gave them the right to interest; (2) people who failed to negotiate honestly, either coercing the borrower or hiding the interest that they were actually going to be charging under rhetorical tricks; and (3) people who in lending made little or no provision for honest borrowers who through no fault of their own might be completely bankrupted (or, in Renaissance times, worse than bankrupted) if the loan went south. If some prior thought is taken to preventing these three problems, negotiation takes care of almost everything else.

    It’s important to understand, however, (1) that interest rate is not the only form of interest in the sense used in moral theology (any fees charged are also considered, and notoriously this is a place where borrowers sometimes get tripped up); and (2) that markets work statistically, but ethics does not. To say that the market will weed out excessively high interest (whether rates or otherwise) is not the same as saying that there will be no excessively high interest, only that lenders will not be able , provided sufficient information is available, to get away with it consistently in the long run. But moral theology has to consider what standards should be upheld in each individual contract, regardless of what statistical fluctuations the market might be going through at the moment.

  20. I don’t dispute that the expansion of credit has been generally good for commerce and that, by extension, that the physical human condition is generally improved thereby. I generally favor free market controls and tend to be skeptical of even well-intentioned government interference. However, it is too easy an answer to say that the consumer can take it or leave it. (Forgive me for paraphrasing. If this is not what is being said, please clarify.)

    There are two separate questions on the table: 1) what government controls, if any, should be applied to credit and 2) should the Church stake out a more restrictive ground for moral culpability.

    I believe that the knowing lending to those that one expects to have trouble repaying is fundamentally wrong unless doing so is providing for basic human needs and, then, it could only be moral if one was charging an interest rate that merely protects one’s interest in the transaction.

    Since credit card companies – and mortgage companies for that matter – have more access to information than anyone else, they cannot claim ignorance as to a particular borrower’s condition. It is, therefore, right and proper that they take a back seat in bankruptcy proceedings. Frankly, if they did better due-dilligence, they wouldn’t take such a beating in court.

    As a legal matter though, I don’t think it is right for credit card companies to engage in predatory lending, impoverishing millions with debt that can only be resolved through bankruptcy. Even if it is as easy on the pocket-book as you make it out to be, bankruptcy is perceived by many to be an admission of failure as a human being that many persons of character are unwilling to embrace.

    I have known many who have suffered for decades to satisfy their obligations rather than file for bankruptcy. I have known others who filed for bankruptcy but were shattered by the experience – suffering every bit as much within as those who struggled to pay.

    Which brings me to the moral.

    It simply is not right to financially torture those who have gotten themselves in a bind. It is kicking a man when he is down. it is letting a man drown while we watch from the bridge. It just isn’t right and, therefore, the Church should speak loudly.

  21. Ms. Elizabeth Warren will save us when she takes over the Federal Consumer Finance Protection Bureau. Beginning this month, large ($10 billion-plus) mortgage originators, banks, etc. will be confronted with the Bureau, which will virtuously clear products for families and push markets in the right direction. Banks have been pounding on working class Americans. Thank you, Dodd/Frank.

    Finance 101: high yield, high risk. Many years ago, I analyzed regional “credit card” banks. They did not earn an appreciably higher return on assets or equity (ROA/ROE). Loan loss expenses and overhead dissipated nearly all the excess (over other consumer loan rates) interest revenues. I thought the business model was marginal, even at the high rates. And, many of the credit card banks were, relative to the high risk nature of the business, under-performers. In fact, one I followed failed at a time when no banks were failing. This go-around, I am mildly surprised credit card losses have not been more severe.

  22. I’ll add my voice to the chorus of people pointing out that while high interest rates aren’t necessarily immoral, predatory lending (taking advantage of information asymmetry) is. Some of these mortgage contracts should be considered voidable for unconscionability.

  23. G-Veg
    I suspect that the quietness of the Church is due to the myriad of modern factors about which even Rome is confused. The ordinary person can not only owe incredible interest after a engine repair credit card charge; but another ordinary person can take a cash advance from a similar card and buy Starbuck’s stock or Tiffany or Coach and come out way ahead in six months and after paying back the cash advance. I think Catholicism has to establish think tanks for complex subjects like modern finance…rather than waiting for a Catholic professor from Georgetown or from some other Catholic University to comment. I think Rome has to organize think tanks which she could easily fund by e.g. requiring a
    special donation from each Catholic during one year only. Imagine if worldwide the result was an average two dollars from each Catholic. That’s over 2 billion dollars which would fund Catholic think tanks in perpetuity. Presume the US would do it’s usual 33% to the fund, it’s per capita donation would make up for the severely poor.
    Much more organization and use of think tanks

  24. “And there will always be a segment of the population who, whether through ignorance, irresponsibility, bad luck, or a combination of all three fall into these traps.”

    J.H. You forgot one – it is called “choice”. Most people make choices in their lives which have consequences i.e. go on vacation instead of saving, etc. If, as God intended, we are to have “free will” then there will be consequences to our choices.

  25. The price of money will always be partly a function of the risk perceived by the lender. In other words credit card companies and so-called predatory lenders rely on highly profitable loans to offset a high rate of substantial losses. I seem to recall studies done a few years back that concluded that these types of lenders were no more profitable than more conventional lenders.
    That said, I do agree that taking undue advantage of information asymmetry can be immoral, and as Don points out this goes both ways.

  26. CatholicLawyer,

    The reality is that the present system rewards those who make poor choices and are willing to steal and punishes those unfortunates who are too honest to do so.

    I see between three and five bankruptcy records a month. I obtain their records in relation to fraud investigations so it is an admittedly select group. My comments are NOT meant to suggest that those who have availed themselves of bankruptcy protection are doing anything wrong.

    In many of the filings I see, a pattern of fraud and theft is plainly evident. They come to the US, run up debts and purchases services that they have no intention of paying. Creditors win a few court cases against them and they go through bankruptcy. They discharge tens of thousands in debt and leave bankruptcy with their house and car and cash. They lie about their marital status, their residence, their assets, their work, and on and on and on…

    The point is that bankruptcy exists to give people a fresh start because there is a point of indebtedness where there is no way out. It was never meant to be used thus.

    If you are an honest man who makes a mistake or suffers a calamity, you shouldn’t be stripped of everything you have while trying to pay off your debts. It shouldn’t be true that bankruptcy is the preferable state to paying off one’s just debts and the predatory practices of lending institutions and credit companies shouldn’t be allowed to steal a man’s dignity through a thousand cuts to his wallet. God forbid you reach the point at which you can do nothing else but live week to week dealing with a pay-day loan scam that makes you poorer and poorer week by week.

    So… Yes. Of course there are consequences but I seriously doubt that Christ would have approved of the practice of impoverishing your neighbor because he was foolish enough to strike a poor bargain.

  27. “They discharge tens of thousands in debt and leave bankruptcy with their house and car and cash. They lie about their marital status, their residence, their assets, their work, and on and on and on…”

    Exemptions vary from state to state. In Illinois debtors have a homestead exemption of $15,000.00 in their home and $2400.00 for a vehicle. The homestead exemption is $30,000.00 for a married couple where they both own a home and each spouse may claim a $2400.00 exemption in one vehicle.

    The vast majority of people going through bankruptcy lose none of their property due to the bankruptcy exemptions being adequate to cover the equity they have in property. I’d say that in the bankruptcies that I file, there might be one case out of eighty where there is any asset for the trustee to attempt to sell, and often that is a house where the debtor is eager for the trustee to sell the house so they can get paid the homestead exemption at the closing.

    Bankruptcy fraud is a criminal offense and occasionally the Department of Justice brings charges for it. However, the bankruptcy trustees do not have the manpower or the time to check on the validity of all the information on the bankruptcy petition, due to the vast number of them. At a typical meeting of creditors the trustee will often have 35-50 bankruptcy debtors to question and quite a few documents to review in regard to each case. Creditors of course can take part in the bankruptcy, engage in discovery and block bankruptcy discharges for fraud. I have represented creditors in such actions. However, in the vast majority of bankruptcy cases the creditors do not appear at the meetings of creditors, and no action is taken by a creditor in the bankruptcy, except to provide reaffirmation agreements where individuals reaffirm their mortgages, car debts and other debts secured by an interest in property. Part of the reason for this lackadaisical attitude on the part of creditors is economic, in that having an attorney review each bankruptcy filed and take appropriate action would be prohibitively expensive, and because creditors by and large do a very poor job of taking steps that can help protect their debts in bankruptcy due to poor internal procedures and acting fast enough after a debtor files bankruptcy.

  28. G-Veg;

    I do not understand your point. Are credit card companies being taken advantaged of by borrowers or are they predatory? Both? Neither?

    I know that bankruptcies increase by 25% within a 30 mile radius of where a casino opens – choice pay rent or try to win big.

    Government interference in the market will not necessarily make it “more” fair. It will limit choice and options. To place the blame all on the credit card company is erroneous. In the end, having government intervene for the few limits the freedoms of the majority. Credit is only a tool if used properly.

    I advise clients not take out loans against possible settlements all the time because of the high interest rates. I have seen them ignore my advice and borrow for the poorest of reasons. Whose fault is it then that after competent advice (I am assuming I provide such advice) they refuse to listen and take out the loan anyway. Who am I to say “no”; because I think I am smarter/more educated/brighter so they must do it my way? It is their life.

    God forbid, you are making assumption about how I have had to live because where you think I am now.

    May God Bless Your Day

  29. CL,
    I agree and would point out that even if we agree that it is morally wrong for a lender to extend credit at high interest rates “against possible settlements” when they know that the borrower has only the “poorest of reasons,” it is doubtful that lenders know the reasons, and criminalizing such conduct would only drive it underground resulting in even more onerous terms.

  30. Joe,
    I do not understand your point. A write-off is simply a deduction of a loss that is analogous to an inclusion of income.

  31. My point, Mike, is that the ability to write off bad debt mitigates if not totally eliminates losses for creditors.

  32. Joe,
    You do not seem to understand basic tax or accounting. That is like saying businesses don’t care about expenses because they can write them off, which is like saying businesses don’t care about profits. Bad debt losses are business expenses that reduce or eliminate profits, which are the point of the business. In no way do bad debt deductions come close to eliminating the losses for creditors — elimination would occur only in a world with 100% tax rates.

  33. I understand that, Mike, which is why I used the word “mitigate.” And a good CPA can find a way to fudge it.

  34. Joe, I’m a tax lawyer and, no, a good CPA will not find a way to fudge it. I don’t know where you get that idea. There is no way to fudge it. To say write-offs are easy is silly. Yes, it is easy to deduct valid business expenses, just as it is easy to include all income — so what? That is the point of a net income tax — to compute profit and tax it. Do you think that companies with reduced or no profits are happy just because their tax is correspondingly reduced or eliminated? Right. Trust me, a CEO who reports to his board that the bad news is we made no money but the good news we is we therefore paid no tax will not be well-received. He will be viewed as an idiot.

  35. Mike, I got that idea after working many years on Wall Street and journalism. Do I need to dredge up Enron and Arthur Andersen, WorldCom and numerous other examples of “creative accounting.” Do we need to revisit how the books are cooked by unsuitable revenue recognizion, inappropriate accruals and estimates of liabilities, excessive provisions and generous reserve accounting and intentional breaches of financial reporting requirements?

    I didn’t just fall of a turnip truck, Mike. One has to be either naive or blind to the egregious accounting crimes that are rife in the history of corporate America. If you want to believe that everyone adheres to the general principles of standard accounting practices, far be it from me to disabuse you of that notion. But I live in Realville.

  36. Catholic Lawyer,

    I apologize for being obtuse. Let me be clear: there are two questions on the table, 1) what government controls, if any, should be applied to credit and 2) should the Church stake out a more restrictive ground for moral culpability.

    As to the first question, conscionability must be in question at some point in contracting debt. Surely this is shy of the freedom to increase interest rates on closed accounts, 50%+ interest rates, hidden fees and intentional acts to push debtors over their limits. The State has a duty to step in to avoid injustice. Admittedly, this can be a difficult course for government to chart but there must be limits and I don’t believe that the present allowances are just.

    Running parallel to this justice point is that there is a basic duty to avoid contracting debt that one has no reasonable ability to pay. Bankruptcy fraud is a serious problem and creditors have a right to protection but their failure to mitigate the ill effects weighs against them. Don notes that Trustees don’t protect the interests of creditors very well and that many creditors don’t take even minimal efforts to protect their interest. Joe Green notes, quite correctly by the way, that part of the calculus is that a creditor’s ability to mitigate the ill effects of their poor “choices” through write-offs feeds the problem.

    In the final analysis, creditors are being shafted but they seem to have accepted that situation so long as they can pass off those losses on others. Many of those “others” are those who can ill afford the business-savvy machinations of an MBNA or AMEX. Short on cash and barely making their ends meet, it is unfair for the card companies to pass off the costs of their bad business choices by increasing interests and otherwise enslaving the debtor. To be perfectly frank, I don’t care that the debtor in that position got their through bad choices, it is no more fair to make slaves of men who reached that condition through bad choices then those who reached that condition through calamity.

    There is a role for the State in this situation and, due to the political consequences of placing a limit on usurious interest, the State has abdicated its role.

    As to the second and, for the record, the context of the post itself, the Church should loudly proclaim that it is morally reprehensible to use economic control over lending to make slaves of men. Usury is wrong. It is as simple as that but the Church has masked the message beneath an ornate and complicated argument. The Church’s position may be properly articulated in the hallowed halls of academia but the common man needs clear, understandable guidance.

    Christ drove the money changers from the Temple, He didn’t argue them into submission or write a treaties on the matter. The Church should unequivocally state Her preference for the poor and smack down the convoluted argument that the greater good of a world’s economy justifies the destruction of those in the poorest of economic circumstances.

  37. Well framed, CL. It would seem to me that lenders carefully factor in that the small number of deadbeats who cause paper losses represent merely the “cost of doing business” and more than offset by the enormous profits made on the vast majority who do not default.

  38. Mike, worked five years at The Wall Street Journal as an editor and had a front row seat to all the shenanigans.

  39. Jose Verde:

    Today’s problem (FDIC insurance losses since 2008 approaching $100 billion) is if/when more than 5% or 6% of a bank’s loans do not pay it’s pretty much “curtains.”

    Banking may be over-regulated, the margins low and there is too much competition not only from other banks but from unregulated finance companies and GSE’s.

    I pay 2.75% on my first mortgage, an adjustable rate loan I’ve been paying for 27 years, and 3.25%, prime, on my second. If the bank pays 0.1% on funds, the spread is just over 3% on the second. Then, there are servicing expenses, paying my taxes and insurance, and providing for the (hopefully) few deadbeats. There may just be enough to provide bank investors with about one-half the rate of return of non-bank equity investments.

    Actually, the IRS standard for taxable deduction of loan losses is stricter than the Federal bank regulators’ and GAAP. Plus, the lender, usually a bank, borrowed the money/deposits and paid interest, usually about 3%-age points below the interest rate charged on the loan, it loaned and did not collect. The bank (or FDIC in a failed situation) must repay the depositor and the bank “sucks wind” on the loan losses.

    I’ve been in this business for 34 years. I’ve been interviewed by j-men and women. They never got it right. Not even close.

    PS: I’m one of the suckers that paid their loans.

  40. T. Shaw, everyone has a story, and it’s admirable to play by the rules. I have always tried to live up to my obligations, financial and otherwise, but sometimes things are beyond one’s control.

    Such as when I got a VA home loan back in the 70s after I got out of the Navy, sold the house five years later to a Realtor who rented it out and pocketed the money instead of paying the mortgage, which I foolishly thought he had assumed. Months went by, no notice from the bank about the arrearages; the bank wasn’t worried since the VA guaranteed the loan and the Realtor wasn’t worried because legally he was off the hook. The renters skipped, the house went into foreclosure and when the bank was made whole by the VA, guess who the VA came after. Me. Forced me into bankruptcy and ruined my life.

    So, in America, the big fish always eat the little fish. No one eats the big fish.

  41. Ok, Joe, got it.
    But what do those shenanigans have to do with being able to deduct legitimate bad debt expenses?
    And what is so bad about factoring in expected expenses in one’s business model? Who would not do that?
    I continue to be genuinely mystified at your point.

  42. Sorry, Joe. I neglected to read your last post. Big fish, little fish. Got it. You are a journalist.

  43. And Joe, since VA loans were assumable in that era, why didn’t you make sure that your buyer assumed the loan? At the closing your loan should have been paid off or assumed. You sold the house subject to your mortgage which you kept? Did your buyer pay anything? Sounds like he didn’t even need a loan. Who closed your loan? Were you paying attention at all?

  44. Holy kicking a man when he’s down, Batman!

    The man opens up about a mistake that he characterizes as having ruined his life and you heap scorn on him?

    I advise writing this one down so that you don’t forget it when the first opportunity for Confession comes around.

  45. Well I guess my last sentence could be taken that way except for the heaping part. If so, then I apologize. But it looks to me like he got taken by one crooked realtor and paid a heavy price for not hiring a lawyer to represent him. That is genuinely unfortunate, but I still do not understand the relevance of a lender’s so-called “easy” ability to deduct losses related to bad loans.

  46. Mike, the VA loan at that time and perhaps still is always kept in the veteran’s name even though it was “assumed” by the Realtor. I didn’t read the fine print, didn’t have a lawyer and trusted the guy would pay off the mortgage. As for your other points, I happily concede that there are legitimate deductions for bad expenses, key word being “legitimate.” It would be off-topic to elaborate on “shenanigans.”

    As a postscript, I did ask Sen. McCain at the time for help in interceding with the VA but nothing came of it. The VA insisted the note was in my name despite the “assumption” clause that was supposed to be in there.

    I’m neither a lawyer or an accountant, but I am a lifelong skeptic, an occupational hazard I’m afraid.

  47. Joe,

    Sorry for your loss. Only thing I ever got from the VA was a couple months tuition benefits. That showed me. My Uncle Tom (RIP) WWII vet (tanks North Africa, Sicily, Italy up to the Po Valley) refused to have anything to do with them.

    Sounds like a typical, untoward government program. And, our children/grandchildren will be destitute over such like.

    I can’t figure who’s worse bankers, congressmen, realtors, used car salesmen, or . . . . Hey, these guys make lawyers look good.

    Don’t forget, #!@& the vet.

  48. Despite that bad experience, I got some decent care at VA hospitals over the years for which I’m grateful.

  49. Today’s problem (FDIC insurance losses since 2008 approaching $100 billion) is if/when more than 5% or 6% of a bank’s loans do not pay it’s pretty much “curtains.”

    See the Federal Reserve data. Loan delinquencies suffered by commercial banks ca. 1991 and today are in that range, only a small minority of banks have had to be put in receivership.

  50. Understood, Joe. A quick Google confirms that historically VA loans normally kept the vet on the hook even if assumed by a new buyer. This is a crazy rule that really undercuts the entire benefit of assumability, but was probably grounded in the predicate that ever increasing home prices allowed for little risk of loss to the VA (and therefore the vet). The process did change in 1988 to require bank approval with the advantage being that the approved assumption removed any risk to the vet. In your case even if after 1988 the real estate agent buyer obviously did not go through the approval process and therefore did not really assume the loan at all thereby burning you. Your skepticism is well-earned as a consequence. I always advise people to hire their own attorney for residential real estate closings, but no one ever takes my advice. For the most part it works out because the closing attorney representing the lender is almost always honest and competent. In your case, I’ll bet the realtor closed the loan himself (permitted on some states) even though he was also the purchaser, which allowed him to basically defraud you, but probably non-provable legally. Quite an outrage really.

  51. When I lived in NY, Mike, it was customary to hire a lawyer in a real estate transaction. This deal took place in AZ and the Realtor handled the sale and it all seemed kosher. An arcane business indeed. A lesson learned too late and subsequent investigation showed many other vets were in the same boat as me, which may be why the law was tightened in 1988. However, moot now, and one must move on.

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