The Usury Battle Continues

The New Mexico state legislature just finished its session with surprisingly good results.  Only a couple of the lawmakers were arrested to drunken driving, there were no reported fistfights, and no one filed any new lawsuits for sexual harassment against the governor.  Even more surprising, the state finally did something about the exorbitantly high interest rates charged in the state.

Usury, the unethical charging of an exorbitant amount of interest on a loan (long a hot topic of debate here in New Mexico) is finally changing.  About four thousand years after Hammurabi solved the problem, the lazy lawmakers up in Santa Fe finally got around to fixing the problem, too. 

If you were to measure the speed at which the legislature moves to solve problems, you’d be hard pressed to find a chronometer.  By comparison, lame Mississippi mud turtles and crippled hearse horses are streaks of lightning.  Eventually, you’d probably end up pacing these sluggish politicians against the formation of stalagmites or the erosions of canyons.  Naturally, you’d have to give the legislature a generous head start.

Supposedly, the argument against the prohibition of interest rates that would make a mafia loan shark blush was that capping the rates would deny the poor a source of credit during an emergency.  Using the same logic, we should allow arson to provide a source of heat during the winter.  It would be cynical of me to suggest that the opponents of such measures receive financial contributions from PACs supported by the loan industry.  

Loans are a necessary part of an expanding economy, and connecting those with money to lend with those who wish to borrow funds to build or expand a business is one of the primary purposes of a bank.  But, what is a fair interest rate to charge for this service?  Across history, there has been an active debate on where to draw the line between a fair rate and an interest rate that takes advantage of the desperation of the borrower.

In roughly 1790 BC, Hammurabi established his code containing a prohibition of interest rates above 33%, a fairly generous rate.  Obviously, the monarch would not have felt the need to establish a maximum rate had there not already been people willing to take an unethical advantage of the desperate need of the borrowers.  

By the time of the Roman Empire, while banking was a relatively small-scale activity for shopkeepers and the lower classes, loans were usually private affairs between rich men seeking to make a profit or to secure funds until harvest time.  While there were no restrictions on the amount of interest that could be charged, the rates usually were 4%, 12%, 24% or some other multiple of four, evidently because of the difficulty of doing math with Roman Numerals.  

After the Romans, the first usury laws were set by religions, the majority of which considered that any form of interest charged against a loan was a sin and thus prohibited, though several religions applied the prohibition only to other members of the same faith, allowing the lender to freely charge interest against non-believers.  

During the Crusades, first England, then many other European countries, used the charge of usury to expel the Jews (although though the Crown’s seizure all of the property of those expelled was probably the chief motive).  After the reformation and the concomitant slow growth of pawn shops, religious leaders relaxed their prohibitions against lending money.  This slow acceptance of loan making and charging interest on the loans was central to the plot of Shakespeare’s Merchant of Venice.

Slowly, most of the world’s religions either relaxed or completely dropped their prohibitions on lending money.  The Muslim faith still officially prohibits any form of usury, and the twisted logic—both legal and theological—to circumvent this prohibition would require far more space than this blog to explain.

In the United States, there are few federal laws regulating loans, leaving the matter of regulating interest rates up to each state.  The federal government outlaws the use of force to collect a debt and mandates both racial and sexual equality for applicants, but has no laws mandating how much interest can be gouged out of a borrower.  The matter has come up for debate in Congress repeatedly, and the Supreme Court has ruled that Washington has the authority to regulate such rates under the interstate commerce provision of the constitution, but so far Congress has failed to pass any meaningful regulations on the subject.

The states, free to do what they wished with the matter, quickly scattered like a herd of puppies, providing no consensus whatsoever.  Some states mandate a maximum rate on regular loans, but allow short term emergency loans, those Payday Loans marketed to the poor, to charge exorbitant rates.  It is fairly hard to find two neighboring states with the same interest rate.

Here in New Mexico, our legislature met that challenge by passing such impressive legislation as the official state question (“Red or Green?” A reference to your preferred chile.”)  We also built a train no one rides and a Spaceport for a loony Englishman, that has lost at least a quarter of a billion dollars, so far.  It is also still against the law in New Mexico for a woman to pump her own gas or change a flat tire.  It is a petty misdemeanor to play the national anthem “inappropriately”.  What do you expect from a state where the most commonly googled recipe is for Frito pie?

What the state legislature did not do was pass any meaningful measures to regulate the loan sharks that masquerade as Payday Lenders.  

Up until a few years ago, those payday lenders could charge rates up to 1000% in addition to various fees and surcharges:  Fees like the “I Want A Bass Boat Fee” or the “You Are My Bitch Fee”.  Four-digit interest rates were necessary, it was argued, to provide emergency funds for poor people with no established means of credit.  A few years ago, the legislature reached a compromise and lowered the rates to only 175%, and left the various handling fees in place.

Finally, just last week, the New Mexico state legislature got around to fixing a problem that was solved long ago by the Mesopotamian and Hittite civilizations:  they finally brought the maximum interest rate on emergency loans down to only 36%.  Even as I write this, astronomers are searching for a bright star in the east.

While I hope the governor signs the legislation, I would still like to point out that the new rate is still higher that what Hammurabi allowed 4000 years ago.