Predatory Lending is for Schmucks

Today, one of my favorite shows on NPR thoroughly disappointed me. Typically I can count on Marketplace to be a bit of a haven, a place where you can get decent economic news on NPR. It's a pretty typical complaint, but for the most part, Morning Edition and All Things Considered have not met a net welfare reducing program they didn't like.

Announcer: "Economists argue that this program is unnecessary and will cost billions of tax dollars. However, if you ask an activist like Jim McSocialist, Chief Policy Officer of the non-partisan Union of Concerned Public Policy Majors:"

Dumbass Activist: "We're the richest country in the world and capitalism has clearly failed stupid people, so it's time to try something different. What we propose is a massive transfer of wealth."

Announcer: "Economists have a bunch of facts and figures that show this isn't a real problem, but we've got some anecdotal evidence to the contrary."

Uneducated Man/Woman on the Street: "I ain't got no education anna I gotta three kids anna I cain't affor no house."

Dumbass Activist: "The deck is just stacked against them. It's time that our lawmakers acted to reshuffle the deck."

Announcer: "Back by studies that show children living in houses outperform children living in gutters by 25% on standardized tests, activists are lobbying Congress this week to sign this bill into law."

Actually, it's not always that bad. Occasionally NPR does overcome every journalist's (apparent) natural fear of economics and do a story based on such wild ideas as "subsidies are a bad idea" or "trade makes everyone richer." Concepts that are somehow still hotly debated around this country.

Anyway...Marketplace. So today they did a story on "Predatory Lending," a trend that is sweeping the nation. (Not that predatory lending is sweeping the nation, news shows doing stories on predatory lending is spreading like wildfire). Unfortunately, they treated "Predatory Lending" like it is a thing that actually happens and that we must be vigilant to keep it bay. Very successful PR from "non-partisan" organizations has more or less convinced journalists everywhere that predatory lending exists.

I'm a bit of a skeptic. Call me crazy, but if you enter into a contract that you can not perform against, I call you an idiot, not a victim. Anti-predatory lending organizations have a great argument for this - the victims of predatory lending are uneducated or not financially literate enough to understand what they're signing. Once again, if you enter into a contract that you can not understand, I'll call you an idiot. Here's a simple idea, don't agree to things you don't understand. If you can't figure out the loan document, then don't take out the loan. The loan agent says you can afford it? Congratulations. I say you can totally jump across that shark tank. Based on the documentation I've seen of your athletic ability, you can totally do it. Go for it, your dream is attainable right now, no need to train for it, just jump!

I suppose what frustrates me about it is the assumption that contracts with dumb people are not as binding as contracts with everyone else. Somehow being uneducated or earning a low income means that you are not subject to the same rules as everyone else. You have to get special treatment, because if we don't hold your hand, you'll do something dumb.

So, I decided to find out a little about predatory lending from someone with a little less of an agenda than ACORN. According to the Department of Housing and Urban Development, predatory lending sounds a heck of a lot like plain, ol' fashioned loan fraud. Under their definition, I'm sure it exists. Mortgage brokers convincing people to overstate their incomes so that they can get a bigger fee? I'm sure it occurs.

If someone lied to you or broke a law, then it's loan fraud and they should be prosecuted. However, the idea that banks and institutions are trying to make loans that people can not afford and drive borrowers into bankruptcy seems a little ridiculous.

Finally, here's the real reason I published this post - an economist has put out an interesting paper examining payday lending and attempting to determine if it is a "predatory" practice. It's pretty approachable, I highly recommend you read it. I'll hit you with a highlight:

"Thus, higher prices are neither necessary or sufficient to conclude that a certain class of credit is predatory."

Interested? Check it out - Defining and Detecting Predatory Lending