Religious Ethics Clash with Loan Practices ; as Easy Money Becomes the Norm in the US, Borrowing Habits Raise More Ethical Concerns

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"If there be among you a poor man ... thou shalt open thine hand wide unto him, and shalt surely lend him sufficient for his need, in that which he wanteth" (Deuteronomy 15:7, 8).

That's the way the King James version of the Bible defines the morality of lending. But the ethics of lending is a problem older than the Bible - and one still struggling for resolution.

Democratic presidential nominee John Kerry has brought the issue to the forefront by proposing a sweeping ban on a series of "abusive" loan types that he says are costing consumers in the United States upwards of $9 billion a year. If passed by Congress, the Kerry plan would require lenders to print loan terms boldly in plain language; to end high prepayment penalties; and to curtail high-rate short-term lending that he says unfairly targets military families.

Given current levels of indebtedness in the US, some say it has never been more urgent for society as a whole to tackle questions about the ethics and legality of lending practices.

In 2003, the average US household with at least one credit card carried three times more credit-card debt ($9,205) than in 1990, according to analysts at CardWeb.com. Yet the nexus of contemporary lending trouble, according to the Center for Responsible Lending, is in mortgage rip-offs. Its analysis shows 2.1 million households give up more than $6 billion in home equity each year in financing deals that include high up-front fees, prepayment penalties on sub-prime loans, or financed insurance.

Predatory lending practices are another phase of the problem. "Payday" lenders extend $300 loans to people who struggle two weeks later to pay back the $350 that's then due, says Mark Pearce, executive vice president of the Center for Responsible Lending in Durham, N.C.

"We see people who have borrowed $300 and have paid $3,000 two years later in fees," says Mr. Pearce. "We think that's predatory lending because the intent of the product, the design of it, is to trap people in their most desperate moments."

Yet closer regulation of lending practices is not necessarily the kindest solution. Society's moral duty to those in need is to let the market provide ample access to capital, argues Jamie O'Brien, an instructor in business at Notre Dame University. While he supports state usury laws that cap interest rates, he argues that some high- interest loans are necessary to cover a lender's risks and shouldn't be regulated to the detriment of the would-be borrower. When lenders can't charge higher rates to high-risk consumers, he argues, such would-be borrowers will simply not get the credit they seek.

"As a Christian, I believe we should all help our fellow man or woman however we can," Mr. O'Brien says, adding that in ideal cases repayment is not expected. But often, he says, "When a legal protection is put in place, either capping rates or fees, costs will be passed on to customers and you're going to see a lot of people forced out of the market. …