Monday, April 11, 2011

Hi! We are consumer advocates and we are here to help you

Small consumer lenders in North Carolina are trying to get the state's usury ceilings changed for the first time in 40 years. The proposed change would keep larger loans at the current ceiling of 30 percent APR but would increase the rates on smaller loans. The changes also are proposed changes in some fees and allowing for late fees and charges on returned checks. Currently the North Carolina law does not allow for such fees to be assessed. The proposed changes are being met with the predictable hue and cry from the "advocacy" groups as fleecing the poor and adding to the profits (a four letter word for these groups) of the lenders. What is particularly important is that North Carolina is home to the major "advocacy" group in consumer lending - the Center for Responsible Lending. So a modification of the usury statute is particularly significant. It doesn't matter that the number of lenders keep falling because of being forced out of business by rising costs. It doesn't matter that loans to the groups who arguably need it more go wanting. Its all for their own good (more on this later).

Of course a usury ceiling is only effective when if limits the credit available to borrowers. If market rates are below the ceiling, then lenders will charge less. If market rates are equal to the ceiling then the market charges the ceiling. But when market rates are above the ceiling, then there will be more loans demanded than supplied by lenders. The question is who gets the loans? Economic theory says that the successful borrowers will be those preferred by the lenders. If all borrowers at that rate are the same economically, the lenders will lend at the lower ceiling rate based on their own personal tastes and preferences. Remember a usury ceiling says that you can not lend at a rate above the ceiling. So the money will go to family and friends or in my case, only to good looking women. I once said that borrowers would have to send me certified proof of their times in the 100 meter dash and I would lend to the fastest until the funds were gone. It was pointed out that I was discriminating against the handicapped or against slow people. I changed the criteria because I naively thought that I was discriminating against white folks, having forgotten about the handicapped. The point is that the market is not allowed to function and the lenders will discriminate given their tastes and preferences. Even first come first serve is a preference of the lender. I point out to students that discrimination by people occurs if the market is not allowed to discriminate and I prefer to be discriminated by the market (my tastes and preferences differ and/or I don't like the price) than to be discriminated against by any person. Consequently, usury laws are racist. Indeed, there is a body of economic research that corroborates this. These studies find that usury ceilings when binding find that funds are shifted from those who would get the loans at the higher rates to those who get loans at lower rates. That is funds are shifted from the higher risk groups (mainly poor minorities) to lower risk groups (mainly nonpoor whites). Indeed, one study concludes that usury laws are a mechanism whereby private interests use the coercive power of the government to extract rents from other groups. The obvious conclusion is that the consumer advocacy groups are actually stalking horses for racists who pretend to help the poor when in fact they are hurting them.

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