The Washington Post ran an interesting article the other day (which didn't get a lot of attention) on a group advocating a cap on interest rates at a local level. The interesting thing is that it's coming from a faith-based group. And, since it is a grassroots movement which appears to be starting at a local level in the hopes of eventually moving the debate nationwide, news of their attempts may be confined to local news, at least for a while. But it's an interesting movement, which is why it caught my eye.

But is their idea viable? Or would the unintended consequences be worse that what already exists, especially at the small, short-term-loan end of the scale? These are questions that bear some examination.

"Usury," in the modern sense, is usually defined as lending money at exorbitant interest rates. In the sense it was used in Biblical times and throughout the Middle Ages, it meant any interest charged for lending money. But while the Bible condemns usury in many places, in at least one it is sanctioned when you loan money to "strangers" as opposed to "brothers," so it's not even crystal-clear morally what the exact definition, in the modern sense, should be.

But it is indeed interesting that a faith group is taking on the issue on moral grounds -- that it should not be seen as right (or legal) to charge outrageous interest on money loaned.

The Washington Post article begins with a story of a woman who took out a "payroll" loan (also called "payday" loans) These are, to be blunt, loans for desperate people who could not get a bank to loan them money. Whether they serve a societal purpose or not is really an open question, but more on that in a moment. First, the story:

After going on disability four years ago, Pauline Charles found herself tight on cash and thought her prayers had been answered when she responded to television ad promising loans to anyone who owned a house or car.

The 50-year old Baltimore resident, who had a car, borrowed $2,000 and by the time she paid it off 18 months later, she had shelled out a total of $11,000 in interest and fees.

"I went in already with financial problems and it just made my situation worse," she said.

This, it should be noted, is an annual interest rate of over 350 percent.

The article continues:

Charles was among several dozen protesters who descended upon bank branches in downtown Washington yesterday as part of a multi-city campaign to bring back usury laws. They are calling for a national interest rate cap of 10 percent for credit cards and other types of consumer loans. Similar actions took place in Durham, N.C., New York, Boston, Chicago and in London.

The groups that organized the event, which include the Washington Interfaith Network and Actions in Montgomery, have also sent letters demanding meetings with the chief executives of Wells Fargo, Citibank, Bank of America, Capital One, Discover and J.P. Morgan Chase.

The problem here, though, is that there appear to be two separate issues. The first is the desire for capping interest rates, either on a local or national basis, on credit cards and bank loans. The second is the payroll loan industry itself, which (to put it mildly) plays by different rules than Visa or MasterCard.

First, the larger problem, with a short history of recent efforts to rein in the credit card companies:

Many states have usury laws that cap interest rates charged to consumers, but they do not affect rates charged by nationally chartered banks, which includes most credit card issuers. Credit card companies frequently charge interest rates of more than 20 percent. A law passed by Congress earlier this year restricting arbitrary and excessive credit card fees has done little to quell complaints among consumers that they are being gouged by credit card issuers. Banks have responded by jacking up the fees they charge credit card holders.

A national interest rate cap of 9 percent was in place until 1980. Efforts to reinstate a national cap have met with mixed success. In May, an effort in Congress to set a 15 percent interest rate cap lead by Sen. Bernard Sanders (I-Vt.) garnered only 33 votes. However, three years ago Congress passed a 36 percent cap on loans to military borrowers after a Pentagon report documented the impact of payday loans on service members.

Now, I actually support a national cap on credit card interest rates, and have called for such in the past. However, I realize that this is a hard issue to move politically. On the face of it, everyone hates high credit card interest rates. And lots of people mutter "there oughta be a law" when the subject comes up. But capping credit card rates would mean that not everyone could get a credit card who has one today. That's just a simple fact -- the banks would have to deny more people with slightly questionable credit records in order to keep costs down (or, at least, that's what they say they would have to do, which is in essence the same thing since they're the ones handing out the cards). When you tell people that you could cap interest rates, but they might lose their credit cards as a result, then support for the issue drops off.

Nevertheless, even knowing this, I support Sanders' action. Maybe if the credit card industry didn't hand cards out to anyone who can sign their name, we wouldn't have the risk in the system which pushes rates up for everyone. That's the theory, anyway.

But this raises an even more interesting question, one that I hadn't really thought about before -- the payroll loans. The bank industry was quick to point this out, and I have to say they have a point:

Lenders say a national interest rate cap would be bad for consumers.

"Payday loans are typically two weeks. A 10 percent rate cap would mean the industry could charge under 40 cents per $100 loaned for two weeks. Even a charity like Goodwill Industries charges $9 per $100 loaned for its payday loan alternative," said Steven Schlein, a spokesman for the Community Financial Services Association of America, a trade group for payday lenders. "A rate cap simply means a ban on short-term loans."

If the business of loaning money out to people in desperate straights wasn't profitable at an interest rate mandated nationwide, then all these places would go out of business. Now, some might think "that's a good thing, really," since these places do prey on the vulnerable in a blatant way. But if you make it illegal, that doesn't necessarily mean it disappears (see: the War On Drugs). Sometimes it just goes underground, to the black market.

And we all know what the underground market for short-term loans is called: loan-sharking. Complete with outrageous "fees" and "interest" -- up to and including perhaps your kneecaps, if you don't pay up on time.

The people who seek out payroll loans are people living very close to the edge. That's why they need the money in the first place -- they are barely scraping by on what they make -- with no savings or reserves -- and then some financial disaster happens and they have nowhere else to turn. As the story points out, they pay an incredibly high price to fix their short-term problem.

But, at least with the storefront payroll loan places, they don't worry about their kneecaps.

If you cut off this lender-of-last-resort to the people who desperately need it, it doesn't solve the problem which led them into the desperation in the first place. And, if the industry didn't exist, an illegal market would appear to take its place, as sure as flowers bloom in the springtime.

So, while it's easy to denounce obscene interest rates of 350-plus percent, killing off the entire short-term loan industry may not be a viable answer. Perhaps some sort of area could be addressed by an interest rate cap law, to carve out different regulations for this sub-set of the loan industry, as was done for soldiers. If these companies can still make money charging 36 percent interest (or less) then perhaps its time to broaden this to cover everyone and not just servicemembers. But whatever it looks like, I do tend to agree that completely wiping out this option may, in fact, create worse consequences than the problem it is trying to solve.

Unintended consequences are always a danger of passing any law. They are, by definition, counter to the intent of the law. So even though I do support caps on credit card interest rates, I can see the industry's point that legislating payroll loans out of existence may be too drastic a measure because of what may happen as a result. And I would urge legislators to examine the problem and come up with a workable answer, rather than just wishing it would go away.

-- Chris Weigant