Libertarian Predatory Lending
by Ethan Glover, Sun, Dec 21, 2014 - (Edited) Mon, Dec 22, 2014
As I’ve said before, one could ask a lot of questions about libertarianism and anarcho-capitalism. In order to answer any questions you may have, try to answer it yourself, you probably already know the answer.
With that said someone presented to me another question worth answering here. “How would libertarians deal with the problem of predatory lending?”
Debt.org defines predatory pricing as, “any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitive, or unscrupulous actions for a loan that a borrower doesn’t need, doesn’t want or can’t afford.”
Right off the bat, I have a problem with the definition. It’s unclear as to what constitutes “unfair” or “exploitive.” The fact that only consenting adults responsible for their own actions can make contracts says that libertarians would do nothing about predatory lending.
But the original question implies that there’s a problem here, and so shall I. The definition lays out for us four ways that someone might sign a loan that they don’t want to sign, so let’s go through each.
“Giving an appearance or impression different from the true one; misleading.”
An example of a deceptive loan might include getting charged a rate that you didn’t expect. Imagine you’re in the following situation.
You just received the first bill for a payment on a loan and it’s charging a lot more than you’d expected. In response, you call up the lender and ask them what’s going on.
They tell you that the charges reflect the contract, even though the bill differs from what the lender said to you verbally. You don’t have a recording of what the other guy said, and can’t prove your claims. What would you expect a court to do?
Ultimately, you can only pray, the lender has the stronger claim. At best, you can report them to various agencies like BBB, Ripoff Reports, and Epinions.
So what would libertarians do about deceptive lending practices? Nothing, why would you expect anything else? Be careful when making important financial decisions and don’t deal with shady people.
“Relating to or using threats.”
With coercion, we get into much more serious ground. However, we have to consider that acceptable types of threats exist.
What if the lender threatens that if you don’t take a loan, you’re missing a great deal? One could call this coercive, but you can’t call it wrong.
On the other hand, what if he threatens your life? Here we see things taking an immoral turn. In fact, the smarter move would be to take a loan and fight it later if possible.
At this point, the situation starts to look like the previous, you’re making a claim that you can’t support. “He said he’d kill me if I didn’t take a loan!”
We can not realistically regulate or plan for this extreme situation in advance. So how could you possibly get out of the situation?
You could look to the community and jury and doing whatever you can do to get evidence and perhaps a confession. This looks like your only chance in a libertarian society. In fact, it’s no different than current society.
I realize this contradicts what I said under deception, but in reality we can’t treat every case in the same way we treat extremes. It’s not a realistic thing to do.
You can always fight to have your voice heard, but there’s no reason to expect people to pander to you specifically when two sides to the story exist.
“Make full use of and derive benefit from (a resource).”
In the sense of a contract, exploitation might mean a lender using his position against the lendee. For example, he knows more about what everyone else offers and can, therefore, offer the best price without going under.
So long as he has the best deal, you almost have to get a loan with him.
On the other hand, this might mean the lender withholding certain information about the purpose of the loan. He or she may exaggerate their expected return on an investment for example.
In fact, this happens every day and no one complains.
An extreme version of this scenario includes a loan involving someone who doesn’t have the mental capacity to understand the deal. Whether a child or mentally disabled, I think we can all say that these people can’t rightfully agree to most contracts without the aid of a trusted cosigner at minimum.
In the case that a child signs a contract for a loan? It’s invalid. I would even want to see the loan returned so as to not encourage children seeking out loans.
"Having or showing no moral principles; not honest or fair.”
Finally, with an unscrupulous contract, we get into something subjective that regulation can’t realistically cover. Some people think all exploitive contracts are unscrupulous, some don’t.
There are people who don’t agree on moral principles or what defines honesty.
There’s an overarching theme here, you can’t universally define predatory lending. Currently, the FDIC makes the decision on what qualifies as if it’s a benevolent organization.
Inevitably, this leads to favoritism and using the predatory lending laws to take down people they don’t like or simply suspect of something else.
Imagine a world without forced monopolies. Different organizations can make judgments on things like predatory lending outside of the regular courts. In other words, companies that specialized in investigating these situations and deciding whether they belong in court.
The value of competition comes from multiple companies operating asynchronously. You can see a real-time comparison of the quality of their work.
In a monopoly system, you have to look at abstract historical statistics that probably have no relation to the actual truth.
Is This Really So Extreme?
To the person who asked the original question, let me propose my own question. When you buy something cheap from eBay, and it breaks after one use, what do you do?
Do you continue to buy from the original seller? Do you find another? Or do you look more towards larger stores like Amazon?
In the same way, when you’re looking for a loan, do you look for a bank or lender that you can trust? Or do you find the first cheap option and not read the fine print? If you take the second option, whose responsible?
No matter what system you choose; risks exist in all of them. The difference? Libertarians don’t support monopolistic systems that aren’t subject to market forces.