Latvian Twist on Faust
posted by Lawrence Cunningham
Is a usurious cash loan secured solely by the borrower’s immortal soul enforceable, as a matter of mortal law?
Fantastic as it seems, a report proliferating on the Web says a new company in Latvia is using that business model, successfully. Two-month old Kontora Loan Company of Latvia, brainchild of a 34-year old entrepreneur, offers cash loans up to about €700 (about $500) with daily interest rates of 1% (and some opacity on the frequency of compounding).
The soul part aside, requirements are modest: borrowers must be Latvian residents and provide name and signature. The company has low overhead, foregoing collection staff or policy, reasoning the soul is security enough. Business is off to a good start, with 200 customers on board, a demographic heavily populated by poor drunks recently in bar room brawls.
Regulators in Latvia reportedly do not object, except that its Consumer Rights Protection Center questions the business from “a humanistic standpoint.” It would not take our nascent Consumer Financial Product Safety Commission much effort to find the loans objectionable in the US, although mere excuse from mortal legal obligation may leave risks that human judges cannot exonerate.
As a mere matter of mortal law, there probably is sufficient consideration for the contracts, and duress would not be a defense for the merely impecunious. But drunks could be excused on the grounds of lack of capacity; opacity in the compounding clause may justify excuse for all borrowers based on nondisclosure. In addition, compounding aside, the daily interest rate would be usurious in the US, probably even in Delaware, Nevada and South Dakota, making the whole bargain unenforceable in our courts. And there is always unconscionability.
But even if excused in the courts of human law, there remains the religious side of the bargain. In Latvia, spiritual leaders vehemently object to the loans and the whole business model. They say the loans are un-Godly and impermissibly prey on people’s fears.
Religious leaders also stress an additional concern, which seems a mixed question of law and religion, and is a bit puzzling: the loan agreements may be assignable. Assuming the contracts are enforceable, they may well also be assignable. Yet does it matter who holds the loan?
As a matter of contract interpretation, one supposes, if the borrower defaults, the soul is lost, no matter who holds the right to repayment. Perhaps the danger is that this firm, reputable enough, may assign the contract to a disreputable one, perhaps one with links to the devil?
Hat Tip: Sara Rothman
July 13, 2009 at 4:53 pm
Posted in: Contract Law & Beyond, Humor
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Responses (3)
Steven Lubet - July 14, 2009 at 3:40 pm
It’s a very small point, but €700 is closer to $1000 than to $500 (at about $1.40 to each Euro).
A.J. Sutter - July 14, 2009 at 6:25 pm
“Perhaps the danger is that this firm, reputable enough, may assign the contract to a disreputable one, perhaps one with links to the devil?” — In which case this type of transaction could give new dimensions to the notion of “moral hazard”.
A.J. Sutter - July 14, 2009 at 6:40 pm
BTW, how exactly does one perfect the security interest in this case? Did the Latvian government establish a registry? If not, does the lender rely on some kind of pledge? In what does that subsist? And in practice, what does the creditor do with the collateral once it has foreclosed? Absent a devilish aftermarket, maybe the entrepreneur is just setting himself up to be haunted. (I note that existence of immortal souls does not per se imply the existence of infernal realms or a Final Consumer.)
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