New legislation could bring banking services to every U.S. post office

Inside Subprime: April 26, 2018

By Lindsay Frankel

New York Senator Kirsten Gillibrand is introducing legislation that would require post offices to offer banking services, giving borrowers an alternative to payday lending services. Under the proposal, local post offices would become places where Americans could hold bank accounts and cash checks free of charge. Each facility would also provide short-term loans of up to $1,000 with low interest rates that cost 90 percent less than predatory payday loans.

One in four American households lack access to traditional banking services, and many Americans rely on short-term, high-interest loans instead. Low-income black and Hispanic families are disproportionately underserved and more likely to use predatory lending services. While some states have banned payday loans or capped interest rates, payday lenders in many states charge interest rates in the triple digits. Payday loans in Idaho cost borrowers an average of 582 percent annual interest, the highest in the nation. Loans provided by post offices would carry interest rates in the single digits.

The newly proposed bill, which already has support from liberal economists and activists alike, would offer a solution to low-income families and individuals with bad credit who are seeking short-term loans.

“This is a solution to take on payday lenders, to take on the problems that the unbanked have all across the country. It’s a solution whose time has come,” Gillibrand explained.

A secondary benefit of the proposed system would be financial gains for the U.S. Postal Service. According to a study by the Postal Service Inspector General in 2014, “Financial services have been the single best new opportunity for posts to earn additional revenue. For the Postal Service, this might ultimately translate into $8.9 billion per year.” Furthermore, post offices are well positioned to meet the needs of people of diverse backgrounds. There isn’t a bank in every zip code, but every community has a post office. The new legislation would make banking services accessible to everyone.

The proposed bill comes after Mick Mulvaney, head of the Consumer Financial Protection Bureau, placed a hold on a payday lending rule that would have tightened restrictions on payday loans. Because the CFPB has moved towards de-regulation of the industry, underbanked families are left vulnerable to predatory interest rates. The timing of Gillibrand’s proposed solution is intentional.

Gillibrand expects support for the bill in the Senate Democratic Caucus. She insisted, “Literally the only person who is going to be against this is somebody who wants to protect payday lender profits.” Even the payday lending industry’s trade group, The Community Financial Services Association of America, did not object to the proposed bill, but CEO Dennis Shaul maintained that “The private sector remains the best opportunity for serving small dollar, short-term loans.”

Postal banking has come to the forefront of economic policy, and congressional Democrats have welcomed the proposed reform. Gillibrand said, “You need bold ideas to fix some of the structural challenges that we have in our economy today.”

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