Senator Kirsten Gillibrand (D-NY) speaks during a press conference December 6, 2017 on Capitol Hill in Washington, DC.
Senator Kirsten Gillibrand, DN.Y., is proposing legislation to end current payday lending practices by giving certain banking services a new home: US Post.
The legislation, known as the Postal Banking Act, would make retail banking services available in all U.S. Postal Service locations. This represents 30,000 post offices across the country.
The services would include low value loans for consumers who offer low fees and low interest rates.
These transactions would compete with payday loans, a short term advance that is usually due with your next paycheck.
The terms of payday loans are often unfavorable, said Alex Horowitz, senior research manager for the consumer credit project at Pew Charitable Trusts, an independent research organization.
About 12 million people use payday loans each year, according to Horowitz. The average loan is $ 375 for a five-month period, which is about $ 520 in fees, he said.
“These loans are extraordinarily expensive with annual percentage rates close to 400%,” said Horowitz.
Payday loans are often provided by small credit merchants to people facing high prices and unaffordable payments, Horowitz said. This includes households that hold traditional bank accounts but cannot access these transactions through these institutions. It also includes a smaller portion of households that do not have a bank account at all.
Last October, the Consumer Financial Protection Bureau authorized banks and credit unions to grant small loans, provided consumers have more than 45 days to repay the money. These institutions have the ability to offer loan rates six times lower than available payday loans, according to Horowitz.
But these institutions still need the green light from their respective regulators to grant these loans. Although the regulator to which each institution reports varies, they are the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, and the National Credit Union Administration.
A CFPB spokesperson declined to comment, citing the agency’s policy of not commenting on current legislation.
The idea first surfaced in a report of the Office of Inspector General in January 2014. The Postal Service could see $ 8.9 billion in new revenue per year by receiving 10% of interest and fees spent on non-bank transactions.
Banks and credit unions would be well positioned to offer these services because of their ability to provide speed, ease and certainty, Horowitz said. Postal banking, on the other hand, would meet the needs of underbanked and unbanked populations.
Some rural areas have post offices, but no bank branches or credit unions, Pew found in his research.
In addition to small dollar loans, Gillibrand’s postal banking legislation also includes other services, including checking and small dollar savings accounts; transactional services, including debit cards, ATMs, bill payments and online services; as well as national and international transfers.
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It’s important to note that transaction services and credit services are different and will require different expertise and economics to operate, Horowitz said.
There are difficult questions that must be answered in order to build a successful postal bank, said David O’Connell, senior analyst at Aite Group, an independent research and advisory firm.
If the postal bank offers lower rates on payday loans, it’s likely they will need to be subsidized to account for the risk, O’Connell said. This could fall on taxpayers who borrow non-payday loans. The government should also take responsibility for collecting any delinquent loans made to cash strapped people, he said.
Dennis Shaul, CEO of the Community Financial Services Association of America, a national association representing non-bank lenders, said that while he welcomes increased competition, which can lower costs for consumers, there are some concerns. .
“To date, almost all attempts to create low-cost loan alternatives have been charitable, required government grants, or were unprofitable and unsustainable,” Shaul said. “The private sector remains the best opportunity to serve small, short-term loans.”