Could We Replace Payday Lenders with Post Office Banking?

I've written before (here) about the special scumminess of payday lenders; today's New York Times gives me a measure of hope that the federal government may finally be doing something to rein in these guys.

According to reporter Jessica Silver-Greenberg, the Consumer Financial Protection Bureau is drafting regulations that will address all manner of short-term loans (full DealBook article, here):

The rules are expected to address expensive credit backed by car titles and some installment loans that stretch longer than the traditional two-week payday loan, according to industry lawyers, consumer groups and government authorities briefed on the discussions who all spoke on the condition of anonymity because the deliberations are private...

Behind that decision, the people said, is a stark acknowledgment of just how successfully lenders have adapted to keep offering high-cost products despite state laws meant to rein in the loans.

Essentially, state governments have been playing Whac-a-Mole, and their efforts have been stunningly unsuccessful.

If you are fortunate enough never to have needed a payday loan, here's a sample scenario: 

You're living teeny-paycheck-to-teeny-paycheck, when you hit a pothole on your way home from work, and not only blow the tire, but bend the wheel. Without the car, you can't get to work. Without work, you'll lose the roof over your head, not to mention the food in the fridge. Since your teeny paycheck has never allowed you to build any appreciable savings, you have neither an "emergencies" fund nor appreciable credit. Suddenly an interest rate in excess of 500% per annum can seem, if not exactly reasonable, at least a real option. Especially as the rate won't be presented in APR terms, but as "I'll give you $200 now, and you'll pay me back, plus $50, in two weeks." That sounds almost reasonable, doesn't it? And if, two weeks from now, you can't pay the full $250? The lender will "kindly" accept partial payment and roll over the loan. Next thing you know, you're down the rabbit hole.

At the center of the regulations being considered... is a requirement that lenders assess whether borrowers can repay loans -- interest and principal -- at the end of a two-week period by examining their income, other debts and their payment history.

Few people can, the data suggest, leaving borrowers to either roll over their loans, heaping on more fees, or take out new one altogether. The [Consumer Financial Protection] bureau found that during a 12-month period, borrowers took out a median of 10 loans. Borrowers paid median fees of $458. The median amount borrowed was $350. And more than 80 percent of loans were rolled over or renewed within two weeks. [Emphasis added]

That churn is central to many lenders' business, according to data from the bureau. Borrowers who take out 11 or more loans each year account for roughly 75 percent of the fees generated. 

In other words, the business model is based on the desperation of the working poor, most of whom are unbanked, and therefore have few options. According to The Economist, about one-quarter of all Americans are either unbanked or underbanked, "meaning they either lack a current or savings account, or they have one but still use alternatives to banks such as cheque-cashers and payday lenders." (Full Economist article, from April 2014, here)

The average underbanked household, The Economist reports, "has an annual income of only $25,500 or so, yet spends around 9.5% of that on fees and interest charged by these banking substitutes." (Silver-Greenberg reports that "the median income of payday loan borrowers was just over $22,400 a year.")

One possible policy solution that has been proposed is to allow US post offices to offer basic banking services, as many postal services worldwide do, and as the USPS itself did early in the 20th century. 

Post offices already sell money orders, and are located in many communities that have no bank branches at all, or one at most. As The Economist notes, "Providing small, brief loans at lower interest rates than payday lenders (not a hard thing to do, since annual rates on payday loans can exceed 800%) could save low-income consumers hundreds of millions or even billions of dollars in interest and fees."

Of course, this would require the Republicans who control Congress to ignore the dollars waved by payday lender lobbyists. How likely is that?