Recently, two seemingly unrelated things happened in the so-called “payday lending” world. First, Senator Elizabeth Warren began trumpeting a plan to offer short-term lending and banking services through the United States Postal Service. Then Native American Tribes sued New York's Superintendent of Financial Services for illegally cutting them off from offering their own online lending services. Since claiming the mantle of Native American, it’s not surprising that Warren hasn’t gone on record supporting Ben Lawsky’s persecution of the tribes. However, the agency she founded and staffed, the CFPB, filed an amicus brief supporting him.
Warren claims the Post Office could offer alternative banking services profitably. But for that to be possible, it would need a monopoly. It appears that’s exactly what Warren and Lawsky are trying to achieve. However, without a change in federal law, they will fail. And luckily so, because if they could succeed, the result would be ruinous not just to Native American tribes, but to the millions of customers who rely on them for short-term loans.
Native American tribes have gotten into online lending for the same as the reason Warren uses to justify getting the Post Office into the game. From her Huffington Post op-ed:
[M]ore than a quarter of all households have no checking or savings account and are underserved by the banking system. Collectively, these households spent about $89 billion in 2012 on interest and fees for non-bank financial services like payday loans and check cashing, which works out to an average of $2,412 per household. That means the average underserved household spends roughly 10 percent of its annual income on interest and fees -- about the same amount they spend on food.
Warren fails to mention the impact interest-rate regulations have had on keeping people locked out of banking services. New York’s usury laws cap interest rates at 25% interest on small, unsecured loans for banks and 16% for non-bank institutions. Between interest rate caps and regulatory compliance costs, it’s simply impossible to profitably lend to certain populations at these rates because of their higher risk.
Rates like 1,095%, which some online lenders charge, sound high. But it’s important to remember that these loans are generally only held for about two weeks, so the actual money spent on interest is fairly trivial, and clearly favorable to the person taking out the loan.