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.
According to a recent study, 41% of American households reported using what the agency calls “alternative financial services,” including online lenders in 2011. It’s interesting that while 75% of American can access the default banking system, 41% are choosing to pay higher interest rates to use the alternatives. And these aren’t the people you might have in mind when you think about brick-and-mortar payday lending. Users of online lenders tend to be middle-class and well-educated.
So what are New Yorkers doing now that they no longer have access to online lending? They’re taking advantage of payday loans, going to their friends and family, and, most troublingly, relying on black-market alternatives. That’s what happened when Virginia cracked down on alternative financial services. Kicking alternative lenders out of the game doesn’t force traditional banks to work with people they previously excluded. And it doesn’t cause people to change their spending patterns so they no longer need short-term loans. It only further limits their white-market options for getting quick cash.
At least it will until Lawsky loses the lawsuit. Native American Tribes are not subject to state regulations, so Lawsky had zero authority to order them, along with 31 online lenders, to stop lending in New York, or to send a letter to 117 banks asking them to cut off their access to electronic payments systems.
“States and tribes do not have a relationship with each other,” explains Dr. Katherine Spilde. She is a Cultural Anthropologist and professor who has spent the past 20 years working with tribes on economic development. “States don’t understand the full weight of tribal sovereignty.”
Only the U.S. Congress can regulate tribes, according to Executive Director of the Native American Financial Services Association, Barry Brandon. “We wrote a letter to Lawsky with our concern about his actions, requesting a meeting,” Brandon said during a telephone press conference. “We received no response from him.”
States can, however, force non-tribe online lenders to comply with regulations capping interest rates. This is exactly what would be necessary to realize Warren’s Post Office prediction. “If the Postal Service offered basic banking services... then it could provide affordable financial services for underserved families, and, at the same time, shore up its own financial footing,” Warren claims. But how?
If banks can’t profitably lend to underserved families, how could USPS? The only possible way this plan could work is if regulators actually succeeded in putting all alternative lenders out of business. This would force American families to choose between the loan sharks and the Post Office. This would be a tragedy for the millions of Americans who rely on payday and online lenders. And it would devastate Native American tribes.
If Elizabeth Warren wants to try to use the Post Office to offer another banking option, it’s ill-advised, but acceptable. Why anyone would want to make cashing checks and borrowing money as fast, up-to-date, pain-free and convenient as a trip to the Post Office is baffling. Despite a legally mandated monopoly on non-urgent letter delivery and direct shipping to U.S. Mail boxes, the USPS is broke.
But the truth is far more sinister. Warren is supporting state regulators in order to give the Post Office its next monopoly, this time over alternative banking services. This time, instead of barring private entities from delivering non-urgent letters, she’s using state regulations to make it impossible to lend to high-risk families profitably.
Vigorous enforcement of state-mandated interest-rate caps would put alternative lenders out of business, and effectively nationalize alternative banking. This will force American families to choose between loan sharks and the Post Office. Thankfully, without a change to national law, the plan will fail. However, state regulators could succeed in putting all non-tribe alternative banking providers out of business. Creating another option for payday lending customers is a worthy goal. But using state regulations to give this option a monopoly hurts everyone.