Explaining Southern California's economy

Expanding payday loans make case for banking the unbanked

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Bank of America is too big to do payday loans, but credit unions and small, regional banks are getting in on the action.

The L.A. Times ran a piece a few days ago about how banks and credit unions are getting into the lucrative but ethically dicey business of payday loans — short-term, high-interest loans that, until recently, were aimed at customers who don't have typical relationships with banks or credit-card issuers. This morning, KPCC's "AirTalk" with Larry Mantle did a segment on the issue.

Payday lending is rife with problems — and the potential for big returns. Here's the LAT:

[M]any people can't repay the loans when they come due. Instead, they simply roll the loans over from payday to payday, or take out new loans to cover the old ones, piling on additional costs that can result in interest charges of 300% or more over the course of a year.

The move by banks into payday lending — or direct deposit advances, as many of them call it — led about 200 fair-lending, consumer, religious and labor groups to write federal regulators last month and call for prompt action to stop "this inherently dangerous product."

"There are people who wouldn't walk into a payday loan store but think that if a bank is doing it, it must be safe," said Lauren K. Saunders, managing attorney with the National Consumer Law Center. "If you take a look at these products from a consumer protection standpoint, they raise serious red flags."

You can think what you want about payday loans and the trend of more above-board financial institutions moving into the business. What this all really highlights is the need for good, low-cost banking services. Major banks and even smaller, regional banks and credit unions are moving into an operating environment that's going to see fees rise and interest rates become less competitive. 

I and others have argued that this sets up a very good opportunity for the federal government to transform the U.S. Postal Service into a "post bank," providing basic, cheap financial services designed to generate low profits for the USPS

"But wait!" you might say. "How can the Post Office afford to do that?" Well, the USPS is currently racing toward insolvency, so it needs to get out the mail business and into...something else. Banking is the perfect solution, especially for urban area — such as Los Angeles — where there's a large number of unbanked people who routinely use the USPS. 

High-interest-rate payday loans, regardless of who's issuing them, would diminish if a government-backed entity began to deal in the same products, but at reasonable rates. You could obviously make the argument that a post bank would crowd out commercial and, in the case of credit unions, non-profit lending (credit unions exist to serve the needs of their members first).

But when you're talking about small loans, usually for only up to $500, the only reason to get into the game is to charge interest in excess of 15 percent (sometimes far in excess). A post bank could drastically lower that, and in the process:

1. Save the USPS

2. Establish a good, basic, low-cost bank for many Americans who don't need a lot of bells and whistles in their banking. Checking. Savings. Teller services, like cashiers checks. Money orders (which the USPS already does). You don't need online bill payments. You don't need credit cards. You don't need CDs. I'm not even sure you would need ATMs, if the post banks could do a deal to tap into somebody else's network.

So what do you think? Good plan? Bad plan? Is this a way to save the USPS? And is the USPS worth saving?

Follow Matthew DeBord and the DeBord Report on Twitter.

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