Gillibrand wants the Post Office to take up high-risk banking — what could go wrong?

Kirsten Gillibrand has a big idea: make the Postal Service lend money to high-risk borrowers. What could possibly go wrong?

The junior senator from New York thinks that turning the Post Office into a financial services outfit for Americans with low or erratic incomes unable to access traditional banking outlets is a winner, for two reasons. First, it would put payday lenders out of business, saving people from what Gillibrand describes as predatory lending practices. Second, it would bring lots of revenues into the ailing Post Office.

This is not Ms. Gillibrand’s first big idea; she also would like the federal government to provide Medicare for all and a job for every American. Did we mention she is almost certainly running for president, and trying to emerge from a crowded progressive field?

Adding federally provided banking services to the “unbanked” might be just a rounding error compared to adding a half-trillion-dollar guaranteed jobs program or adopting single-payer health care, but it is just as flawed a notion.

Just as ObamaCare eviscerated the guts of how insurance is meant to work by not allowing insurers to adjust rates for preexisting conditions and other cost-related variables, Gillibrand’s plan would ignore the economics of lending. There is a reason that low-income individuals have to pay more for a loan; many will not be able to pay back what they owe. The cost of that default has to be spread over similar customers. That’s how banking works.Ms. Gillibrand tweeted that her legislation would “wipe out the predatory practices of the payday loan industry overnight by providing an accessible and low-cost alternative.” In other words, the Post Office would be required to lend to people with poor credit under unrealistically generous terms mandated by Congress. Almost certainly, down the road, taxpayers will be on the hook for another sizeable entitlement.

The costs could be enormous. Imagine staffing up 30,000 outlets with personnel trained to provide retail banking services, ready and able to create and service loans with all the necessary technology and communications. (Bank of America, by way of reference, has fewer than 5,000 branches.)

The economics of this proposed venture have not been spelled out, but they are unlikely to sway Gillibrand and others who see the $40 billion payday industry as preying on the financially vulnerable. Pew Research polling has shown that fewer than one in 10 in our country views payday lending favorably.

The reality is more complicated. The industry plays an important role in providing an opportunity to quickly access cash when hard up, or during periods of unemployment, to roughly 12 million people with poor credit.

Because the credit risk is substantial, the Consumer Federation of America, a not-for-profit consumer advocacy group, reports that the average annualized interest rate on loans can be 400 percent or even more; the loan duration is for two weeks, so the actual interest paid is not multiples of the term amount. The average loan is $350 and costs $15 for each $100 borrowed. Still, lump-sum payments can take up as much as one third of the average customer’s paycheck. Many repay their debt, only to have to borrow again.

Though some lenders pay high rates, the industry’s total fee revenues do not live up to the criticism lodged by Gillibrand et al. In 2016, for instance, analysts estimated loan volumes at $36 billion and fees at $6 billion.

Notwithstanding the high fees charged by the payday lending industry, the Economist reports that “surveys show its customers are mostly satisfied, because payday loans are easy and convenient.” The magazine also reports that “Academic research on payday-lending regulation is mixed, with some studies showing benefits, others showing costs, and still others finding no consumer-welfare effects at all.”

Despite this uncertain outcome, the Consumer Financial Protection Bureau under the Obama administration adopted rules that would have all but driven payday lenders out of business. Mick Mulvaney, head of the CFPB today, has angered liberals by delaying implementation of those regulations.

The proposed CFPB rules demanded that lenders who offer short-term small loans had to verify that customers were able to pay off the loans and had enough money to cover their day-to-day needs. In addition, the agency required a “5 percent payment option” that would cap installment repayments at 5 percent of monthly income. The CFPB estimated that banks and credit unions could, under those terms, issue loans at much lower prices than payday lenders.

The industry fought the regulations, arguing that low-income customers often demanded emergency loans and that the new burdensome compliance might clog the system, driving borrowers to unregulated and even less savory alternatives. The CFPB seemed to offer support for that view, estimating that the regulations would reduce lending by about 80 percent. The then-director of the CFPB, Richard Cordray, was unmoved, saying confidently that “most people will be able to get the credit they need” by borrowing from organizations willing to comply with the new rules.

Like Cordray, Gillibrand wants to save people from themselves, even if it means making credit less available.

Historically, regulating the payday industry has fallen to the states. Today, some 18 states and the District of Columbia have all but banned the enterprise. Gillibrand should step back and allow local governments to determine the future of the industry. If she is concerned with the vitality of the Post Office, she and her colleagues in Congress could allow genuine reform of that institution. She should not conflate the two to score political points.

Published on The Hill