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Banking at the Post Office — Payday lenders more accepting of idea than bankers

Bank-graphic_rgbThe U.S. Postal Service may soon take financial services where traditional banks are no longer eager to be — low- and moderate-income neighborhoods in Mississippi and elsewhere around the country.

Savings accounts, debit cards and small loans would become as common place at some post offices as Forever Stamps and parcel packages.

Advocates for people who lack such financial services hail the prospect of Postal Service banking as a sorely needed lifeline. “It seems to be a really interesting and natural fit for the clients that would be served,” said Paheadra Robinson, the Mississippi Center for Justice’s director of consumer protection.

On the other hand, the banking industry is hardly doing cartwheels over the prospect of a new player in financial services, even if the entry is into markets banks have departed and left to alternative providers such as payday lenders, pawn shops and check cashing stores.

The post office doing loans, the American Bankers Association said, is the “the worst idea since the Edsel,” referring to the 1959 Ford car model long considered the automotive industry’s biggest sales disaster.

“Dangerous” and “foolhardy” were among other descriptions with which the ABA greeted a U.S. Postal Service inspector general proposal that post offices add financial services in zip codes lacking adequate financial services.

“This would be like the banking industry moving into running the airlines,” said Richard Hunt, president of the Consumer Bankers Association, an organization that bills itself as the voice of the retail banking industry.

Advocates for expanding the role of post offices in distressed neighborhoods say the objections of bankers have more to do with their wanting to retain the option of reclaiming the under-served markets at some point.

That’s understanble considering that at stake is a population the inspector general put at a quarter of all households, or about 68 million adults. With its brick-and-mortar infrastructure already in place, the Postal Service calls simple financial services “the single best new opportunity for the posts to earn additional revenue.”


Languishing market

Branch closings have been the go-to remedy for traditional banks struggling with low loan rates, low loan demand and higher regulatory and technology expenses.

Mississippi lost a net of 41 branches from June 30, 2011, through June 30, 2012, figures from the FDIC compiled by SNL Financial show. Mississippi is also the headquarters home of two banks among the nation’s top branch closers in that period — Gulfport’s Hancock Holdings with 30 closings and an 8th-place ranking and Tupelo’s BancorpSouth with 21 closings and a 12th-place ranking.

Birmingham, Ala.’s Regions Financial, which is among the market leaders in Mississippi, had 107 fewer branches serving low-and-moderate income neighborhoods in 2010 than it did in 2008, according to SNL Financial. Regions disputed the closing numbers presented by SNL, saying the business data research firm overstated the figures.

The ABA insisted the branch closings across the county must be considered in the context of the crisis the financial services sector endured toward the end of the last decade. Considering the industry had more than 95,000 branches and the collapse of several hundred banks, it’s not surprising that branch closings would occur, the ABA says.

Mac Deaver, president of the Mississippi Banking Association, did not return several telephone calls seeking comment. Charles Elliot, president and CEO of the Mississippi Credit Union Association, declined to comment.


Regulatory concerns

Mississippi Banking Commissioner Jerry Wilson does not expect the state will regulatory authority over the Postal Service financial services operations, though the short term, low-dollar nature of the lending may create a need for some oversight. “If they are going to compete with payday lenders, they would probably have to have an application through us.”

Wilson said he expects the lending part will pose the most challenges, especially in having trained personnel. “You’ve got to have skilled people” who are as adept at collecting as they are in making loans, said Wilson, who retired as president and CEO of Macon’s BankFirst before becoming banking commissioner in spring 2012.

The Postal Service will also need to have Saturday morning and afternoon hours, a time in which most working people are free to make transactions, he noted.

Wilson said it is too early to judge the IG’s proposal. It has too many “unanswered question to say it would be a good plan,” he said.

Payday lending executive Jamie Fulmer of Spartanburg, S.C., sees merit in the Postal Service proposal, especially in its potential to bring services to neglected communities. The regulatory end is a concern, however, said Fulmer, public affairs senior vice president for Advance America, Cash Advance Centers.

“I think it is yet another independent voice articulating the need for consumers to have access to short-term credit,” he said.

“We think that if the post office or anyone else can offer a competitive product into the market that consumers can afford, that is a good thing.”

Payday lenders in Mississippi fall under state laws that restrict loan amounts, interest and prohibit rollovers of loans. Fulmer said he would expect any other issuer of short term loans to follow the same rules. “If they start having inconsistent application of rules and regulations, then it becomes a problem,” he added.

Payday lenders also will soon be subject to regulation by the federal Consumer Financial Protection Bureau. Those rules set by the CFPB should also apply to the Postal Service’s short term, low-dollar lending, Fulmer said.

Fulmer said he sees no way for the Postal Service to make money on short term loans at 10 percent of the cost of payday loans. “If they think they are going to raise $9 billion (annually) that math doesn’t add up.”

A more realistic yearly earnings estimate, he said, is about $900 million.

Just what fees the Postal Service would charge on short-term loans is a concern for the Mississippi Center for Justice, said Paheadra Robinson, the organization’s director of consumer protection. “That’s one of the things we’d like to know more about,” she said. “In order to provide these services to the community, would they be charging a lot of the fees that alternative providers are charging?”

In its report, the Inspector General’s Office said the shorter-term, small-dollar loans would be made to people who have their paychecks directly loaded onto a Postal Service pre-paid card and have received at least two straight payments. “People could borrow up to 50 percent of the gross paycheck,” the report said. “Every borrower would be required to pay a minimum of 5 percent of their gross paycheck until the loan is paid off…. The Postal Service would automatically withhold loan payments from borrowers’ paychecks before putting the difference on their Postal Card.”

Using a loan of $375 as an example (based on 50 percent of a bi-weekly paycheck for a person earning $18,000 a year) the borrower would pay $38 from each paycheck.

“If the Postal Service charged a $25 upfront loan fee and a 25 percent interest rate, the borrower would pay off the loan in 5 ½ months, paying a total of $48 in interest and fees across the life of the loan,” the IG report said.

The $48 is “less than a tenth of the fees charged for a typical payday loan of the same size,” the report added.

Loan defaulters could potentially be subject to Treasury withholding of IRS refunds, according to the report.

As part of establishing the service, the Postal Service would seek partnerships with the financial sector to provide the backend for some of the services, including Postal Cards, setting up and managing Web and mobile access, servicing the accounts and loans, and possibly funding and holding the loans on their balance sheets,” the IG said.


Will it happen?

The Postal Service itself has not committed to any course that would lead it into the financial services sector. The agency did not take part in the development of the IG’s white paper. “We appreciate all innovative ideas to generate revenue and enhance our customer’s experience and we are reviewing the recommendations of the OIG paper,” Postal Service spokesman Dave Partenheimer said in an email.

The Washington Post reports that Congress would have to authorize the Postal Service expansion into financial services. That would face long odds, according to The Post, noting the contentious wrangling in Congress over the future of the Postal Service.

The IG report points out, however, that “given that the Postal Service is already providing money orders and other types of non-bank financial services, it could explore options within its existing authority.”


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