The battle against high-interest loans

Financial companies profit on poor and working people. Here’s how we can fight back.

A core aspect of progressive minimalism is advocating for systemic change that can help redistribute wealth and restrict some of the worst tactics that powerful companies use to maximize their profits at the expense of consumers. This is why I’m over the moon about Senator Sanders and Representative Alexandria Ocasio-Cortez’s jointly-proposed legislation, The Loan Shark Prevention Act. Sanders announced:

The reality is that today’s modern-day loan sharks are no longer lurking on street corners breaking kneecaps to collect their payments. They wear three-piece suits and work on Wall Street, where they make hundreds of millions in total compensation and head financial institutions like JPMorgan Chase, Citigroup, Bank of America and American Express.

The Act proposes a cap on interest rates on consumer loans to 15 per cent. In other words, any American bank or store that charges an interest rate exceeding that limit is deemed in violation of the Act and will have to forfeit the entire interest. Consumers who pay higher than the cap have two years to start an action to obtain a refund of their interest amounts.

There are a few exceptions to the consumer interest cap. One, the government can allow rates to exceed the ceiling for no more than 18 months if money market interest rates have risen over the last six months and it threatens the safety of individual lenders. The 18-month limitation period does not apply to credit unions, as they’re already subject to a limitation period under other legislation.

The average credit card interest rate is 19.24% yet banks borrow money from the U.S. Federal Reserve with an interest rate of 3% and amongst each other at an interest rate of 2%.

But even if you have an excellent credit score, the lowest interest rates still hover around 14%. Yglesias cites a statistic from the U.S. Federal Reserve that concludes Visa and Mastercard dominate about 85% of the credit card industry.

Goodbye payday lenders

In this recent Vox piece, Matthew Yglesias states that this would effectively eliminate payday loans, which, to be honest, may not be a bad thing. As of last year, payday loans are a $9 billion business in the States, with 11% of Americans acknowledging that they’ve used a payday lender at least once between 2016–2018.

I didn’t realize this before I conducted research for this article but the average interest rate for payday loans in America is 400%! There are 15 states and the District of Columbia that have laws in place to limit these interest rates to 36% but other states have shown little interest. Last year the Governor of Ohio caped payday loan interest rates to 60% of the original principal (apparently the average interest rate for Ohio payday lenders is 591%)!

Canadians also suffer from predatory payday lenders. Three years ago, CBC featured a man who took out a payday loan for a few hundred dollars to buy his daughter a Christmas present who didn’t realize that the interest was being calculated bi-weekly. That translated to an annual interest rate of 546%. It took him 3 years to pay off $1,400 of loans and he speculates he paid more than $10,000 on interest.

On the other hand, payday loans can certainly provide relief to people in a bind. Forty percent of Americans can’t afford a $400 emergency and 22% state that they anticipate to forgo payment on some of their bills. Meanwhile, 48% of Canadians are just $200 away from insolvency, with 26% of them claiming they have nothing leftover at the end of the month. In this way, payday lenders act as a stop-gap for people in a pinch.

But there is a better way, and that includes reintroducing a public scheme that’s already been done before: postal banking.

A postal savings system

Postal banking is not a new concept. In fact, Canada introduced postal banking just shortly after the federation of Canada and it was widely used for a whole centuryuntil it was abandoned in 1968.

One of the chief advocates of reinstating postal banking is Mike Palacek, the national president of the Canadian Union of Postal Workers. Big banks have been shuttering bank branches in rural communities, leaving poor and marginalized people underbanked or completely unbanked.

He argues that given there are twice as many Canada Post locations as Tim Horton’s, it could serve the need for all Canadians, no matter where they live and how much they earn. Even in communities that still have bank branches, Palacek points out to CBC,“We’re paying some of the highest bank fees in the world in this country because of a lack of a public option.”

In tandem with the unveiling of The Loan Shark Prevention Act, both Sanders and Ocasio-Cortez have also called for a return to postal banking. In a press release, Senator Sanders argues:

Americans desperately need and deserve access to banking services that do not rely on either payday lenders or Wall Street financial behemoths. Post offices exist in almost every community in our country. There are more than 31,000 retail post offices in this country. An important way to provide decent banking opportunities for low-income communities is to allow the U.S. Postal Service to engage in basic banking services.

And continues:

This is not a radical idea. The vast majority of postal services around the world allow their customers to do some form of banking. There are 1.5 billion people worldwide who bank with postal services. The American people should have this option as well, just as they have in the past. From 1911 to 1966, the U.S. Postal Service offered banking services. In 1947, the Postal service had 4 million people utilizing its financial services.

[…]

The Postal Service already cashes Treasury checks and issues money orders. The USPS should fully exercise its existing statutory authority and implement pilot programs offering affordable financial services, including ATMs, paycheck cashing, bill payment and electronic money transfers in post offices.

Mehrsa Baradaran, lawyer, banking scholar, and law professor, has been championing postal banking for years.

Her book, How the Other Half Banks: Exclusion, Exploitation and the Threat to Democracy, astutely points out that 40 million Americans do not have access to basic financial services. Postal banking, she argues, can remedy this.

In her Tedx Talk, Baradaran points out that when the Great Depression hit, money flowed to the safe postal banking system. From 1930 to 1933, postal banking deposits doubled. After the Great Depression, postal banking was retooled to pay off the debt and started selling defense savings stamps to help fund the war. At the end of World War I, the government raised $8 billion through the stamps.

In 1947 the U.S. postal banking system reached its peak. It held approximately $3.4 billion in deposits and had 4 million users. But as time went on and more community banks started popping up with higher interest rates and backed by deposit insurance, the need for postal banking declined. In 1966, President Johnson decided to conclusively end the floundering public service.

But as Big Banks continue to lower their savings rate, target middle to high-income earners, and pull out of rural communities, poor and working people are finding it harder to access reasonably-priced financial services or financial services at all. This is further troubling when we all consider existing research that indicates poverty impedes cognitive functioning.

What I love about postal banking is that it’s neither radical nor hypothetical. The infrastructure already exists and we need only refer to our history books to see how it was run. At one point, Big Banks were community banks, who knew many of their patrons and worked hard to gain their trust. That’s just not the reality anymore. Now thanks to Sanders and Ocasio-Cortez’s efforts to restrain consumer interest rates, it’s time to consider how people of all means can access the basic financial tools they need in order to build wealth in 2019.


More

“As Thousands of Taxi Drivers Were Trapped in Loans, Top Officials Counted the Money,” by Brian M. Rosenthal (New York Times)

An in-depth investigation by the NY Times into the price of taxi medallions, the permit that enables drivers to own cabs, that force cab drivers to take out massive loans. According to the piece, a taxi medallion can cost up to $700,000.

Money quote:

New York City in particular failed the taxi industry, the Times found. Two former mayors, Rudolph W. Giuliani and Michael R. Bloomberg, placed political allies inside the Taxi and Limousine Commission and directed it to sell medallions to help them balance budgets and fund priorities. Mayor Bill de Blasio continued the policies.

Under Mr. Bloomberg and Mr. de Blasio, the city made more than $855 million by selling taxi medallions and collecting taxes on private sales, according to the city.

Keeping in theme of this week’s newsletter, it’s difficult to argue that taxi drivers were not setup to fail.


Ask Me Anything


Reader Question: When you first started to track your spending, how did you managed to stick to the new habit? I tried for 2 months. And I lost my tracking after a week due to forgetfulness.  

Great question.

Here’s the honest answer: I didn’t. I fell off the wagon again and again. But, as punishment, I would eventually force myself to sit down and go all the way back to when I stopped recording my expenses and write down everything I missed. It was horrible. It became clear that as soon as I stopped tracking my spending, I began to spend frivolously. Whenever it happened, I almost always blew my budget or came close. If anything, it reaffirmed that tracking my spending is the best way to keep my spending in check.

Also, it’s okay if you go over your budget on occasion, as long as it’s manageable. Even my frugal fiance believes that a budget is just a guideline and shit happens.

Figure out what works for you. Experiment with different ways to track your spending. Some people swear by Mint.com, others love their spreadsheets, and I revel in the simplicity of pen and paper.

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I’m answering questions about minimalism, ethical living, personal finance, purposeful productivity, the practice of law, sustainable economics, and more! To submit your questions, simply reply to this newsletter or shoot me an e-mail at hello@jennifertaylorchan.com.