The payday loan and auto securities industry provides predatory loans to people who live in communities that do not have access to traditional banks. In Illinois, the interest rate for these loans varies between 197 and 297%. Nationally, the industry extracts $ 90 billion from low and middle income households per year.
To put this in context, the millions of Americans who sometimes rely on these usurious loans spend more on interest and fees in a year than on food.
Now thanks to a bipartisan group of Illinois lawmakersGovernor JB Pritzker has a hugely important bill on his desk that would cap interest rates at 36%.
As we await the governor’s signature, now is the perfect time for Illinois policymakers to start the next conversation to ensure that every American has access to financial services: postal banking and public banks.
Community banking in decline
To get started, let’s do some level adjustments.
First, the payday loan and auto securities industry only exists because large swathes of the United States lacks even a single traditional bank in the community. It’s as simple as that.
Second, traditional banking operations have changed dramatically over the past decades. In 1985 there were more than 18,000 of these banks, but in 2018 there were only around 5,400. Today, only five banks – JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and US Bancorp – control half of all assets, or roughly $ 7 trillion.
As these banks have grown through mergers and acquisitions, they have closed branches in many low-income communities, in Indigenous communities, and in communities of color in Canada. urban and rural areas. And these trends don’t even take into account decades of racist banking practices.
Third, everyone should have access to loans, but not all loans are created equally.
When the banks lend, they create new money. These loans support home purchases and help people start and grow businesses. More money flows when banks invest in a community by continually making new loans. As money circulates, property values increase, demand for housing increases, and new businesses open. This economic activity stabilizes the tax base and the cycle repeats itself.
In other words, while state and local governments can encourage economic development, bank lending does.
When people rely exclusively on payday loans and auto titles, there is less (if any) new home and business loans in their community. Without bank loans, there is no new money creation, which means communities are stuck in a cycle of disinvestment. This one-two punch can stun communities for generations.
So what can be done? Governor Pritzker’s signing on the Illinois Predatory Loan Prevention Act would provide the people of Illinois with much needed financial assistance. But national and local authorities should also adopt two elegant solutions debated in Congress: postal banking and public banking.
If Congress adopts the Postal Banking Act, the US Postal Service will be able to provide basic checking, savings, bill payment, and short-term credit solutions to workers and small businesses. These are services that the post office actually offered until 1967. With 11,000 post office branches, the post office bank could be the oasis that every banking desert needs.
The post office has the infrastructure to restart postal banking services. It has professional staff who already handle cash and sensitive materials. It has safes, planes and trucks on site, as well as internal security. And he’s already trading around $21 billion mandates per year.
In addition, polls show that 75% of all voters support postal banking services. It is a bipartisan political grand slam.
the Public Banks Act would help states and cities to launch their own public banks. Instead of depositing hundreds of billions of public funds in big banks for the benefit of distant shareholders, public banks could invest money locally. National and local public banks could be created micro mortgages, finance affordable housing, advance clean energy projects and ensure that small and medium-sized businesses have access to capital.
Capping interest rates on loans is just one step in a larger package of solutions to ensure that every person, business and community has access to fair loans and banking services. Banks have chosen not to provide these services, and payday and auto securities lenders have embarked on predatory offers. Neither industry will change. Public banks are the ideal solution to fill these gaps.
Ameya Pawar is a former Chicago city councilor, a member of the Open Society Foundations, and a senior member of the Economic Security Project. Terri Friedline is Associate Professor at the University of Michigan and author of “Banking on Revolution: Why Financial Technology Won’t Save a Broken System”.
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