WASHINGTON — Senator Elizabeth Warren, as a financial industry watchdog, wants to crack down on sky-high interest rates and other potentially unfair practices of the payday loan industry. But as a self-described champion of lower-income families, she also sees a need for small, short-term loans for people who otherwise can’t get credit.
So Warren has seized on a novel idea: Transform the US Postal Service into a lender.
The Massachusetts Democrat is calling for post offices to go into competition with private enterprise and offer simple financial services — like bill-paying, check-cashing and small loans — as an alternative to payday lending.
“There are still people who need cash on a short-term basis,” Warren said in an interview. “The question is: Is it possible to design something and give people access to small-dollar loans without getting them ensnared in the trap of payday lending?”
So-called payday lenders offer short-term loans, often less than $1,000, that carry steep fees and whopping interest rates, which critics say catch borrowers in a negative cycle of debt. But for some of the 12 million Americans who take out these loans yearly, they represent the only option to pay for expenses such as car repairs or unexpected medical bills.
The plan to thrust the Postal Service into the business, an idea that Warren supported in a recent op-ed article for The Huffington Post, faces grim odds in a deeply polarized Congress. Representative Elijah E. Cummings, a Maryland Democrat, has introduced legislation to move the proposal forward, but banks and congressional Republicans are expected to oppose it. Senator Bernie Sanders, an independent who caucuses with Democrats, also supports the concept.
Payday lenders, who say their business has been unfairly maligned, maintain the Postal Service would need to play by the same rules as private enterprises.
Industry representatives say they provide valuable services to millions of struggling Americans who have few credit options and are on the fringes of the traditional banking system.
“We’ve heard a lot of criticism from some consumer groups but we don’t hear viable alternatives for this underserved community,” said Peter Barden, spokesman for the Online Lenders Alliance, a trade group.
In 15 states, including Massachusetts, payday loans are banned or price caps are low enough to effectively prohibit payday lending.
Consumer advocates assail it as a predatory business, arguing that high fees thwart the repayment of loans on time. As a result, borrowers are forced to renew their loan or take out an additional one.
On average, they spend $520 in finance charges for loans averaging $375, according to the Safe Small-Dollar Loans Research Project at the Pew Charitable Trusts.
“Most borrowers can’t support that,” said Nick Bourke, the project’s director.
The industry has recently come under the scrutiny of the Consumer Financial Protection Bureau, which Warren played a key role in creating after the financial crisis. In November, the federal agency took its first enforcement action against a payday lending firm, requiring Cash America to pay $19 million to settle charges it had violated lending laws and impeded an investigation.
A report by the Postal Service inspector general suggested the government agency could allow consumers to borrow up to 50 percent of their paycheck at an annual interest rate equivalent to 28 percent, a fraction of the triple-digit rates common in payday loans.
That addition, combined with offering other financial services, could serve the roughly one-quarter of Americans who do not have bank accounts or need more affordable access to credit. More than 90 percent of the bank branches that closed since 2008 are in lower-income areas.
The changes could generate $8.9 billion in annual revenue for the cash-strapped Postal Service, which is losing billions of dollars yearly. Agency officials are still evaluating the proposal, said Postal Service spokeswoman Toni DeLancey.
Industry representatives said they would welcome new competition into the market, as long as the agency abides by the same rules.
“We’re wholeheartedly supportive of that idea provided they carry the same level of regulatory oversight as those of us operating in the competitive regulated marketplace,” said Jamie Fulmer, senior vice president of public affairs at Advance America, a consumer lending company.
But some bank representatives doubt the Postal Service is suited to take on financial services.
“What is next? Asking Amtrak to get in on the loan business?” said Richard Hunt, chief executive of the Consumer Bankers Association.
From 1911 to 1967, post offices allowed consumers to make savings deposits but discontinued the practice as banks began to offer higher interest rates. Today, the agency provides money orders.
The payday loan industry is pushing for one federal charter for lenders to follow, as the business increasingly moves to the Internet and crosses state boundaries, leading to a patchwork of lending regulations. They say that framework could help identify fraudulent companies, while giving others the ability to create more flexible financial products.
“People are preferring to go online instead of standing in line,” said Mary Jackson, senior vice president of corporate affairs for Cash America.
On the other side is an effort to rein in the payday lenders, led by Senators Jeff Merkley of Oregon, Tom Udall of New Mexico, Richard Durbin of Illinois and Richard Blumenthal of Connecticut, all Democrats.
That legislation, which Warren signed on to last year, would require all lenders, including banks, to follow state rules for the small-dollar, payday-like loans they offer customers.
“It would level the playing field for a wide range of financial services providers and make sure there’s consistent and meaningful protections,” said Tom Feltner, director of financial services at the Consumer Federation of America.