On Tuesday of this week, I presented at the Utility and Review Board hearing on payday loans. The UARB is reviewing the payday regulations and will issue a decision on these loans in a few weeks. This post details what I presented to the Board: at best payday lenders are predators and at worst engage in benevolent exploitation. There is a clear need to more strictly regulate and enforce regulations.
Usury is never justified. It is a criminal offence defined as the charging of exorbitant interest rates. Under the Criminal Code the amount considered criminal is more than 60% interest per annum. This is to protect citizens from loan sharks. In Nova Scotia, payday loan regulations cover loans up to $1,500 granted for periods of 62 days or less. Nova Scotia still has the highest regulated rate in any province, which is at least 550 times what is considered criminal. As illustrated by Bruce Wark in The Coast: “a $300 payday loan for 14 days could cost up to $75 and carry an annual percentage rate (APR) of 651.8 percent. The same loan on a line of credit would cost about $5.81 with an APR of seven percent; bank account overdraft protection would cost $7.19 with an APR of 19 percent and a cash advance on a credit card would typically cost $7.42 with an APR of 21 percent.”
Provincial government regulations, with the exception of Quebec have allowed lenders to supersede the criminal code, exempting payday lenders from prosecution. Charges can only be brought in the province of Newfoundland and Labrador, which has chosen not to introduce regulations or to even prosecute despite complaints of violations. Nova Scotia is one of the other provinces that somehow deems the lenders to be worthy of regulation, and are scared to put them out of business. Is this really in the public interest?
Payday lending in socioeconomic context
Many Canadians are living paycheque to paycheque (47% report doing so) and those paycheques barely cover their basic needs. Very few Canadians have any ‘savings’ or contingency funds to cover anything outside daily expenses. The person using payday loans is the working poor, facing financial difficulty because of a health care crisis or other emergency, but increasingly struggling just to pay regular monthly expenses. People seeking payday loans in Halifax recently related that some of their reasons include car repair, heating oil, school expenses, and hours cut at work.
Payday loans proliferate in our socio-economic context, which has been marked by an increase in financial and economic insecurity, and debt. We have seen 30 years of stagnation in average wages, with the minimum wage in Nova Scotia only now approaching its 1977 peak (in real dollars). Household debt-to-income ratio has risen to a record 162.6 per cent, which means for every dollar of after tax income, Canadian households carry $1.62 in debt (note that this does include mortgages, though 47% of that debt is consumer debt). It is in this context that our provincial government has opted for a regulatory approach that accepts the growth of payday loans, arguing that such lenders are preferable to informal loan sharks. Is this benevolence?
Image from StopPaydayPredators.orgSanctioning exploitation: a question of balance?
The Nova Scotia cabinet minister responsible for policies related to payday loans recently suggested that constructing the right rules to govern these loans is “really a matter of finding a balance.” The balance he was referring to was between regulating business and protecting consumers. To find a balance between two unequal parties, it is necessary to counterbalance the power of the more powerful party, in this case the payday lenders. Payday loan consumers are amongst the most vulnerable and payday lenders have very little competition. Indeed, once one payday lender traps someone, other payday lenders benefit as customers desperately seek to pay the first one off.
Unless one believes our government should be in the business of regulating the benevolent exploitation of community members among us, we need very stringent regulation, and indeed an outright ban on payday lending. Ensnaring people in dire financial straits in debt traps is not benevolent: Service Nova Scotia reports to the UARB that in 2013-14 52% of all loans were repeat loans and that borrowers received an average of 13 loans each. Of course, this is highly profitable exploitation. Canada’s payday lending market is worth about $2.5 billion in loan volume each year, and consists of about 2 million customers.
Nova Scotia’s regulatory regime grossly inadequate
In 2011, when the unelected Utility and Review Board reviewed the regulations for payday loans in Nova Scotia, it reduced the maximum charge from $31 to $25 per $100, based on the evidence presented to it. The evidence for reducing the fees even more has only mounted.
Nova Scotia’s regulatory regime, like other provincial regulatory approaches, can be described as “more like industry cost-and-profit protection than consumer protection.” The one exception is Quebec: the province limits all loans to a maximum effective annual rate of 36%, which effectively ended payday lending in the province, since no payday lender chooses to operate with a low profit margin. Researchers reported not knowing of “any evidence showing that this choice has caused any harm to consumers in the 15 US states plus the District of Columbia that have set rates so low that all payday lending has ceased.”
Even with weak regulations, most governments could step up enforcement. Ontario recently challenged payday loan companies to follow the (weak) rules and not charge fees to end run the province’s maximum borrowing cap. Similar challenges via a class action lawsuit have also been made in Alberta, Manitoba and British Columbia. Ontario refused to issue any new licenses for one of the payday lenders that had these sorts of complaints lodged against it. The B.C. government fined a company $25,000 and demanded that it refund “unlawful” fees paid by consumers, but these penalties remain unpaid as the lender appeals. Service Nova Scotia reports that 18 inspections were done last year, but with 49 outlets that raises questions of adequacy, especially with no details on those inspections. It also reports that it received only 3 complaints last year (note that only written mailed or on-line complaints are possible).
Financial Exclusion is a Structural and Systemic Problem
Financial exclusion is a structural systemic problem that requires revisions to bankruptcy laws, strengthening usury laws, and strong consumer-protection laws that are enforced. In addition, non-profit partners could be supported to do more to fill the need. It is also time for governments to ensure that mainstream banks and credit unions to do more for this clientele. Recently, Van City Credit Union began offering products designed to help those who require them in the first place by establishing credit history rather than trapping people in debt. Our governments can also participate in facilitating alternatives. What about banking at the post office?
Why is it so expensive to be poor?
It is incumbent on our governments and regulatory bodies to protect those most in need. This is, after all, also the era in which middle-income and high-income earners can borrow hundreds of thousands of dollars on a five-year mortgage at 4%, while low-income earners face borrowing a few hundred dollars for a couple of weeks at 600 to 800%!
Just because something is legal, doesn’t mean it is ethical. Indeed, the expansion of the credit system is more insidious than just payday lenders and includes student loans. Described as debtfarism, it entrenches reliance on privately created money, especially as the number of holes in our social safety increases. Ultimately, addressing this unmet need requires repairing that net, and working collectively to strengthen the financial and economic security of Canadians. In the meantime, lots can be done to protect consumers of these loans. Here are our recommendations:
The provincial government should consider making payday loans illegal and should develop a comprehensive poverty reduction strategy that includes addressing the needs of the working poor. Barring making them illegal, the UARB should enforce the following:
- Limits on fees: the maximum allowable interest should be lowered to respect the federal maximum interest rate of 60 per cent per annum, i.e., $1.82 per $100 over two weeks and no other charges permitted.
- Limits on sizes: a loan cannot be for more than 20% of net pay
- Require that contracts for loans include contact information for credit counselling services, and require that such credit counselling information be prominently posted within outlets offering loans.
- Require information that makes comparison of costs to other financial products, so that consumers fully understand their choices.
- Prohibit payday lenders from reporting of all information, including default information, related to small short-term loans in the credit reporting system.
- Should make it easier for consumers to lodge, which make telephone complaints possible, and report in more detail on their enforcement efforts (18 in a year when there are 49 outlets does not seem sufficient), and provide audited reports on clientele demographics and payday loan usage in the province.
- Prevent colocation in casinos; and institute municipal bylaws that limits payday lenders to a certain number and a certain distance from each other, and institute minimum distances from the location of VLTs
- Increase municipal business licensing fees and use the revenue to support non-profit partners to assist in financial literacy and provision of other services