Next week, the Nova Scotia Utility and Review Board will begin a new round of public hearings on payday loan regulations. This blog captures CCPA-NS’ written submission submitted to the UARB.
It is past time for our governments to design regulations that actually protect vulnerable borrowers from usurious lenders.
In an economy characterized by precarious employment,1 rising inflation,2 and minimum wages substantially lower than required to cover basic household needs, many Canadians struggle to meet their day-to-day financial commitments. According to Statistics Canada, 17% of all Canadian households and 25% of Canadian households with incomes less than $40,000 have monthly spending that exceeds their income, while 27% of all Canadians and 39% of Canadians with household incomes under $40,000 borrow to buy food or pay for daily expenses because they run short of money.3
The lack of financial choices available to payday borrowers
Even as households increasingly must borrow to cover basic financial needs, a growing proportion of Canadians, particularly rural and low-income Canadians, are under-served by banks and other traditional financial institutions. Canadian banks have been closing branches for years, and rural and low-income communities have significantly less access to banks.4 “More than 1,200 rural communities in Canada have post offices but no banks or credit unions, and only 54 of 615 Indigenous communities have access to local bank branches,” In addition, small personal banks loans have been replaced by credit cards and lines of credit, but often these financial alternatives are not available to low-income households.
With increased borrowing to make ends meet, combined with rising financial exclusion, many low-income Canadians have no choice but to take out payday loans. According to a Financial Consumer Agency of Canada (FCAC) survey, 65% of payday borrowers do not have access to a credit card, while 88% do not have a line of credit.5 A recent ACORN Canada survey found that the majority of payday borrowers do so as a last resort because they have been denied access to adequate credit by mainstream financial institutions; only 3% said they prefer high-cost loans. People do not take out payday loans by choice, but because they lack choice.
Exploiting the vulnerable
As most payday users borrow because they have no alternative credit choices to meet necessary expenses,6 payday lending can only be categorized as exploitation. Exploitation occurs when one party takes unfair advantage of another; it uses another person’s vulnerability for one’s own benefit.
The industry claims payday borrowers enter agreements freely, but true freedom requires choice, which most payday borrowers have been denied. Furthermore, many borrowers’ susceptibility to exploitation is aggravated by lower levels of financial literacy.7 The FCAC survey shows the majority of payday borrowers did not correctly identify that a payday loan is more expensive than an outstanding balance or cash advance on a credit card.8
It is the vulnerable position of most payday borrowers that enables payday lenders to charge annualized interest rates over 20 times higher than high-cost credit cards. Payday lending is essentially government-sanctioned exploitation.
As it stands, Nova Scotia’s maximum rate is higher than British Columbia, Alberta, Ontario, Saskatchewan, Manitoba and New Brunswick.
Repeat loans, debt cycles, and financial consequences
It is also concerning that many are forced to take out another payday loan. In Nova Scotia, 63% of the loans granted for the year ending June, 2020 were repeat loans. The average repeat-loan borrower took out roughly seven repeat loans. Thus, the majority of borrowers who seek short-term bridge financing, end up trapped in a long-term cycle of debt, often paying much more in interest and fees than the value of their initial loan.9 Indeed, given the high proportion of repeat loans, it is clear that payday lenders rely on repeat loans to maintain profitability.10
The financial consequences of the debt cycles caused by payday loans are dire. Recent studies find that payday loans create difficulties paying bills, cause borrowers to default on other types of debt, and increase the likelihood of bankruptcy.11 The aggravated financial distress caused by payday lending, in turn, is associated with deteriorating health, and food insecurity.12
Recommendations
As per the issues before the NSUARB, we recommend:
1. The maximum cost of borrowing that is currently set at $19 per $100, which is a maximum annual interest rate of 495% (based on a two-week loan), be lowered to 35%, which is the rate in Quebec. The profitability of the payday loan industry should not be placed ahead of the protection of vulnerable consumers.
2. The maximum default fee of up to $40 is one of the highest in the country and should be lowered to $20 per loan, which is what is charged by Alberta, B.C., N.B. and N.L.
3. Payday loan regulations should be reviewed at least every two years by the NSUARB.
Given the harmful exploitation of payday borrowers, and the damaging financial and social impact of payday lending, effective consumer protection requires much more than making small adjustments to the maximum fee charged by payday lenders. Substantial, broad-based reforms are required, and though the UARB may consider many of these recommendations to be beyond its mandate, under the Consumer Protection Act, “The Board may make recommendations to the Minister on matters in respect of payday loans and payday lenders.”13 Our additional recommendations are as follows:
4. The provincial governments should encourage and promote alternative sources of small, short-term credit, and in particular, credit union credit products geared toward low- and moderate-income families.
5. The Nova Scotia government should lobby the federal government to amend the Bank Act to require banks to improve access to rural and low-income communities, and to ensure access to:
Low-interest credit for emergencies including low-interest credit cards or line of credit;
Low-interest overdraft protection;
Access to no-holds on cheques;
Lower the Non-Sufficient-Funds fee from $45 to $10.
6. The provincial government should lobby the federal government to amend the Criminal Code, to change the criminal rate of interest in subsection 347(2) to 35% (from 60%) and repeal section 347.1 (which provides certain exemptions from the criminal rate of interest to payday lenders).
7. The provincial government should pay all employees on a weekly basis and encourage private employers to do the same. Weekly payment means that when employees face a cash shortfall, they do not have to wait as long until they are paid; this should help many avoid having to access short-term credit.
8. The Nova Scotia government must also address the underlying issues to support those who are struggling to make ends meet and having to resort to these loans, by strengthening the social safety net and making life more affordable. It should, among other priorities, improve income assistance rates and other income supports including the NS Affordable Living Tax Credit, increase the minimum wage substantively, address the housing crisis by building non-market housing, and improve public services including extending public health care for pharmacare, and continue to build an affordable, universal child care system.
Authors: Michael Bradfield, Retired Dalhousie University Economist and CCPA-NS Research Associate; and Christine Saulnier, Nova Scotia Director, Canadian Centre for Policy Alternatives. Twitter: @CSaulnierHfx. Thanks to James Sawler, Economist at MSVU for his contributions and Jacob Burchell, practicum student from Dalhousie’s Law, Justice and Society program, for his research support.
1. F. Fong, Navigating Precarious Employment in Canada: Who Is Really at Risk? Chartered Professional Accountants of Canada, 2018.
2. Statistics Canada. Table 18-10-0004-01, Consumer Price Index, monthly, not seasonally adjusted.
3. Financial Consumer Agency of Canada, Canadians and Their Money: Key Findings from the 2019 Canadian Financial Capabilities Survey, November 2019, p.7.
4. H. Chen and M. Strathearn, “A Spatial Model of Bank Branches in Canada”, Bank of Canada Working Paper, 2020.
5. Financial Consumer Agency of Canada, Canadians and Their Money: Key Findings from the 2019 Canadian Financial Capabilities Survey, November 2019, p.13.
6. Financial Consumer Agency of Canada, Payday Loans: Market Trends, October 26, 2016, p.8.
7. K. Kim and J. Lee, “Financial Literacy and Use of Payday Loans in the United States”, Applied Economics Letters, 25(11), pp. 781-784.
8. Financial Consumer Agency of Canada, Payday Loans: Market Trends, October 26, 2016, p.5.
9. PEW Charitable Trusts, Payday Lending in America: Who Borrows, Where They Borrow, and Why, 2012, p.8.
10. C. Robinson, “A Business Analysis of the Payday Loan Industry,” Payday Lending in Canada in a Global Context, Eds. J. Buckland, C. Robinson and B. Visano, Palgrave-Macmillan, 2018.
Michael A. Stegman and Robert Faris, “Payday Lending: A Business Model that Encourages Chronic Borrowing,” Economic Development Quarterly (2003).
11. J. Gatherwood, B. Guttman-Kenny, and S. Hunt (2019) “How Do Payday Loans Affect Borrowers? Evidence from the U.K. Market”, The Review of Financial Studies, v. 32, n. 2, p. 449.
P. Skiba and J. Tobacman (2019) “Do Payday Loans Cause Bankruptcy?, Journal of Law and Economics, v. 62, p. 485.
B. Melzer (2011) “The Real Cost of Credit Access: Evidence from the Payday Lending Market”, The Quarterly Journal of Economics, v. 126, n. 1, p. 519.
12. E. Sweet, C. Kuzawa, and T. McDade (2018) “Short-Term Lending: Payday Loans as Risk Factors for Anxiety, Inflammation and Poor Health”, SSM - Population Health, v. 5, p. 118.
Y. Chang (2019) “Does Payday Lending Hurt Food Security in Low-Income Households?”, Journal of Consumer Affairs, v. 53, n. 4.
13. Nova Scotia Consumer Protection Act, 18T(10).
