Poverty Reduction: Ending the Payday Loan Cycle

I’ve been reading a document from the Tamarack Institute this week. It’s called 10—A Guide for Cities Reducing Poverty and it was presented during the Cities Reducing Poverty: When Mayors Lead conference in Edmonton in February. I borrowed CBRM Mayor Cecil Clarke’s copy. (JUST KIDDING! He didn’t attend. I have included a copy at the bottom of the article, though, perhaps he’ll check it out.)

The document includes 10 real-life poverty reduction strategies from 10 real-life Canadian cities and I’m going to explore a few of them over the coming weeks beginning today with Number 6, which concernsPayday loan store. payday lending and is brought to you by the real-life Canadian city of Hamilton, Ontario.

A payday loan, according to the Nova Scotia Utility and Review Board (or UARB which, for reasons I cannot fathom, is the body charged with regulating them in this province) is a loan of up to $1,500, advanced for 62 days or less.

Payday lending, according to this terrific Bruce Wark article  in the 7 August 2014 issue of The Coast, is “a form of legalized loan sharking.” I’m not even kidding this time, that’s literally what it is:

In 2007, the federal government amended the criminal code to allow payday lenders to set their rates higher than 60% per year. That 60% maximum had been intended to stop loan sharks from preying on people in desperate financial straits by lending them money at excessively high rates.

Prior to this change in the legislation, payday lenders had faced class action lawsuits over their high rates of interest. Now, they could legally lend at rates over 60%, provided the province in which they were lending had regulated the industry.

Nova Scotia, you will blush with pride to hear, was the first province to regulate, opening wide the door and calling, “Yoo hoo! Over here!” to the payday loan industry. (Quebec and Newfoundland, alone among the Canadian provinces, declined to regulate.) And what a fine time to welcome high-interest lenders to the province—just as the world economic system was collapsing in on itself.

Wark’s article will tell you everything you need to know about the payday loan cycle and I highly recommend you read it. (Also worth checking out is this Global TV interview with a woman who worked for two payday loan outfits in Calgary over a period of five years before finally quitting because, “I can’t go to work stressing that [if] I’m not getting somebody in a deeper hole, that I’ll get fired.”)

What you chiefly need to know about payday loans is that, as Christine Saulnier of the Canadian Centre for Policy Alternatives stated in a 2008 presentation to the UARB, their costs “disproportionately affect the most vulnerable (asset-and income-poor) consumers who have few if any other options to fill the needs that are being filled by a payday loan.”

(Although there’s one other thing I would note: when you look up these payday loan companies in the Nova Scotia Registry of Joint Stock Companies, it’s startling how many of them have lawyers from Halifax’s toniest law firms as recognized agents.)

Today, though, I would like to accentuate the positive; eliminate the negative; possibly even latch on to the affirmative—and look at ways the payday loan beast I mean industry can be tamed. Which brings us back to Hamilton, Ontario.

In February 2016, Hamilton became the first city in that province to license payday loan lenders. To operate in Hamilton, such lenders must pay $750 each year to have an inspector check their operations, provide credit counselling information for anyone entering their outlets and ensure the actual interest rate charged on short-term loans is clearly displayed.


But wait! There’s more…

Just after Hamilton passed its licensing legislation, the province of Ontario took an even bolder step in the effort to curb predatory lending: Finance Minister Charles Sousa announced changes to the regulations governing credit unions that would allow them to make small, short-term loans.

According to the 15 August 2016 edition of the Windsor Star, the Windsor Family Credit Union (WFCU) has become the first in Ontario to take advantage of these new abilities: it is offering small, short-term loans at an annual interest rate of 37% to “those who otherwise wouldn’t qualify.” Borrowers must be employed and the maximum loan will be $2,500.

Megan McIver, a spokeswoman for Credit Unions of Ontario, said the province wants the industry “to step up to the plate” in an effort to strengthen protection for borrowers who rely on payday loans. She said what WFCU is offering — even with a 37% annual interest rate — is not a money-making initiative.

To put that 37% interest rate in perspective, consider this: in Nova Scotia, the maximum interest that can be charged by a payday lender per $100 is $22. So, if you borrow $300 for 14 days, it will cost you $66, which works out to an annual percentage rate (APR) of—I hope you’re sitting down—573.57%.

To put it into even sharper perspective, consider that that $22 per $100 loan is a marked improvement over the initial rate set by the UARB of $31—an APR of over 800%.


The Not-So-Wild West

Alberta’s NDP government took aim at predatory lenders with new regulations that came into force on 1 August 2016. The province capped interest per $100 at $15 — the lowest rate in the country.

According to CTV News Calgary, the new rules forbid payday lenders charging fees to cash loan checks, soliciting by email or phone or offering another loan while one is still outstanding.

In addition, the Alberta government says it will work to encourage banks and community groups to offer alternative short-term loans — an idea that has already seen take up with two banks, First Calgary Financial and Chinook Financial, offering loans at 19% interest with a six-to-18-month payback period.

“I am so pleased First Calgary Financial will launch its Cash Crunch loan on August 22. It is credit with reasonable rates, longer payback terms and financial literacy supports that set Albertans up for financial health, not ruin,” said Stephanie McLean, Service Alberta Minister.


South of the Border

The United States is home to a number of  interesting initiatives enlisting credit unions to combat payday lenders.

In January 2016, the Filene Research Institute, a Wisconsin-based consumer finance research organization, announced a collaboration with QCash, a digital lending platform offering “relationship-based underwriting, without credit check, to [credit union] members in search of small, short-term unsecured loans.”

QCash is the brainchild of the Washington State Employees Credit Union (WSECU) which, according to the press release announcing the collaboration, has been “meticulously refining payday loan alternatives at the credit union over the past decade.”

WSECU’s QCash program books over 30,000 loans annually, maintains loan loss rates in the 6-8% range, provides financial education for members using this product, and generates a $4 million/year, net.

Besides offering small loans at short term, QCash also offers “super speedy” response times to loan requests and access via mobile or online banking, thus taking on payday lenders in an area where they had previously stood unchallenged, convenience.

And that’s not Filene’s only initiative. The institute has received $700,000 from the Ford Foundation to develop new financial products that reduce debt and increase assets for low-income families. One of the ideas it’s test-driving is The Employer Sponsored Small Dollar Loan Program, under which an employee may borrow $300 to $1,500 from a local credit union if his employer verifies his income and sets up an automatic withdrawal to repay the loan from his paycheck.

Another pilot program, Borrow and Save, ensures that half of whatever amount a client borrows is placed in a savings account. Once the loan has been paid off, the client gets access to the saved portion. The idea is not only to provide money for emergencies, but to help clients build some savings for future, unexpected expenditures.

“The goal is to establish a behavior and a habit of saving,” Filene’s Andrew Downin told the New York Times in January 2016.


I’m Looking at You, Nova Scotia

I wrote to the Nova Scotia departments of business and finance and to my own branch of the Sydney Credit Union see if there is any talk of measures to combat predatory lending in Nova Scotia.

The provincial government spokesperson I reached has promised a reply, so I will update this story when I receive it.

The credit union has yet to respond.

So here’s what Nova Scotia Business Minister Mark Furey told Bruce Wark in 2014, when Wark asked if the province, which regulates credit unions, could require them to offer small, low-interest loans.

“My mind’s not closed, I don’t wear blinkers,” he says. “It’s certainly an option and an opportunity we could explore as government.”

And I realize I’ve come a long way from what “cities” can do to reduce poverty—this sort of action is clearly a provincial matter. But a city could certainly encourage a province to step up, couldn’t it? And a city could also encourage its own credit unions to at least explore the possibilities represented by organizations like the Filene Research Institute. Really, there’s a lot a city could do…if its mayor were willing to lead.


Note: Articles on payday lending are never complete without the obligatory quote from the payday lenders or the organizations that represent them — here in Canada it’s the Canadian Payday Loan Association (CPLA), which represents 19 companies comprising 816 of the 1,537 payday retail outlets and licensed internet lenders in the country. Four of its member operate in NS with 16 retail outlets and internet lending licenses.

Here, then, is a bunch of quotes from the payday lenders. Enjoy:

“We look at Canada as an opportunity. Canada is a good place to be. We just want to let the legislative process play itself out,” Jamie Fulmer, spokesperson for Advance America, the leading payday lender in the United States. (National Post, 18 May 2009)

“Do we want people going to pawn shops, bouncing cheques or going to the pool hall to borrow from some unscrupulous person?” Stan Keyes, president CPLA (National Post, 18 May 2009)

“It’s important to look at how many credit cards they have, how many other types of credit they’ve got that are causing them difficulty. You get the impression it’s just payday loans. Well, no, they have payday loans because they have other credit difficulties as well,” Norm Bishop, secretary CPLA (CBC, 10 February 2015)

[CPLA] President Stan Keyes says putting more restrictions on lenders would likely hurt consumers.

“They would of course shut their doors, and that would create an online industry that would be unlicensed. This is where the demand will go,” he said.

The association says the industry is small and not making an unreasonable amount of profit from consumers. (CBC, 3 February 2015)


Photo by Vinceesq via Wikimedia Commons

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