NDP Proposes Alternative to Payday Loans

Susan Leblanc, MLA, Dartmouth North

Susan Leblanc, MLA, Dartmouth North

Susan Leblanc, the NDP MLA for Dartmouth North, has introduced a bill that would see the provincial government guarantee personal, short-term, “micro-loans” for amounts up to $2,000 from credit unions.

I spoke to Leblanc briefly, by phone, on Friday and she told me the guarantee would be similar to the one the province now provides for small business loans from credit unions. The idea, she said, is to provide an alternative to payday loans — the short-term loans provided by payday lenders (like Money Mart and EasyFinancial and Money Direct and The Cash Store) at usurious rates in this province. (Both payday lenders and credit unions are regulated by the province, unlike banks which are under federal regulation.)

The Spectator has written about payday loans — and alternatives to payday loans — before (here and here), but the introduction of this new legislation seems like the perfect hook on which to hang an update, so let’s wade in.

 

The situation

The first thing to be said about payday lenders is that they do meet a societal need — they just do it in a really crappy, self-serving way.

Payday lenders will lend to the “credit-challenged,” a cohort that may not be able to borrow from banks or credit unions (although, as you will see a bit later, payday loans are also used by people with good credit). Payday lenders allow you to apply online or via a phone app. They’ll get you your cash in “10 minutes or less.” And if you prefer to arrange your loan in person, they have lots of bricks and mortar outlets. (John Oliver on Last Week Tonight said there were more payday loan outlets in the United States than McDonald’s and Starbucks outlets combined. I decided to compare payday loan outlets in Cape Breton to Tim Hortons and — if Google Maps is to be trusted — they are practically tied, with 20 Tim Hortons to 19 payday lending outlets.)

In 2016, the Financial Consumer Agency of Canada (FCAC) polled 1,500 payday loan users, asking them, among other things, what other financing options they had access to:

[O]nly 35% of respondents reported having access to a credit card, compared to 87% of Canadians; 12% had access to a line of credit versus 40% of the Canadian population.

    • 27% said a bank or credit union would not lend them money.
    • 15% said they did not have time to get a loan from a bank or credit union.
    • 13% said they did not want to get money from a bank or credit union.
    • 55% said payday lending offered the best customer service.
    • 90% said payday lending was the fastest or most convenient option.
    • 74% said payday lending was the best option available to them.

So, payday lenders are convenient and they serve a need, but they also charge exorbitant rates. In this province, they are permitted to charge $22 dollars over two weeks for every $100 loaned — that’s an annual percentage rate (APR) of over 500%. The business model depends on borrowers being unable to repay the initial loan on time and rolling the debt over into new loans, with all the attendant penalties and fees. (Payday lenders charge interest on loans that have not been paid in full by the deadline — in Nova Scotia, the interest rate charged is 60%, the maximum permitted under the Canadian Criminal Code.) The result is that some clients never emerge from debt (and may eventually be forced to declare bankruptcy).

Those FCAC stats come from a Gardner Pinfold report presented to the UARB in September, during hearings on payday lending, on behalf of the Nova Scotia consumer advocate David Roberts. The report also found that the use of payday loans in Nova Scotia has been growing — between 2012 and 2016, the number of loans granted rose from 148,348 to 213,165 (an increase of 24%) before dropping back slightly in 2017 to 209,000. The number of repeat loans (which the province has only been tracking since 2013) has also been growing, and in 2017 numbered 117,896. The default rate has also risen — from 7.1% in 2012 to 7.8% in 2016 — but the average value of a loan has remained steady at about $440.

Interestingly, in terms of who gets into trouble with payday loans, the report cites research by Hoyes, Michalos & Associates, one of Ontario’s largest Licensed Insolvency Trustees, which found that:

[M]iddle- and higher-income earners are much more likely to use payday loans to excess. The average monthly income for a payday loan borrower is $2,589, compared to $2,478 for all debtors. Payday loans are more likely to be used by debtors with an income over $4,000 than they are to be used by those with an income between $1,001 and $2,000.

The report continues:

The finding that payday loan use is not restricted to low-income borrowers was reflected in a Financial Consumer Agency of Canada (FCAC) study, which concluded that “while payday loans are primarily used by those with low-to-moderate incomes (more than half lived in households with annual incomes under $55,000) many higher-income Canadians also reported accessing these loans. Twenty percent of respondents reported household incomes exceeding $80,000.”

 

The bill

Leblanc told me that in drafting Bill No. 57, an amendment to the Credit Union Act, the NDP looked “across the country” at alternatives to payday loans.

[O]ne of the big things that we looked at was the Vancity model, that’s the credit union out in Vancouver, and so we took inspiration from some of those things, but we also did quite a lot of talking to people here, on the ground.

Those “people” included credit union board members and employees who, according to Leblanc, declared themselves interested in providing short-term micro-loans, but only if the government were willing to guarantee them.

According to Leblanc, there is nothing in Act that would stop the province’s credit unions from providing such loans now (and Mike Toomey, lending manager at the Sydney Credit Union, told me back in 2016 that credit unions do provide “lending options for smaller amounts”) but competing with the payday lenders is a “risky endeavor,” which is why the NDP is proposing the government guarantee.

Payday lenders on Cape Breton Island. (Source: Google maps)

Payday lenders on Cape Breton Island. (Source: Google maps)

 

The NS model

The Nova Scotia model cited by Leblanc is the Credit Union Small Business Loan Guarantee Program. As the government explained in a 2016 press release about the program:

Credit unions administer the program and provide loans to small businesses and social enterprises, ensuring lending decisions are made in the community. Government partners with the Nova Scotia Co-operative Council to provide the guarantee and management of the portfolio.

Participating credit unions here in Cape Breton include those in Sydney, Glace Bay, Sydney Mines, Dominion, Isle Madame and Chéticamp as well as the East Coast Credit Union which has branches in Baddeck, Inverness, L’Ardoise, Mabou, Margaree, Port Hawkesbury, Port Hood and St. Peter’s.

Under the terms of the program, credit unions can provide financing up to $500,000 in the form of “term loans, working capital and lines of credit.” Loans may be granted for up to 10 years and the province will guarantee up to a maximum of 90% of the value of all term loans and 75% of lines of credit, although a 90% guarantee may be available on the latter to those who qualify under “special financing streams.” (These include streams for immigrant entrepreneurs, Black entrepreneurs and those starting or expanding businesses in the forestry, fisheries, social enterprise and agri-business sectors.)

The web site states that all types of businesses are eligible “except residential and commercial real estate, beverage rooms and taverns, or any venture of a questionable ethical or legal nature.” (Which makes me wonder if you could borrow money to open a payday loan operation — I’m thinking the answer is “No.”)

That 2016 press release mentioned earlier put the default rate on the loans at 5%.

 

The BC model

The British Columbia model Leblanc cited is the Fair and Fast Loan program offered by the Vancity credit union in Vancouver.

I spoke to Vancity’s vice president of credit and member support, Mo Ladak, on Monday and asked him what had inspired the program, which launched in 2014. He said:

Ultimately, we saw a need in our community…with these various payday lender shops popping up on a lot of street corners and really gouging individuals…with their extremely high rates. Although they don’t promote the rate, they promote the cost of borrowing, but when you translate it to a rate, back then, it was equal to about 600%…I think now it’s around 400% or so, which is still extremely high.

Ladak said Vancity CEO Tamara Vrooman was “quite passionate” about the issue, and so the credit union did some research based on its own members and “embarrassingly,” he said, noticed that about 12% of them had “a pre-authorized payment going to a payday lender.” For Ladak, this shows that use of payday loans is not limited to low-income or “credit-challenged” individuals. Sometimes, he said, people resorted to this channel for reasons of “convenience or access” — they didn’t want to go to the bank or the credit union to apply for this type of loan because they “felt a little bit embarrassed” about needing it.

Initially, members had to come into a branch or contact Vancity’s call center to arrange a loan under the Fair and Fast program, but in August 2015, the credit union really began competing with the payday lenders in terms of convenience and access with the launch of its online/mobile solution. Ladak said Vancity first looked at how payday lenders were adjudicating loans and realized they weren’t consulting credit bureaus — they weren’t actually judging people based on their past credit.

“So what we did,” said Ladak, “was we created an algorithm that would look at the member’s relationship with us in terms of, primarily, had they been with us 90 days, so we could look back at their history?” The algorithm also considers whether the applicant is a BC resident and whether they receive any social assistance (as Ladak explained, loans can be considered an asset “and hence could impact their social income”). Also taken into account is the member’s history with the credit union — have they ever been overdrawn? Have they ever written an NSF (non-sufficient funds) check? Do they make regular deposits?

The online/mobile service removed the need for applicants to go into a branch and speak to anyone about their situation — loans could be “approved and funded within 10 minutes” and the result, said Ladak, was “exponential growth” in the program which now has a loan portfolio worth $9 million.

Fair and Fast loans range from $100 to $2,500 and the payback period can be anywhere from two weeks to two years, although the average is 12 to 13 months. Vancity charges a 19% lending rate which Ladak said makes it similar to a credit card. Borrowing $100 for two weeks from Vancity will cost you about 80 cents. Borrowing the same amount for the same term from a payday lender would, under current BC legislation, cost you $19.

Ladak said the Fair and Fast loan default rates are “reasonable” in the “single digits,” and that although the credit union began the program with no expectation of making a profit, they are “not losing money.” They are, in fact,  “a little profitable,” he said.

But what Ladak really stressed about the program was the wide variety of people it serves:

[T]here seems to be some sort of perception that the only people who go to payday lenders are folks that are really credit challenged or [who] wouldn’t be able to qualify anywhere else. What we’ve observed, in the number of loans we’ve issued, is every single gamut of membership — all ages, all income levels, all types of demographics…are taking out these loans.

In fact, Ladak says they divide the Fair and Fast loan recipients into two basic “personas:” on the one hand are those with poor credit, but on the other are:

…folks who are just suddenly strapped where, their car’s broken down or their hot water tank is broken or is leaking and they just simply don’t have the funds to be able to cover that unexpected expense. And again, as I mentioned, those types of individuals are…making solid incomes with great job histories, great credit, but just are having a hard time making ends meet, especially with everything going up in price right now.

Ladak said Vancity’s small loans are not guaranteed by the provincial government but this is probably a good time to note that the Vancity credit union has a membership of 525,000, assets of $21.7 billion and 59 branches.

Atlantic Central, which represents the 49 credit unions in Nova Scotia, New Brunswick, PEI and Newfoundland, has a membership of 304,444 with total assets of about $5.5 billion.

Here in Nova Scotia, we have 24 credit unions with 145,603 members and total assets of $2.6 billion.

I actually asked Atlantic Central what it made of the NDP’s proposed legislation and if it was interested in providing micro-loans to members in Nova Scotia was sent this quote from President and CEO Michael Leonard:

Credit unions were not involved in the development of the private members’ bill which would see them offering microcredit loans. Of course, Atlantic Central and credit unions welcome the opportunity to work with all parties and appreciate the NDP’s interest in addressing Nova Scotia’s high consumer debt. Credit unions are concerned with the increase in household debt and the debilitating effect that excessive debt can have on families in the communities we serve. We are also concerned with the use of Payday Lenders in our communities and the unreasonably high interest rates charged. Credit unions are focused on providing financial advice to consumers to ensure they meet their financial goals while offering competitive products and services to our members.

Sorry, I think I nodded off there for a moment. I have to say, when it comes to showing concern about the use of payday lenders, I like Vancity’s response better.

 

The odds

Seating plan, Nova Scotia House of Assembly, as of 6 September 2018.

Seating plan, Nova Scotia House of Assembly, as of 6 September 2018.

I asked Leblanc about the bill’s chances of passing and she actually laughed, explaining how difficult it is for the NDP — the third party in the legislature with seven seats to the PCs’ 17 and the Liberals’ 27 — to get any bill to second reading, let alone passed into law:

[T]he only way for it to be called for second reading is for us to call it on Opposition Day, but because we’re a third party, we don’t get very many of those. And then, of course, the trend is, if we call a bill for debate on second reading, it never really goes any further. So what I hope is that people will think this is a good idea and get in contact with the Liberal government and say, “Listen, this is something whose time has come, we think you should call this for debate and pass this bill.”

Everything I’ve read about predatory lending leads me to the conclusion that regulating payday lenders is not the answer — providing viable alternatives to payday loans is the answer.

If you agree, why not tell your MLA?

 

 

 

 

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