Anticipating next week’s Cardus study on pay day loans, and a vote by the city of Kitchener to regulate the sector, Convivium’s Rebecca Darwent talks to Cardus Work and Economics Program Director Brian Dijkema about helping low-income Canadians gain fair and equal access to credit.
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Rebecca Darwent: Can you start by bringing us up to speed on the work you have been doing to set the stage for what has led to the paper we are expecting for release next week?
Brian Dijkema: We have done six reports on payday lending since 2016. It has been one of those occasions where our work, the timing, and the policy discussion were occurring at the right moment. Our first paper, and the one that has the deepest dive into the research on payday lending and the market as a whole, is Banking on the Margins. We've done work in Ontario and Alberta, advising the governments as they were crafting new regulations for payday lending.
There is a usury law in Canada. People who lend money may not lend it at a rate higher than 60 per cent interest per year. The only exception is payday loans for $1,500 or less and terms of six months or less. In the area of exceptions, the province regulates. From 2016 to 2018, we saw a variety of problems as Manitoba, Alberta, Ontario, Nova Scotia and New Brunswick began revisiting those regulations. We provided information and research to help them.
Next, we graded the governments. We said, "Look, the governments have done all this work. What grade would we give them based on our research?”
The paper coming up [next] Friday is grading our “grade” now that we have gotten data back from governments. How accurate was our research? Did things actually turn out the way we thought they would or were things different? It’s a chance to measure our predictions. Were we right or wrong?
What conclusions have you drawn?
For the most part we were right. We said the challenge with payday lending is not so much the interest rate. It is expensive, but the bigger challenge is the fact consumers must pay it back all at once. If you are short $300 cash and you have to take out a loan, having to pay back $363 is a lot of money. But lowering that to $15 per $100, which is what Ontario did, the difference between $363 and $345 is $18. If you're short $300, the $18 matters, but it's not the biggest deal. The biggest deal is what happens with the term. So, instead of having to pay it back in one chunk, we recommended paying it back over a longer period.
We said an interest rate of $17 per $100 would be the lowest possible limit before payday loan stores start going out of business. We don't really care about the businesses per se, but we do care about the availability of credit for people who need money. So, if you're short on cash, you have to find it somewhere and there have been a number of occasions where payday lending is the smarter decision, rather than, say, getting multiple NSF fees from your bank.
But why grade yourselves now?
I think it's always important for us to be checking in with the real world, so we're not living in the clouds. We can say lots of things, we can use the best available data, but we have to say, "How does it actually work?"
Policies are made to achieve a particular goal. In the case of the provinces, Ontario and Alberta in to be specific, the goal was to protect consumers from unscrupulous lenders, and to ensure consumers were protected while having access to credit. Those were the two goals. We wanted to see a credit market that enables people to move up the financial and economic ladder. To do that, you need to have a combination of accessibility, so there needs to be credit. People who are on the lower end of the income scale have far less access to credit than people on the upper end. So, there's an equality of access that we were concerned about. We said, "Look, what is actually going on? Have the laws improved equality of access? Have they made them worse? What's going on?"
What have you seen in terms of equality in credit?
It seems the inequality in credit has actually gotten worse. There appears to be a shrinking of the small-dollar credit market, just based on the number of stores that have closed and that no longer offer payday loans.
We don't know if that's been good or bad for consumers because the government doesn't measure that. That's one of our criticisms of the government: they've been so focused on suppliers, they've actually forgotten to measure the effects on the people who use it. One of our recommendations to government is to pay more attention to that and to put those types of studies into legislation next time, so they can see whether they have achieved their goals or not.
You wrote in your original paper, "The best loans for borrowers are loans taken from those with whom a strong personal relationship is dominant and where collateral is found in trust, rather than a purely economic instrument.” What does this mean for the average borrower looking for a loan?
We showed there is a spectrum of credit. The best credit, at least for the borrower, is low cost and high access. If you're borrowing, you want to pay the least amount possible for the most amount of money. That's the ideal credit for the borrower. But at the same time, the system relies upon the ability of people to have collateral, so if a loan goes bad, something can happen. The best type of loan is the loan you get from your mom or dad.
We call it the Bank of Mom and Dad – it's a great loan. When you ask yourself, "What kind of collateral do mom and dad hold on me?" the answer is, well, almost nothing, other than you being their kid. On the other side of the spectrum is a loan shark, where the collateral is violence. “If you don't pay back, I'm going to bust your knee caps.” What's interesting is that our modern markets are less relationally driven. I would think they are in many cases. But the ideal is one where the relationship doesn't have to occur, where the trust can be high, and you can move things quickly. We've seen community banks that we thought were going to start to offer alternatives because they were focused on building up the human element and building up the relationships.
But they have not really responded. Now, it's early days as well; we noticed that pretty quickly. But it seems they just haven't responded. I think part of the challenge is that even credit unions, these community banks which are supposed to be high in relationships, understand that relationships are expensive. They're inefficient, and so there's that drive. That drive for efficiency appears to be driving the market as a whole.
Where would you say the credit unions are in all of this?
The best one is the one is Vancity in British Columbia. Vancity has a very interesting program. But in Ontario, there's really only one, maybe two. The Windsor Family Credit Union has a really great alternative that they've put out. And there was an attempt by a group in Ottawa, by something called the Causeway Work Centre, that we were saying, "This is a good model." But that appears to have shut down.
They seem to have realized this is actually a very difficult product to pull off, that there are some people who can do it efficiently but it will cost a certain amount of money to do that, and I think it just hasn't been a priority for them.
Let’s look at Kitchener. We know it’s coming closer to capping the number of payday loan facilities allowed to operate within the city. My understanding is they have 18 locations currently, and city staff are recommending they cap it at 10 through attrition. Current businesses will be allowed to stay open but if one shuts down, you can't have a new one open, unless there are fewer than 10.
This is similar to what took place in the city of Hamilton, where the number of establishments were reduced to match the number of wards in the city. Kitchener will vote Monday on these regulations and the public approval seems high. What do you think should happen? What do you think of the regulations that they're proposing? Is this reflective of a precedent that Hamilton set? What would these regulations mean for people in Kitchener?
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There are two things going on with the Kitchener proposal. One of which is really, really good, and I would encourage them to pursue it even farther than they already are. And the other is not so good. So, let me start with the really, really good one.
One of the things that they're proposing is to put a buffer zone around places where people are particularly vulnerable to some of the approaches to payday lending. They said, "Look, we don't want payday loan stores to be around, for instance, somebody who is in a gambling addiction facility." One of the challenges is there's certain temptations that come with that, there's certain challenges with people's ability to make sound decisions, so we want to put a bit of a buffer zone, from a zoning perspective.
That is great policy. It is sound, prudent policy and use of the zoning powers that they have. In fact, we would encourage them to make note of it particularly around people with cognitive disabilities. I know there are various homes that provide services to people with cognitive disabilities. I would invite them to include that as well because that's a real challenge. Those are folks who may be particularly prone to some of the challenges related to payday lending.
The other thing that they're doing, which is capping it, will not achieve the goal they want. What capping does is provide what is effectively a monopoly on payday lending for the stores that are in existence.
So, if you're a new store and want to offer better deals or what have you, you actually aren't allowed to open anymore. What ends up happening is that it privileges existing businesses. And the reality is those are big businesses that are going to take that and do what always happens with a monopoly, the customer is going to lose.
As we look at Kitchener do you foresee these changes happening across the provinces as municipalities adopt these regulations?
I do think this is a case where Kitchener has a chance to set a different path than the one that Toronto and Hamilton have done. There is absolutely no evidence that in Toronto and Hamilton, the policy is going to be better for consumers. The bulk of the evidence seems to suggest that it goes the other way. I've spoken with various city officials and said, "Well, why are you doing this? It's not an optimal approach." They said, "Look, we needed to do something to make the councillors feel comfortable about this."
I would say focus less on looking like you're doing something and focus more on things that will actually get results for consumers.
On actually taking action.
Just to go back to the paper for a moment, I'm curious to know if there was any particular piece, any takeaway that might have been surprising to you, in terms of this self-evaluation? Or was it really just, “Yes, this all makes sense to us. This is what we were expecting to see in grading where things were at for us.”
The biggest surprise for me was the failure for alternatives to come about. This may be simply naive, we were aware of the cost. But we thought that the credit unions, because of their community focus, would have done more. We thought there would be more alternatives coming from the community-banking sector. It's a chance for reflecting on what the nature of our economy looks like, the role of relationships in it, and some of the social work that needs to be done.
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