In the throne speech this month, Lieutenant Governor Lois Mitchell announced the Notley government’s intention to “protect Albertans who are experiencing economic distress from being preyed upon by unscrupulous lenders” and the government’s intention to “introduce an Act to End Predatory Lending.”
The idea is sound. As noted in a recent report by Cardus, Banking on the Margins, payday lenders and the loans themselves are structured in such a way as to encourage their customers to become dependent. The loans, while quick and easy, do not build credit, and they require customers to pay back the original amount borrowed plus substantial interest in one lump sum. Too often this results in adding a significant deluge of spending for people who are already struggling to maintain a responsible cash-flow. An unemployed construction worker from Fort McMurray who has trouble making ends meet one week can be crippled by the automatic withdrawal of his previous week’s shortage plus interest rates that, in Alberta at an annual rate of 839% on a ten-day term, are the second highest in the country. And, as our research suggests, the struggle doesn’t stay with the individual. The lack of funds and the increase in debt are linked to mounting costs to families, significant physical and mental health problems, increased criminal activity, and a host of other problems which ultimately strain society – and often the government.
So three cheers for trying to find a better way forward for people in need of short-term loans, but where things get tricky is when we ask “how?” And the real question is which NDP will come to the fore when this bill is introduced? Will it be the NDP of the social gospel movement of Chester Ronning, the first leader of what is now Alberta’s NDP? If so, we are likely to see a pragmatic government response that emphasises the role of cooperation between citizens who unite to address a social ill – a throwback to the old Co-operative Commonwealth Federation. Or will it be the NDP that springs from the academic and activist realms that wants to make a political point via direct government intervention, regardless of the outcome?
Our research suggests that Notley would do best for Alberta if she followed in the footsteps of Ronning and Woodsworth and focused on trying to create an environment that leads to a better, and more just, small-dollar credit market, rather than shutting down payday lenders and leaving no alternative.
Why? Because the fact is that payday loans do provide a lifeline to many people. As our paper notes, they are often the best of the worst for people facing eviction if they don’t pay the rent, or who need cash to buy groceries. There are times when bounced checks, or the penalties for arrears exceed the cost of a payday loan. To end payday lending – even if it is predatory – might leave people worse off. A prairie dog is no better off if he is saved from the hawk by being placed beside a coyote.
What is needed is a better loan, and to get that, we need a better market that rebalances the interests of the lenders. Our paper notes that to do this we need a concerted joint effort between three groups: community associations and charities; financial institutions; and, yes, government.
The government should keep its eye focused on how to improve, not kill, the small dollar loan market. To do this, it should concern itself less with a hard interest rate cap, and more with the repayment terms. As noted above, the real challenge for people who need emergency infusions of cash is the onerous repayment terms that drop like an anvil on paydays. If the Alberta government were to follow Colorado’s example, and create a regulatory environment which mandated loan terms and required lenders to accept instalments rather than lump sums, it would go a long way to alleviating the cash flow pressure that leads to dependency.
But more importantly, the government should focus on enabling innovation in co-operative institutions like credit unions, and easing the ability of charitable organizations to partner with financial institutions to offer better loans. Our paper recommends exploring options such as providing loan-loss reserves to credit unions or banks who are looking to innovate in this sector, or, better, to provide social-impact bonds which extend a return to those who provide innovative services which align with the government’s objectives. The fact that groups like First Calgary Credit Union and Momentum are already making limited moves in this space suggests there is an appetite for it.
The Notley government has a choice to make in its efforts to end predatory lending: it can make an ideological point, or it can make a principled move that leverages the power of Albertans to build a better, fairer small dollar loan market.
Let’s hope the old CCF shows up when the bill is introduced.