FACE OF POVERTY CONSULTATION A Faith-Based Coalition Working to Eliminate Poverty

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1 FACE OF POVERTY CONSULTATION A Faith-Based Coalition Working to Eliminate Poverty Brief to the Nova Scotia Utility and Review Board 2015 Hearings on Payday Loans Basic Principles All major religions have prohibitions or restrictions on interest rates. These strictures reflect a fundamental tenet against exploitation of the weak and vulnerable. Hence, the Face of Poverty Consultation and its supporting faith groups are concerned with the payday loans industry and its regulations. Adam Smith s The Wealth of Nations (1776) provides the rationale for the belief that the free market, based on individual self-interest, can serve the public interest without government intervention. It must be noted that Smith imposed three over-arching conditions to this proposition: 1. the privately controlled market must be perfectly competitive no one should have power (economic, social, or political) over anyone else in the economy; 2. actors in a market (industry) must have alternatives and full information; and 3. the market must operate within an ethical framework which leads to self-regulation of people acting in their self-interest. Without these and other conditions, the private market must be regulated by government if the market is to serve society s interests. The very fact of this hearing shows that governments recognize that the payday loans industry requires regulation. The issue is the nature and extent of that regulation as determined by the Nova Scotia Utility and Review Board. Although there is a federal legal limit on interest 60 % annual percentage rate (APR) - the federal government exempts the payday loans industry from this legal restriction, if they are subject to provincial regulations. The obvious assumption in this federal exemption is that provincial regulation will prevent the payday loans firms from charging interest rates above the 60 percent criminal rate. The Issues Because of the constraints of time (limited notice of this hearing) and resources, we focus on just 3 issues relevant to your deliberations: the effective rate of interest; the severe hardships on those living in poverty; and the enforcement of the regulations. 1

2 What are the Rates of Interest? The current Nova Scotia regulations limit the maximum fee to $25 per $100 borrowed, normally for a period of 2 weeks. Thus the actual annual percentage rate would be at least 650 per cent {($25/$100) x (52/2)}, assuming a borrower (1) could pay off only the $25 fee before re-entering a loan agreement, and (2) faced no default fees (nor roll-over fees as roll-overs are not permitted). Despite this straight-forward calculation, the Board accepts the industry s claim that its Annual Percentage Rate should be considered within the federal legal limit of 60 percent. In the 2007 hearings, the payday loans industry presented a variety of rationales for not annualizing the effective interest rates charged by the industry. Which of these did the Board accept? It should not be that the industry s costs are high due to the short-term nature of their loans which requires a continuous flow of new borrowers if that is the nature of the industry these firms choose to operate in, it does not justify usury. In addition, evidence given by The Cash Store in the 2010 hearings showed that their typical client borrowed several times. The Board should not accept the industry s rationale that it faces a higher default rate it claims its typical customer has above average income and therefore the probability of default should be low and the data support this. Recent independent reports (e.g., Consumer Financial Protection Bureau, 2013) show that neither of these claims can be supported by the evidence. Nor should the Board accept the claim that to set the fees too low would drive the firms out of business and people would be forced to seek even more costly sources, such as pawn shops. Schwartz and Robinson cite the lack of any evidence showing any harm to consumers in Quebec and the 15 US states plus the District of Columbia that have set rates so low that all payday lending has ceased. North Carolina (2007) claims that its ban was beneficial to consumers (2013, p. 28). The 2008 decision was rationalized (UARB decision, 2008, [53]) on the basis that (1) the borrowers had sufficient education to understand the high cost of the loans; (2) the borrowers had income levels which would allow them to repay the loans fully, when due; and (3) there is effective competition in the industry (ibid., [259]. We dispute all three rationales. Another aspect to the default rate experienced in the industry is the fact that firms advertise that they do not conduct credit checks on potential customers, not even checking their own national data base to see if a new borrower has outstanding loans or defaults with other branches. Not checking with credit rating agencies may permit faster loans and avoid the rating agencies fees, but not accessing your own data base is tantamount to willfully avoiding due diligence. This does not justify charging high rates for all customers because firms do not filter-out high risk borrowers. Surely the firms have a responsibility to practice due diligence. 2

3 The decision to not consider the rates of interest as an annual rate but to look at the industry s rate of return ignores the reason for the criminal rate to be 60 percent it is to protect the clients, not the profits of the industry. Who Uses Payday Loans? As noted above, the payday loans industry consistently claims that its typical customers are well-educated and receive above-average incomes. Thus, they are assumed to understand the terms of their loan and to have the capacity to repay a loan from their next pay day. If this were the case, as an anti-poverty organisation, we would not be presenting a brief. However, the industry claims rely on customer satisfaction surveys which have been heavily critiqued. One issue is that these are telephone surveys and under-represent lowincome borrowers as many of these cannot afford a telephone. The Thinkwell survey results, presented as evidence for this hearing, show that one third of payday loans were needed to pay for necessities and that most borrowers are renters. These are indicators that many borrowers have low incomes and cannot, in the short run, meet their families needs in the face of an unanticipated demand on their budgets. This interpretation is consistent with the U.S. data (Consumer Financial Protection Bureau, 2013). Moreover, the 2010 hearing testimony of the chair of Cash Store Financial Inc. contradicts the industry association s claims that customers are not caught in a dependency situation. Mr. Reykdal of Cash Store, then the largest single lender in Nova Scotia and one of the largest across Canada, testified (pp. 30, 31) that their typical customer borrowed 3 to 6 times in the 3 months after their initial loan. What mathematical manipulation gives so little weight to the Cash Store s experience, with half the Nova Scotia market, against the claims of the rest of the industry that there were few repeat borrowers? Thus, perhaps the majority of borrowers are in vulnerable financial circumstances. The experiences of front-line workers suggest that vulnerable people have few alternatives and limited time to seek them out, and are exploited by usurious rates of interest (see appendix A). The Task Force on Financial Literacy (2010) warns of the serious risks to financial well-being posed by financial illiteracy (p. 13) and notes that half of adult Canadians struggle with simple tasks involving math and numbers (p. 17). Further, Aboriginal Canadians, low income families, seniors, and recent immigrants struggle most with financial literacy (ibid, p. 14). In addition, these vulnerable and marginalised Canadians are unlikely to know their right to complain about their treatment or to file a complaint with the payday loan industry association. For many, their life experiences have shown them that they will get little benefit from challenging those with power. In Nova Scotia and other jurisdictions, there is a cap put on how much may be borrowed, normally 50 percent of net pay. This is an attempt to protect borrowers and lenders. 3

4 However, few Canadian households can afford to lose half of their next pay, having experienced a large drain on their funds from their current pay. If we accept the profile of their clients provided by the industry association, the cap can be dramatically reduced without substantially affecting the number or value of loans made. It is the mandate and the responsibility of the Nova Scotia Utility and Review Board to regulate the payday loans industry to protect the citizens of Nova Scotia. To do this the Board must recognize that the market approach is inadequate without much more stringent and effectively enforced regulation of the industry. How effective is enforcement of the regulations? No matter how well-designed regulations may be, they are of little use if not adequately enforced. It is not clear that the Nova Scotia Utility and Review Board concerns itself with the enforcement of its regulations. This may reflect the Board s faith in its market approach, relying on competition between lenders and over-sight by the industry association (which assured the Board in 2010 that it had received only 7 complaints). Or the Board s attitude may reflect the legislated division of functions, with the Board determining the regulations and Service Nova Scotia enforcing them. The 2010 payday loans hearings of this Board heard evidence of lenders in other jurisdictions not following regulations, evidence collected primarily by academic researchers. Some researchers employed mystery shoppers to pretend they needed loans quickly. The mystery shoppers discovered that lenders did not follow industry guidelines nor government regulations. The Board seems to have ignored the implications of the academic evidence in favour of its own faith in the market and the claims of the industry. The Board s decision carried no suggestion that Service Nova Scotia should employ mystery shoppers or other follow-up to ensure the regulations were honoured by payday lenders. Recommendations 1. The maximum allowable interest should be lowered to respect the federal maximum interest rate of 60 per cent per annum, i.e., $2.25 per $100 over two weeks. This is higher than Vancity Credit Union charges for loans which approximate payday loans (Nelson, 2014). Other charges must be clearly specified and explained in promotional materials and contracts. These charges should be limited, in total, to $15 for the first loan and to $5 for any subsequent loan within two months of a previous loan. 2. As in British Columbia, if a person or household takes out a third pay day loan within a 62-day period, the lender must spread repayment over three pay periods with no single payment of more than 35 percent of the principal and costs. 3. The cap on permissible loans should be lowered to 20 percent of net pay. 4. Payday lenders should be required to annually provide Service Nova Scotia and the public with audited aggregated data from their clients contracts, summarizing 4

5 the distribution of clients by level of income and by the number and timing of loans received by clients who borrow more than once during a year from any of the branches of the lender. 5. Service Nova Scotia should be required to report to the Utility and Review Board hearings on the payday loans industry, explaining the pro-active measures they have taken to enforce the regulations and the results of those measures. 6. The Nova Scotia Utility and Review Board should provide public notice of upcoming hearings at least 4 weeks in advance of the date for registering as an intervenor and 4 months in advance of the hearings. References Consumer Financial Protection Bureau, 2013, Payday Loans and Deposit Advance Products A White Paper of Initial Data Findings. accessed January 6, Nelson, Jacqueline, Vancity shakes up payday loan industry, The Globe and Mail, Published Thursday, July 03 accessed January 6, 2015 Nova Scotia Utility and Review Board, NSUARB-PD Reykdal, Gordon, Evidence in the Payday Loans Hearing, NSUARB-PD Schwartz, Mark, and Robinson, Christopher, Payday Loans: A Socially Responsible Industry?. Schwartz.pdf Accessed February 6, 2015 Task Force on Financial Literacy, Canadians and Their Money, accessed January 22, Appendix A An example of the impact of a payday loans experience, provided by a person who heard that the Face of Poverty Consultation would be presenting a brief to these hearings. One of my family got herself into terrible hot water through using these loan companies. I think this happened 3 times: each time she was borrowing from one, then borrowing from another and another to pay the other one, etc., and the high interest rate sent the debt sky-rocketing. She ended up being bailed out by me and another time going into bankruptcy. She has a BA, and a job and is single but has some mental health issues 5

6 which have contributed to financial irresponsibility. The mental health issues are being better addressed now and I hope and pray she is being more responsible at present. Another part of this is that in coming out of bankruptcy and needing a car the interest rate on the car loan was 19% for 2 years - she has it lower now but it is still a huge debt- her own challenge since she insists she needs a car. The banks don't offer any help in the climb out of bankruptcy the availability of these pay day loan sharks is a real problem. I asked once if there was a way of putting a person on a do not lend list but alas there isn't. If a person does not have access to reasonable loans these are the only options. They are very dangerous. Approved February 9,