Nova Scotia Restores Economist's Faith

BACKGROUND: Nova Scotia Payday Loan Decision; Media Reaction

In making their decision to support a market-based solution to payday loan rate caps, one of the people the Nova Scotia Utility and Review Board relied on quite heavily was Dr. Kevin Clinton, an economist who appeared as an expert witness:

"Based upon its review of the evidence in the present matter, the Board is satisfied that the payday loan marketplace in Nova Scotia is competitive, and it so finds as fact. Further, the Board accepts the evidence of Dr. Clinton to the effect that competition will even increase once regulation takes effect."

"The Board also accepts the evidence of Dr. Clinton respecting the difficulties which would be encountered in the event the Cost Approach was selected to determine the maximum cost of borrowing. In this regard, Dr. Clinton noted the difficulties in developing a standardized format to obtain cost data from different lenders."

"In setting the maximum cost of borrowing, the Board does not accept the Consumer Advocate's argument (an approach applied by the Manitoba Board) that the NSUARB should set a maximum rate such that only the "lowest cost" lenders will remain in the Nova Scotia marketplace, implying that such lenders are the only efficient lenders participating in the market. In the view of the NSUARB, based on the evidence presented at the hearing (especially that of Dr. Clinton), market competition provides a catalyst for efficiency. If there are fewer lenders in the market, there will be little or no incentive for them to be efficient and prices will tend to rise for consumers. Moreover, if rates are capped too low, near or below an amount which permits lenders to recover their costs and earn a reasonable profit, even the most "efficient" lenders will most likely withdraw from the market. The Board concludes that such scenarios would not be in the best interests of consumers and the Board considers it should address this point by setting a rate that will foster a healthy competitive marketplace."

I was interested to get Dr. Clinton's reaction to the Nova Scotia decision given that it was such a strong contrast to Manitoba's (Dr. Clinton was also an expert witness in Manitoba, but needless to say, that board did not share his views on how markets function). Here is what he had to say:

"The Manitoba decision was so empty of reasoned economics & evidence that I stopped following payday lending developments. If these rulings are to be dominated by political factors, it is a waste of time for economists to participate. "

"The [Manitoba] PUB report makes elementary logical errors. For example, it betrays a complete misunderstanding of the concept of elasticity of demand. In buttressing their argument, they attribute to me views which I did not express, and which I believe to be wrong."

After the decision in Nova Scotia, it is fair to say that Dr. Clinton is following payday loan developments again, his faith restored that there is room for reasoned economic debate on how to set a payday loan rate cap.

New Brunswick Urged to Act

In light of of Nova Scotia's recent payday loan rate cap decision, New Brunswick is being urged to act by both the Canadian Payday Loan Association and the Consumers' Association of Canada: New Brunswick told to clamp down on payday loan companies

Reaction to Nova Scotia Payday Loan Decision

Reaction has continued to trickle in this week to the July 31st decision of the Nova Scotia Utility and Review Board to back a market-based approach to payday loan rate caps. The following is a summary of the recent media coverage:

The Chronicle Herald: URB sets payday loan limit

• "The Nova Scotia Utility and Review Board has decided to let competition in the marketplace keep the costs of loans in check and on Thursday set the maximum cost of borrowing at $31 per $100 borrowed."
• "'The maximum rate set by the board must be sufficiently high to allow the marketplace to function properly, while also preventing lenders from charging excessive fees and charges,' the board says in a 105-page decision released Thursday."
• "The rate decision, the outcome of a five-day hearing in Halifax in January, contrasts sharply with a recent decision in Manitoba that set a much lower maximum borrowing rate."
  
• "Nova Scotia’s board says 'it places no weight' on Manitoba’s decision, which debates the morality of payday loans."

The Canadian Press: N.S. regulator sets payday loan charge maximum at $31 for every $100 borrowed

• "'Certainly there was a lot of dissatisfaction and negative publicity about payday lenders,' said [Municipal Relations and Service Nova Scotia Minister Jamie] Muir. 'The myth was out there that they take advantage of those who could least afford it. But, the [Utility and Review Board] report said in general the people who are using these services are typical Nova Scotians.'"
• "'They got it right,' said Stan Keyes, president of the Hamilton-based Canadian Payday Loan Association. 'The board followed the evidence and from that determined the announcement that goes to protecting the consumer, and ensures there is a competitive viable industry in Nova Scotia.'"
• "Still, consumer advocate David Cameron said he's unconvinced that the industry is as competitive as some industry representatives say it is. 'If there is competition it's not uniform throughout the province,' said Cameron. 'That's quite evident by looking in the phone book and seeing how many operators there are in certain towns or communities.' Cameron said the $31 maximum seems high, and that he hoped there would be more evidence gathered by the board before setting the rate. 'But there's a real problem in a rate not being set, too,' said Cameron. 'The board was faced with a difficult dilemma. There's no easy solution here, any decision made would be a difficult one.'"
  

CBC: N.S. regulator caps fees on payday loans

• a brief (128 words) summary of the decision taken from the Canadian Press
  

The Globe and Mail: Nova Scotia Limits Payday Loan Charges

• a brief (143 words) summary of the decision taken from the Canadian Press

Nova Scotia Backs the Market

I teased yesterday that there would be big news coming down the wire this morning. After months of deliberation and after allowing input from interveners on the decision of the Manitoba Public Utility Board, the Nova Scotia Utility and Review Board issued its order this morning on the maximum allowable rates for a payday loan in that province.

At the crux of the issue around setting a maximum allowable rate for payday loans in any Canadian province is the debate around competition and how it can impact consumers. In Manitoba, the PUB decided that the market is not competitive enough to provide sufficient benefit to consumers. While 310-LOAN and The Cash Store argued hard for an order that would move to improve the level of competition, yielding increased benefits to consumers, the PUB decided to give up on the market by setting a maximum rate that was much lower than the rate that many lenders required in order to remain viable - ultimately reducing competition. In Nova Scotia, the Utility and Review Board saw it differently and has elected to encourage a competitive market. Today they ordered that the maximum allowable rate for a payday loan in Nova Scotia will be $31 per $100.

Here are some snippets from their decision:

The Board concludes that it should adopt a Market Approach to determine the maximum cost of borrowing.

Increased competition, accompanied by improved disclosure to borrowers, will afford proper protection to consumers. Fostering an environment which requires better disclosure, and which provides more regulatory certainty, should allow existing payday lenders to continue to operate in the Province and should encourage new payday lenders to enter the marketplace. The Board received, and accepts, expert evidence given at the hearing which outlined the benefits of increased competition in the marketplace. The Board considers it should set a rate that will foster a healthy and competitive marketplace.

I will follow-up with industry and media reaction as it becomes available throughout the day.

The full board order is available here.

Big News Tomorrow

I just received word that industry watchers can expect an important announcement tomorrow. Check this space in the morning for the details.

In Defense of the Little Guy

As provinces establish their applicable rate caps throughout Canada, one of the most vulnerable groups of lenders are the "mom and pop" operators with a small number of stores and often located in Canada's smaller communities. These lenders normally process a lower volume of loans because of the communities they are in and face higher costs for the same reason.

In Manitoba's Public Utility Board hearings last year, Deloitte, one of Canada's largest accounting firms, presented a cost study of 4 small to medium-sized lenders in that province. According to Deloitte, the average of cost for the lenders to issue a $100 loan was $26.87. Despite this evidence, the Manitoba Public Utility Board (PUB) set a maximum allowable rate of $17 per $100 on the first $500 and $15 per hundred on amounts between $500 and $1000.

In defense of their position, the PUB suggested that a business model should meet a certain (undefined) level of efficiency in order to earn the right to survive in Manitoba:

There is no public interest reason supporting inefficient payday lending, anymore than one might expect a pizza restaurant to survive by selling only eight pizzas a day – competition will address pizza market issues, but regulation is required for payday loans (in the absence of a “competitive” market), to ensure that the consumers of payday loans are served by efficient payday lenders.

The Board didn't examine the level of competition in the pizza industry. It didn't compare how many pizza restaurants there were in any given community and elaborate on how that particular number was suitable to call the market competitive. It surely wouldn't suggest that in small communities where there is only one pizza restaurant that regulations are required in lieu of competition.

While those Manitoba communities with only one pizza restaurant will continue to enjoy their pepperoni slices, the custodians of the "public interest" in Winnipeg have ensured that their only access to payday loans will be miles down the highway, in the nearest town that is big enough to attract Money Mart or The Cash Store.

I was prompted to write this piece about the mom and pop lenders who will be the victims of excessively low rate caps after receiving an e-mail today from one of those small lenders. While the inconvenience of having to drive great lengths to get access to emergency credit is one issue that is easy to identify (especially with the rising cost of fuel), it is often more difficult to capture the intangibles that are offered by smaller service providers. The following is an excerpt from the e-mail I received this morning (for privacy reasons I will keep the lender's name confidential):

Last week we ran into a problem, I was out of town and so I could not run to our client's bank to do a direct deposit. Than we had in one day two clients that each borrowed $500.00 so that took up our capacity to do e-mail transfers (we can do up to $1,000 of e-mail transfer in 24 hours, $3000 in 7 days & $7,000 in $30 days). Even if I had been in town, doing direct deposit the only way that I know how is to run to my bank, withdraw cash and than run to our client(s) bank to deposit directly into their account which really takes time and ties me to my office.

Without divulging any of your successful ways of doing business can you point me to a better or more efficient way of doing direct deposits or a method to increase our capacity of e-mail transfers.

So here is a guy who runs a small payday loan location who is willing to drive from bank to bank in order to deposit money for one of his customers who is out of town and can't make it in to a location. I can't think of the last time I received that kind of service from any company I have dealt with. I also haven't spent much time in a small town so maybe that is were I went wrong.

To all of the decision makers in Canadian provinces who feel that there is a public interest in putting these lenders out of business, I encourage you to go visit a few of them. Talk to them. See the type of service they offer first hand. You may feel better about allowing them to stay in business when you see that what they lack in efficiency, they make up for in good old fashioned customer service, something the public may in fact be interested in.

New Data on the Cost of Providing Payday Loans in Canada

Since the passage of Federal Bill C-26 empowered the Provinces to set payday loan rate caps, politicians, bureaucrats, public utility boards and special advisers have all struggled to determine what an appropriate cap would be. Today, Deloitte, one of Canada's largest and most respected accounting firms, provided more data to assist key decision makers with the release of their BC study, creatively titled "Cost of Providing Payday Loans in British Columbia."

While the firm may not receive any style points for the title of their report, they should be praised for its substance. This report, funded by the Canadian Payday Loan Association (CPLA) and completed with the participation of CPLA members and non-members alike, is the most representative study ever completed on the cost of providing payday loans in a Canadian province. The study includes data from 12 BC payday lenders, representing 57 of the estimated 121 private payday loan locations in the province (the study excluded publicly-traded payday lenders).

The result:

This report estimates the cost of providing a $100 payday loan in British Columbia to be $25.21, which can be further illustrated as follows:

The results of this study are particularly relevant in BC because of the approach the government there has taken in its search for an appropriate rate cap. In a payday loan consultation document circulated earlier this year, the BC government defined its objective for a maximum allowable rate as "the lowest charge possible that still allows a viable payday lending market." Deloitte seems to have provided them with their answer.

Manitoba Judge Weighs in on PUB Decision

Just as I was considering a post about the dog days of summer, the Manitoba Court of Appeal has provided some fodder for industry watchers. If you are just tuning in, I mentioned in a post on May 2 that The Cash Store was contesting the Manitoba Public Utility Board's ruling on, amongst other things, the maximum allowable rate for payday loans in that province. Here are the relevant details from that post:

Formerly known as Rentcash, The Cash Store Financial Services took things one step further and filed a "Notice of Motion for Leave to Appeal" with the Manitoba Court of Appeal claiming that the Board, among other things, "erred in law and exceeded its jurisdiction by directing itself as being mandated to drive certain payday loan companies out of business and by issuing an order intended to achieve that result..."

After a technical meeting to work out how this process would proceed and who would be involved, the Court of Appeal met on July 16 and 17 to get into the meat of the matter. I am working on getting transcripts from these two days and I will provide more information on what was said and what it all means as soon as I can. In the meantime, one of the people who attended these hearings was kind enough to send his notes and they provide for some interesting reading. The disclaimer on this is that these notes come from a third party who was at the hearings and there accuracy has not been verified with the benefit of transcripts.

...the judge hearing the application expressed the very same concerns about the PUB order that we have. In fact it was somewhat therapeutic to hear someone express them so eloquently. He said that anyone reading the report would come away with the impression the payday loan service providers were nothing but scum. He stated that the actual order was to be found in the last 10 pages. Everything previous was more or less rhetoric.

He stated that the federal government and the provincial government had enacted the legislation in order to accommodate the payday loan industry. In doing so they have given (their consent) to the practice. He questioned whether the board had the mandate to institute societal objectives. That is the (purview) of the government. If the government didn’t like the industry they could have simply made it illegal.

He went further and questioned where the analysis of the American rates was that the board said it used in coming to its conclusions. In particular he wanted to see the expenses. In the absence of these figures it was like comparing apples and oranges. Wage rates, rent, taxes, supplies were all likely to be very different to U.S. companies as opposed to Canadian firms. To say that because the rate was $17.00 (per) $100 in Indiana this somehow by itself justifies the same rate in Manitoba is to simply ignore reality.

I couldn't have put it better myself. I guess that is why he's a judge and I am writing blog entries.

The next step is for the judge to issue a decision on whether or not to grant The Cash Store leave to appeal. Obviously the initial sentiment sounds positive from an industry and consumer perspective, but there are still a lot more steps to go before we can have some hope of a more balanced order from the Public Utility Board.

I will try to dig up more commentary and hopefully transcripts from these hearings and pass them on as they become available. At the very least, there should be some interesting commentary that stems from the judge's decision, whenever that comes down.

Alberta Payday Loan Legislation Update

John Cotter of the Canadian Press provided an update on the timeline in Alberta today:

"(Service Alberta spokesman Eoin Kenny) said the changes to the Fair Trading Act, including details of the interest rate cap, are expected to be made by the spring."

Manitoba Payday Loan Legislation Update

The Province of Manitoba put out a press release this morning to announce that their legislation has received the Federal designation that is called for under Federal Bill C-26. Manitoba is the first Province to receive this designation and is on pace to have its payday loan legislation come into force in the fall.

The only possible delay on the horizon stems from a Court of Appeal action launched by The Cash Store Financial Services (formerly Rentcash) that argues against the Manitoba Public Utility Board's rate cap decision:

"'The court of appeal has moved quickly to get itself in a position to decide whether there is any basis for an appeal,' said (Finance Minister) Selinger. 'Our current intention is to wait until after the court makes that initial decision before making any further comments about dates when we can begin to regulate payday loans.'"

The Court of Appeal is scheduled to consider this matter next week.

Old School Comments About Online Credit (or plain old bias?)

Yesterday I commented on Peggy Nash's private members bill that calls for a federal regulatory regime for payday loans (Mixed Messages?). Later in the day I came across this article that included a quote from Bob Whitelaw, recently a consultant for Alterna Savings. He expressed concern that payday loan consumers who borrow online may be exposed to identity theft risks and may get "mixed up with money laundering." These follow his comments to the Standing Committee on General Government in Ontario regarding Bill-48 where he told the committee that there were "1,200 or more existing online payday firms," and "When I mention these Internet groups to the credit unions and banks, they are less than thrilled to know that their customers and clients are providing a tremendous amount of personal information online."

First, to set the record straight, there are currently 31 websites offering payday loans to Canadians. Each of these sites must have an arrangement with a major Canadian bank or credit union in order to use the electronic funds transfer system to move money into a customer's account and collect payment when the loan comes due. These transactions are governed by the rules of the Canadian Payments Association. The banks and credit unions are well aware of what information is required to process online credit applications by all manner of credit providing companies and they have strict rules that govern these transactions.

Second, and more interestingly, Mr. Whitelaw's former employer appears to be more than comfortable asking for personal information online. Alterna, no doubt aware of the fact that 58% of Canadians bank online, offers an online application form for a number of products, including a personal loan. On their online credit application, Alterna asks applicants to provide the following (copied from their site):

1. Loan Information
2. Application Information
3. Address Information
4. Employer Information
5. Spouse or Co-Applicant Information
6. Income
7. Assets
8. Liabilities
9. Mortgage
   

In total, Alterna asks for 91 pieces of information on their online credit application. In comparison, 310-LOAN's online application asks for 33. I checked into the security on each of these sites and Alterna's application form is secured by VeriSign, 310-LOAN's by SecureTrust. Finally, both have privacy policies on their sites and both are bound by the same privacy legislation.

I mean no disrespect to Mr. Whitelaw, I have had the chance to meet him in the past when he was working with the Canadian Payday Loan Association. If I were to bump into him again, I would ask him which of these two credit providers is putting customer data at risk and, if either, how he made that determination? I would also want to know why he felt that applying for credit online puts a customer at risk of being embroiled in money laundering? Should I close my online bank account at TD Canada Trust? Or is it only payday loan companies who we should fear? And again, how did he make that determination?

If I had my druthers, the journalists who are writing about the industry would be asking these questions too.

Mixed Messages?

Both the Winnipeg Free Press and The Toronto Star are carrying a story today about Federal NDP MP Peggy Nash's proposed private members bill on payday loans. According to The Free Press, Ms. Nash is proposing a bill that "calls on Parliament to create a regulatory process, putting one law in place for how payday loan companies operate across the country."

In theory, a single national regulatory regime would make life easier on a lot of people. Lenders who operate in multiple provinces would lower their compliance costs by only having one set of rules to worry about and provinces could save on the public utility board hearings, licensing bodies and other costs associated with industry oversight.

The trouble is, a lot of money has already been spent to get the regulatory environment to where it is today. After as much as a decade of study by Industry Canada and the Consumer Measures Committee, the regulatory regime was built around a province-by-province solution. In May 2007, the federal government passed Bill C-26, empowering the provinces to regulate the payday loans industry. Since that time, British Columbia, Saskatchewan, Manitoba, Ontario, Nova Scotia and New Brunswick have all passed payday loan legislation. Manitoba has completed its rate setting process and the other provinces are in the midst of doing the same. Industry and consumer groups have spent a great deal of time and money working with each of these provinces to help draft effective legislation, regulations and rate caps.

We will have to wait to see the contents of Ms. Nash's bill, but at first glance, the timing seems a bit off. What is more interesting is that it also seems to contradict the NDP's previous position on payday loan legislation. The following are excerpts from the NDP press release regarding the introduction of Bill C-26:

"NDP Finance Critic Judy Wasylycia-Leis hails today’s introduction of a bill that will allow provincial governments to regulate payday loans as a major breakthrough."

"'We’ll be looking for quick passage of this bill to enable provinces like Manitoba to move ahead with their plans for effective consumer protection as soon as possible.'"

I have already commented on what appears to be political grandstanding on the part of the NDP in Ontario. Hopefully this is not more of the same at the federal level.

310-LOAN's Facebook Page Surpasses 100 Fans

Online marketers in all fields are adapting to the new opportunities and challenges of promoting their brand in the era of Web 2.0 and online social networking. On May 30th, 310-LOAN launched the latest version of its website and took its own leap into this new and relatively unknown marketing medium with the 310-LOAN Facebook page. The page contains payday loan blog content from Advance View, 310-LOAN's first foray into video (previously posted here), a discussion board, general information about the company and links to their online application form. So far, the page has generated more than 100 fans and over 1300 page views.

It is difficult to know how 310-LOAN's experience compares to other financial service pages on Facebook because there is not a lot of data available for public consumption; nonetheless, it has generated some significant traffic in its first month. I will keep you posted on any other interesting developments in the field of payday loan marketing - it provides a nice break from all the legislation-related posts :)

Still Waiting on the Ontario Payday Loans Advisory Board

The clock is ticking for the Ontario Payday Loans Advisory Board. The Advisory Board was established as part of Ontario's Payday Loan Legislation, Bill 48, and will be made up of an academic, a business person and a consumer advocate. Its job is to establish the maximum allowable rate for payday loans in Ontario. The posting for these three positions closed April 25, 2008 and the Board's mandate only runs until September 30, 2008. Given that it is almost the end of June, this Board is going to have to move quickly if it is to make an effective decision in such a short time period.

While we don't know who will be on the Board, we do know one person who won't be. York University's Dr. Chris Robinson spoke recently at the committee hearings for Bill 48 and made it clear that the Public Appointments Secretariat did not select him for a role on the Board:

All I can do is give you the recommendations. I'm not going to be able to do anything else, since your expert committee-or rather the Public Appointments Secretariat-has decided that I'm not competent.

I will keep you posted as more information comes out of Ontario.

Payday Loan Company Earns Prestigious Award

If you are looking for work in Washington State, you might want to consider sending a resume to Moneytree Inc. The Tukwila, WA based payday loan and cheque cashing company has been recognized as the best large company to work for by Washington CEO Magazine. Thanks to PaydayPundit for the find and congrats to Moneytree Inc.