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.

PaydayPolitics.org launched South of the Border

Online payday loan content is relatively hard to find, compared to some of the other topics that populate the web, so I am always pleased to share new sites that focus on this topic. This morning, the people behind PaydayFacts.org launched PaydayPolitics.org. This is a type of site that is more common in the United States, where the political climate is more adversarial and members of the federal and state legislatures receive far more attention to their personal track record, both politically and otherwise.

The idea of the site is to track political candidates and provide voters with information on their payday loan related track record. This will be very helpful for voters who have a strong opinion about payday loans and would like to support those politicians who support the effective use of the product.

Here is a bit of information about how the site is structured:

"Under each candidate profile, you'll find a picture, political stats, contact information, etc. in addition to quotes/voting history regarding the Payday Loan industry. Below each profile, you can post any additional facts/editorial content you would like. We'll give each candidate a 'PaydayPolitics.org Rating' and you can post your agreement or displeasure with that, as well, if you like."

Industry Reaction to Ontario Payday Loan Legislation

CPLA - Canadian Payday Loan Association Applauds Ontario Payday Loan Legislation:

"This legislation is an important step forward for real consumer protection in Ontario.'" - Stan Keyes, President of the CPLA

Dollar Financial - Money Mart Welcomes Ontario Legislation on Payday Loans:

"'We welcome this important legislation and share the Government of Ontario's commitment to balancing consumer protection with a viable industry that will continue to provide this important financial service at a reasonable rate.'" - Syd Franchuk, Chairman of National Money Mart

The Cash Store Financial Services (formerly Rentcash) - Cash Store Financial supports Ontario's balanced approach to payday regulation:

"'In Ontario, the debate on new industry rules has been balanced and reasonable. Everyone agrees, including the United Way, that payday loans are a needed product that must be made available to consumers. With strong consumer protection measures now in place, the government must set rate limits that will enable existing operators to remain profitable and able to provide the service.'" - Gordon J. Reykdal, Chairman and CEO of The Cash Store Financial Services

Ontario Passes Payday Loan Legislation - Bill 48

Official Press Release - ONTARIO MINISTRY OF GOVERNMENT AND CONSUMER SERVICES | New Payday Loans Act Provides Stronger Protection:

"The new Payday Loans Act, 2008 will enhance consumer protection by licensing all payday lending industry operators and banning controversial lending practices. The Act was unanimously passed today by the legislature."

more to come...

Ohio payday loan customers cry foul

Payday loan customers in Ohio are trying to come to grips with their State government's decision to effectively ban payday lending in that State. Here are some comments in the Ohio press today:

"'This is a godsend for people trying to get their bills paid, basically make ends meet,' Dan Schardt, 48, said while exiting Cashland, 223 W. Perkins Ave.

The Sandusky electric technician, who uses a payday loan about once a month and said he always pays them back on time, believes people like him are being punished for the actions of those who may not use the loans responsibly."

"'This is the first instance where the government just shuts down a business arbitrarily,' Schardt said. 'They're not considering the people who will be out of work, the property owners who lease to them and the public -- it's a big disappointment.'"

"'It's not fair,' said Lyle Viock, 49, who uses occasional payday loans to pay bills while waiting on the $800 he receives each month in spousal support after the death of his wife. What are people supposed to do?'"

"'This is supposed to be a free country,' Viock said. 'It doesn't feel free when they're telling you what to do with your money'"

Ontario Debates Payday Loan Bill - Part 3 (Politicizing the Debate)

Part 1 | Part 2 | Part 3

The Standing Committee on General Government met twice last week to hear public testimony regarding Ontario Bill 48. I have gathered a few comments from day 1 that I will post shortly and I am still waiting for transcripts from day 2. In the meantime, I would like to comment on what appears to be an effort by Ontario's third political party to politicize the debate and score points on the backs of payday loan consumers.

My position on payday loan legislation in Ontario and throughout Canada is that consumers deserve legislation that provides consistent disclosure on rates and terms so that they can understand the payday loan product and make effective financial decisions between it and other products that are available to them. They also need a reasonable cap on payday loan rates that prevents unscrupulous lenders from exploiting vulnerable individuals with rates that are exceedingly above the costs associated with issuing these loans.

Payday loans are not financially viable at 35% APR or even 60% APR. Unfortunately, this does not make for attractive headlines. Doing right by the payday loan consumer requires the understanding that they are choosing between a $40 NSF fee at CIBC and a $24 fee for a payday loan, not a 35% APR or a 350% APR. The media and voters who do not use payday loans have demonstrated that they do not understand this distinction. For example, Robyn Doolittle’s May 29 article in the Toronto Star commenting on the first two days of public testimony before this committee and titled 60% cap on interest urged for payday loans, states:

"Many of the speakers recommended the committee follow a model laid out in Manitoba in April in which a cap was set on a graduated scale. In some cases, the annual rate could still exceed 60 per cent, but for the most part the rates would be capped below that."

The truth is, the Manitoba Public Utility Board set rates that they themselves admit will drive many lenders out of business; nonetheless, the Board’s maximum rates equate to 443% APR on the first $500 issued and 391% on amounts from $501 to $1000.

Committee members from the Liberal and Progressive Conservative parties seem to understand this, but members from the NDP are sending very mixed messages that can only be intended to make the passage of effective payday loan legislation politically expensive. Committee member Ms. Cheri DiNovo is, on one hand, grabbing headlines by calling for rates to be capped at 35% APR and, on the other hand, extremely supportive of Dr. Chris Robinson’s testimony that recommends a rate that includes fees of 16% of the loan value up to the first $500 issued, the equivalent of a 417% APR on a 14 day loan. The latter, of course, going unreported because neither she nor Dr. Robinson make mention of the APR.

While this may be a shrewd political tactic that exploits the media’s minimal understanding of payday loans, it will be wholly unfair to payday loan consumers if it leads to rates so low that the product is no longer available to them. As I have said before, payday loan consumers deserve better.