Worth re-posting: Payday Pundit wants to shout from the rooftops…

Further to my previous post, here is a Payday Pundit post that illustrates how even award winning payday loan alternatives offered by not-for-profit agencies in the United States still amount to 252% APR:

"Even credit unions and charities could not offer payday loans under annual percentage rate caps of 24%, 28% or 36%"

Will Credit Unions ever be an option for cash advance consumers?

As Canadian Provinces work on their payday loan legislation and look at ways to implement effective consumer protection measures, it is worth reviewing the role that Credit Unions may play in providing short-term, small-sum credit to payday loan consumers.

Some voices in the debate such as Cheri DiNovo, Jerry Buckland, Chris Robinson and Acorn, while they all acknowledge that consumers need access to payday loan style credit, are adamant that if payday lenders were driven out of the market, Credit Unions would step in to fill the void. This view of the Credit Union as the saviour of credit constrained Canadians serves as the pillar upon which they build their argument for payday loan rate caps that would drive existing lenders out of business.

Brad Duguid, Liberal MPP in Ontario, recently described this as a "Pollyanna policy," that would drive payday loan customers to "underground" sources of credit. Mr. Duguid's concern has been echoed by numerous parties including the Consumer Measures Committee and Scott Hannah of Credit Counselling Canada.

Fortunately for policy makers (and payday loan consumers who may be wondering what sources of emergency credit will be available to them in the future) who are trying to reconcile these two positions, the Quebec experience provides some insight into what we might expect from Credit Unions in the absence of payday loan companies.

There are no payday lenders in Quebec as a result of the law in that Province that prohibits lenders from charging more than $1.34 for a $100 loan for 14 days, or 35% APR. If, as Cheri DiNovo and company have predicted, Credit Unions will step in to fill the void left by payday lenders, we would expect to see a robust set of short-term, small sum credit products offered by Credit Unions in Quebec. Readers will be interested to know that this has not been the experience in Quebec.

Here is what has happened:
One financial institution, Desjardins Financial, launched a product called micro-loans that was targeted at previously unbanked individuals. It was launched in 2001 and by 2006 there were 245 branches participating in the program. Over this time, they issued 1,792 loans for a total value of less than $1 million. I cannot ascertain the status of the program today as there is no reference to it on Desjardins' website.

To put this in perspective, a single Money Mart location will issue more than $2 million each year. Also, every payday loan customer must have a bank account, meaning that the only product I could dig up that is even close to a payday loan, was not even targeted at the payday loan consumer. Bottom line: Quebec's Credit Unions did not ride to the rescue of credit constrained consumers in the absence of payday loans in that Province.

One is left to wonder where payday loan consumers are going for their emergency credit in Quebec. Pawnshops are an obvious answer, but I have yet to dig up any good data on the state of the Quebec pawnshop industry. I will do some digging and try to provide some meaningful information as soon as I can. In the meantime, those advocating for Credit Unions to serve the needs of those Canadians who are currently counting on payday loan companies to get them through a tough financial spot should give some thought to where consumers will really go when they are short before payday. If Quebec is any indication, it won't be their local Credit Union.

Thoughtful insight from the blogosphere

As someone who is relatively new to the world of blogging (this blog hit the 'sphere in April), I have been surprised to see the level of commitment that some bloggers and blog readers put into their posts and their comments on other people's posts. A great example is the comments that followed a high octane blog entry from Matthew Mayer titled You Can Still Save Payday Loans in Ohio. The article itself is interesting, if a bit aggressive, but the comments that follow about the ins and outs of the cash advance business make for an even more informative read. Yours truly even took the opportunity to throw in a cent or two.

While it is well worth the time to read through the full list of comments, here are some highlights:

• Payday loan borrowers sent 30,000 letters to Ohio law makers (I doubt there were 30,000 Canadians who even knew about either the Manitoba or Nova Scotia public utility board hearings regarding payday loans).
• Over 5,000 people participated in rallies relating to the pending Ohio payday loan legislation.
• The "faith based community" in Ohio is unified against payday lenders (not sure of the importance of this point, but it was interesting news nonetheless).
• An interesting link to an article about "The Self-Interested Self-Help of the Center for Responsible Lending" (I hadn't seen this article before and I will certainly give it a read and pass on the Coles notes in a future post).
• Reference to a North Carolina study of payday advance users where “87% said that payday advance companies provide a useful service.”
• Some interesting comments from former payday loan employees, one talking about how they work with borrowers to try to help them manage their payday loan debt and also describing how hard they work to ensure that they do not lend to overextended borrowers.
  
• And finally, an interesting YouTube video of a payday loan company talking about the approach they take to the cash advance business (two posts in a row with video!):

Ever get hit by an unexpected bill?

It has been a quiet week on the payday loan front in Canada, despite a flurry of activity south of the border. Later in the month industry watchers will be interested to see if the Manitoba Court of Appeal will grant leave to The Cash Store to appeal the Manitoba Public Utility Board Order 39/08. I am also curious to find out who Ontario will appoint to its advisory board that will be responsible for recommending a cap on the cost of payday loans in that Province. Finally, committee hearings will continue in Toronto regarding Ontario's payday loan legislation. So there should be more interesting news to digest in the not too distant future. In the meantime, for some light entertainment, I thought I would share 310-LOAN's latest marketing efforts, a video ad that will be debuting later this month on 411.ca. Enjoy!

Legislation that leads to loss of payday lenders could harm many

Mike Sussman of The Newark Advocate made the argument yesterday that banks and credit unions are unlikely to offer more attractive credit alternatives to payday loan borrowers and that the loss of payday lenders in Ohio could inflict more harm on consumers who are already facing a myriad of financial pressures.

Sussman also mentions who has had the most input in the legislative process in Ohio. While I think many Canadian provinces are doing their best to incorporate a wide range of feedback into their regulatory work, the one voice that we haven't heard enough from up here is the consumer's.

From Mike Sussman of The Newark Advocate:
"Banks, credit unions and small lending divisions of major financial institutions have had the most input. These are the folks with deep pockets that are used for huge donations to our Ohio legislators. Lately, arguments have surfaced that this group of traditional lenders could meet the needs of the payday borrower. Nothing could be further from the truth."

"Payday lending, while expensive, is the last line of defense for the financially overburdened low credit score consumer. Taking this option away will only increase the amount of hardship in a state already overwhelmed by foreclosure. Consumers, unlike Bear Stearns, will have nowhere to turn for immediate financing."

The Problem with APR

This cartoon comes from Check Into Cash via Payday Pundit and it is a fun look at the trouble with using APR (a measure of annual interest) to describe the cost of a payday loan (click the image for a larger view):

Ban payday loans? Big mistake - Christian Science Monitor

An article in today's Christian Science Monitor provides some commentary on the perils of bans on payday advance loans in some American States and suggests that a paternalistic approach to credit regulations hurts consumers.

From Ban payday loans? Big mistake. | csmonitor.com:

"The injury on top of the insult is that laws against payday lending do serious economic harm to the people likeliest to use such a service, as confirmed by multiple teams of researchers."

"...once the paternalistic rhetoric is switched off, payday lending's usefulness to borrowers in tight spots is fairly easy to understand. The quick cash means that the car gets an urgent repair, a critical check doesn't bounce, or the heating bill gets paid. Used responsibly, payday lending can help a borrower stave off financial calamity."

Manitoba decision being contested

On the heals of Ontario MPP Lisa MacLeod's comments that the Manitoba Public Utility Board decision is "hurting consumers" by driving reputable organizations from the market, two of the industry intervenors in the hearings have taken steps today to challenge the Board's April 4th decision:

CPLA: The Canadian Payday Loan Association has made a request to the Board asking that some aspects of the decision be reconsidered.

The Cash Store: 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..."

Jury still out on Money Mart cheque cashing case

Here is a follow-up on the Vancouver Sun journalist who is in court fighting Money Mart over Canada's little-known cheque law: Money Mart usually wins, but jury is out on this case

Ontario Debates Payday Loan Bill - Part 2

Part 1 | Part 2 | Part 3

I have finally made it through the first round of debates on Ontario's proposed Payday Loan Act (Bill-48). As I alluded to in my first post on this debate, the views on this bill are quite diverse.

The Liberals and Conservatives (of the Progressive variety) showed a very clear level of support for the industry and used research from the Library of Parliament, Pollara and Environics to support their understanding of who payday loan customers are - recognizing them as the lower end of Canada's middle-income earners. They also made multiple references to the importance of competition, consumer choice and consumer responsibility and the lack of viable alternatives being provided by banks and credit unions. Lisa MacLeod went so far as to say that the Manitoba Public Utility Board's payday loan decision is "hurting consumers" because it is driving reputable organizations from the market.

The NDP, on the other hand, identified payday loan consumers as "the poorest people." While they acknowledged that payday loans are necessary, they believe that they should be provided by credit unions and can be provided at 28% APR - the equivalent of charging $1 on a $100 loan for 14 days.

To repeat an earlier post, the best national data available shows that it costs at least $20.66 to issue a $100 payday loan. Also, those borrowers in the UK who do not have access to a licensed lender pay an average of £200 for a £100 loan.

While any payday loan consumer would love to pay $1 for a $100 loan, if the product is not available to them at that rate then their next best option, if you believe the UK to be a reasonable proxy, is significantly higher. Fortunately for payday loan consumers, the Ontario Liberals and Conservatives get it.