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 their accuracy has not been verified with the benefit of transcripts.
[UPDATE: it turns out that transcripts of this meeting are not available]

...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.