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