The payday lending market in Canada is changing. Provinces across Canada have lowered interest rates and changed the rules for small-dollar loans. The goal of these policies is to protect consumers from unscrupulous lenders, and to minimize the risk of borrowers getting caught in the cycle of debt. What has worked, and what hasn’t? In this paper, Cardus continues its multi-year study of the payday loan market in Canada and evaluates which policies are working, which are not, and what yet remains unknown about payday loans, consumer behaviour, and the impact of government regulation on the supply and demand for small-dollar loans. Our study shows that many of our earlier predictions—including concerns about the disappearance of credit options for those on the margins—have come true. It also shows that alternatives to payday lending from community financial institutions and credit unions have largely failed to materialize, leaving consumers with fewer options overall. We also comment on the social nature of finance, and make recommendations for governments to better track and measure the financial and social outcomes of consumer protection policy.
The payday lending market in Canada operates in a much different regulatory environment today, in 2019, than it did in 2016, when Cardus published a major policy paper on the subject. That paper, “Banking on the Margins,” provided a history of payday loan markets in Canada; a profile of consumers who use payday loans and how they are used; an analysis of the market of payday loan providers; an exploration of the legal and regulatory environment that governs borrowing and lending; and recommendations for government, the financial sector, and civil society to build a small-dollar loan market that enables consumers rather than hampering their upward economic mobility.
That paper, alongside other contributions from the financial sector, consumer advocacy groups, academics, and other civil society associations, contributed to major legislative and regulatory revisions to the small-dollar credit markets in provinces across Canada, including those in Alberta and Ontario. These two provinces in particular have set the tone for legislative change from coast to coast.
Cardus’s work on payday lending consisted of a variety of measures, ranging from major research papers to policy briefs and testimony at legislative committees.
Legislation aimed at protecting consumers of payday loans and making small-dollar loans more affordable passed in Alberta in 2016, and in Ontario in 2017. These legislative changes lowered the fees and interest rates that lenders could charge for small-dollar loans. New legislation also introduced a series of changes related to repayment terms, disclosure requirements, and other matters. Cardus offered an initial evaluation of those changes in 2018, and marked the various aspects of those changes for their likely effectiveness at achieving our desired goals. Cardus research suggested that the optimal result of payday legislation and regulation is a credit market that ensures a balance between access to credit for those who needed it most (which in turn assumes the financial viability of offering those products), and credit products that don’t leave customers in a situation of indebtedness that prevents upward economic mobility. We gave government policy a grade for each of the policy areas that were covered by the legislation and offered insight based on our research paper on how these changes would work out in the market.
The purpose of this paper is to turn the lens toward our own evaluations. Our research attempts to provide a dispassionate analysis of the literature and research on payday loans from within a clearly articulated set of principles, and to make recommendations that emerge from those.
What you will find below is a grading of our grading—where were our assumptions and reading of the data correct? Where have the data shown us to be wrong? What have we learned about the small-dollar loan market, the capacities of the financial and civil society sectors, and government intervention in markets? What gaps remain in our knowledge? Are there any lessons for policy-makers and researchers? How might our conversations about payday lending, markets, and human behaviour change as a result of this work? Read on to find out.
Our evaluation of the new legislation and regulations put in place by Alberta and Ontario was based on our research of available data and academic analysis related to payday lending read against data from the government of Alberta’s 2017 Aggregated Payday Loan Report, data gathered from Ontario’s Payday Lending and Debt Recovery section at Consumer Protection Ontario, which is within the Ministry of Government and Consumer Services, and from personal conversations with officials from the business associations representing payday lenders.
Where We Were Right
Municipal Bylaw Analysis
We were correct in our concerns about the provincial government’s devolution of regulatory power to municipalities. Ontario’s legislation gave municipalities the ability to use zoning bylaws to “define the area of the municipality in which a payday loan establishment may or may not operate and limit the number of payday loan establishments.” We gave this measure a D grade, citing concerns about the way in which municipal policies might unintentionally limit consumer choices and contribute to the development of monopolistic tendencies in municipal markets. We noted,
Forbidding shops from being placed next to homes for people with mental illness, for instance, would be positive. But in general, cities should try to avoid acting in ways that encourage negative unintended consequences. The recent move by the City of Hamilton to allow only one lender per ward is a classic example of this. It puts far too much focus on lenders, while leaving borrowers
with less choice and effectively giving existing lenders a local monopoly.
Our concerns about the spread of Hamilton’s policies spreading further were validated when the City of Toronto adopted a policy that limited “the number of licences granted by the City to 212. . . . [And] the number of locations where an operator is permitted to operate is limited to the total number of locations that existed in each ward as of May 1, 2018.”1
Data from Ontario’s Payday Lending and Debt Recovery section at Consumer Protection Ontario show that five municipalities—Hamilton, Toronto, Kingston, Kitchener, and Chatham-Kent—have instituted such policies, all of which have focused on strict limits on the numbers of payday lenders, and which have grandfathered existing payday lenders.
Our research shows that two other municipalities—Sault Ste. Marie and Brantford— have considered such bylaws, and that Brantford alone has considered the ideal policy of using zoning powers as a means of preventing lenders from setting up shop close to vulnerable populations.
Our report card gave this regulation a D grade mainly due to concerns about municipalities failing to attend to the unintended consequences of these policies, and the introduction of regulatory redundancies.
It seems that our concerns were valid. Two of Ontario’s largest municipalities—Hamilton and Toronto—adopted policies that created an oligopoly for small-dollar loans. Existing payday loan locations now have an almost permanent, government-protected, and enforced oligopoly on payday loan services. Competitors who might have offered lower prices or better services to consumers are now forbidden from opening, giving incumbents—many of whom are associated with larger corporations—a huge advantage at the cost of consumer choice. And municipalities also opted to duplicate advertising and disclosure regulations that were already required by provincial regulation. It is a classic case of a government’s preferring to be seen to do something to give the aura of effective action, even if that action is suboptimal, or damaging to its citizens, and absent any evidence, let alone clear evidence of the efficacy of their policies. Recall that the policy goal of these regulations is to protect consumers while enabling access to credit. But the policies enacted by Hamilton and Toronto uses the power of government to privilege existing, big-business lenders, while limiting the availability of credit.