Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue No. 32 - Evidence - February 1, 2018
OTTAWA, Thursday, February 1, 2018
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-237, An Act to amend the Criminal Code (criminal interest rate), met this day at 10:30 a.m. to give consideration to the bill.
Senator Douglas Black (Chair) in the chair.
The Chair: Good morning. Welcome colleagues and members of the general public who are following today’s proceedings of the Standing Senate Committee on Banking, Trade and Commerce either here in the room or watching us via the Web.
My name is Doug Black and I chair this committee.
Before proceeding, I’m going to ask my colleagues around the table to introduce themselves so the witnesses and those watching know which senators are here this morning.
Senator Ringuette: Pierre Ringuette from New Brunswick.
Senator Wallin: Pamela Wallin from Saskatchewan.
Senator Mockler: Percy Mockler from New Brunswick.
Senator Tannas: Scott Tannas from Alberta.
Senator Dagenais: Jean-Guy Dagenais from Quebec.
Senator Stewart Olsen: Carolyn Stewart Olsen, New Brunswick.
Senator Unger: Betty Unger, Alberta.
The Chair: May I also add that we are very ably assisted by our analysts and by the clerk of our committee.
Today, our committee continues its hearings on Bill S-237, An Act to amend the Criminal Code (criminal interest rate).
Yesterday, we heard from our colleague and the sponsor of the bill, Senator Ringuette. Today, we are going to hear in the first panel from Ms. Courtney Mo, Public Policy Manager, Momentum, appearing by video conference from Calgary. Good morning. And we have Ms. Patricia White, Executive Director, Credit Counselling Canada, who is here with us in the room today.
You see the empty chair, and we are waiting for Mr. Tom Cooper, Director, Hamilton Roundtable for Poverty Reduction. He will be appearing by video conference. He is on the road. I presume the roads are what they are in Canada in February. When he shows, the chair will be filled and we will proceed with his evidence as well.
I would ask each of the witnesses to do a five-minute — and we’ll be watching for the five minutes — opening statement. Then, after that, the senators will undoubtedly have questions for you.
Again, welcome, and may we start with Ms. White.
Patricia White, Executive Director, Credit Counselling Canada: Thank you for the opportunity to appear as a witness regarding this bill.
First, I want to provide you with some information about Credit Counselling Canada. Credit Counselling Canada is a national member-based association of not-for-profit organizations that provide Canadians with education and guidance on money management as well as credit and debt strategies.
Our 17 member agencies manage over 65 offices across the country and deliver professional, compassionate and objective assistance in person, by phone and via Internet to anyone in their communities.
Certified counsellors provided counselling and education to over 175,000 individuals and families last year. In Financial Literacy Month in November, our members carried out 860 events attracting 17,000 participants in just that one month. We’re busy all year round.
Last year, over $103 million was paid through debt repayment programs, which enabled clients to pay back the balance of their outstanding debt.
The current Canadian lending landscape is becoming increasingly complex and obscure to the general public. CCC members strive to create clarity for Canadian consumers to enable them to better understand their options for improving their personal financial situation.
As you deliberate, I thought it would be important for you to understand what is actually happening with Canadian consumers with an example. Anna lives in British Columbia. She is 66 years old, widowed and a pensioner. She accumulated debts due to lack of budgeting. She was a single mother raising her daughter and worked two to three jobs her whole life just to get by, and she is still working at 66 in order to pay off her debts. She struggled with debt most of her life and never had the support to improve her financial literacy. She declared bankruptcy in 2005. After that, she was denied affordable lending by chartered banks and had to go to high interest lenders to assist her with unexpected expenses and deficits when her income didn’t cover monthly expenses.
When she came to one of our members, she owed money to three instalment loan companies at interest rates in excess of 30 per cent and two payday loan companies. She has recently decided to pay her debts through a four-year repayment plan, but she plans to retire when she is 71 and debt-free, hopefully. She has been provided with ongoing support from her credit counsellor to ensure success in this process.
What we have seen over time is an increasing demand on what are called high-cost alternative financial or small dollar credit products. These loans have high interest rates and additional fees that take them over the 60 per cent limit, with little or no transparency.
What we see are vulnerable consumers who aren’t able to handle these interest rates. The majority of these consumers are elderly, recent immigrants, single mothers, Indigenous people and those who are unable to borrow from traditional financial institutions or are considered high-risk as a borrower.
We can’t stress enough the importance of good financial health and well-being. Our society values have changed in recent generations. People are encouraged to have lines of credit to meet the pressures of modern consumerism rather than saving for emergencies. There is no buffer when life happens. Living paycheque to paycheque has become the norm for many Canadian families. It is a problem that is making everyone vulnerable to excessive debt require quick access to high-interest credit just to make ends meet.
I know the media has been focused on the high debt compared to disposable income, but the root cause analysis is missing. There is a fundamental lack of financial literacy amongst our vulnerable populations. This lack of financial literacy becomes the foundational layer in the inability of Canadians to save and borrow — two very important financial behaviours. They are limited to a complex borrowing and lending marketplace and those that prey on the lack of financial literacy amongst consumers, so the cycle goes on.
We have a few recommendations to suggest for your consideration.
We strongly encourage a reduction in the interest rate, with consideration of the way the interest is calculated and the additional charges, such as late fees, that are on top of a current rate. We support your consulting with the industry before making these changes.
Please ensure that legislation is enforceable in the future by an appropriate oversight body that is accessible to Canadians who wish to report an infraction.
We’d like to see the mandate of the collection of data on usage of high cost alternative financial products to provide information for future evaluation.
We think that financial education should be available to all high-risk borrowers. Vulnerable consumers need more opportunities to learn about personal finances. It is likely most useful at a time when they can fully appreciate the risks and benefits on whether or not to purchase additional credit.
We’d like to see the restriction of the online lending environment by requiring regulation through licensing.
Those are our recommendations for your consideration.
The Chair: Thank you, Ms. White.
Ms. Mo, please go ahead.
Courtney Mo, Public Policy Manager, Momentum: Good morning. Thank you for the opportunity to speak with you today.
Momentum is a non-profit community organization that partners with over 3,000 Calgarians living on a low income each year to support them in building a sustainable livelihood through entrepreneurship programs, skills training programs and financial literacy. Over the years, program participants have drawn our attention to the impact of high-cost credit products such as payday loans, pawn loans, instalment loans, title loans, auto loans as well as rent-to-own schemes. Many of our participants are struggling with high-cost debt, which prevents them from building a sustainable livelihood. This has led to us examine the issue more thoroughly. This is what we’ve learned.
One, high-cost credit in Canada is contributing to a dangerous cycle of debt and poverty for the most vulnerable. Those who can least afford to borrow end up paying the most. These lenders are primarily located in lower-income neighbourhoods and often target people on employment insurance, newcomers, those with no credit scores or bruised credit scores and limited other options. These loans are regularly used to cover basic needs. That means that people living on a lower income are effectively paying 60 per cent interest or more on their groceries, their rent or diapers.
Two, it’s a growing problem. Instalment loans are the fastest growing type of debt in Canada — a 7.7 per cent increase in 2016 — and approximately 6.4 million Canadians had an instalment loan at the end of June 2017. High cost instalment lending accounts for $132 billion owed in Canada, and we have observed that recent changes in Alberta’s payday lending rules are now driving borrowers to instalment lending instead.
Three, the current maximum allowable interest rate in Canada is too high. These lenders are lending at the maximum in some cases, and in others, such as rent-to-own and pawn loans, are lending above the 60 per cent rate. One Momentum participant received a pawn loan for a TV so that she could afford food and transportation that month. The $150 loan cost her $45 for a 30 day period. The problem was she wasn’t able to pay off that loan after 30 days, so she had to re-loan and re-loan and re-loan. Well, $45 every 12 months turns into $540 for a $150 loan. She also lost the TV in the end, not being able to cover the debt in interest and fees.
Four, greater clarity is required regarding how the interest rate maximum is calculated, communicated, what it applies to and how it is enforced. As you know, our current world of high-cost credit didn’t exist when the criminal code maximum rate of borrowing was first established. Enforcement is an issue. There are clearly lenders charging above the criminal code maximum rate of borrowing. Insurance fees, often not presented as optional, drive the cost up, yet are not included in the maximum rate of calculation. This has resulted in a loophole to increase the cost and lenders aggressively selling insurance as an add-on fee.
Furthermore, the provinces use annual percentage rate calculations, which is a more commonly used and understood rate of calculation, while the federal government uses the effective annual rate. This is confusing and leads to ambiguity as to what is allowable.
You’ve asked for a gender and indigenous lens. It is often people living in poverty who turn to these high-cost lenders, and we know that a high percentage of women and indigenous people are living in poverty. It has been most often women and indigenous people willing to share their stories and show us the contracts that they have with high-cost lenders.
In closing, this bill is an important strategy in reducing poverty and the cost of poverty to our Canadian systems. We are supportive of lowering the criminal code maximum rate of borrowing, ensuring it applies to high-cost consumer credit broadly, ensuring it is enforced, ensuring it includes all related fees or potential add-ons by lenders, and ensuring it is harmonized with how interest rates are calculated with the provinces and territories.
We have submitted two reports to supplement our testimony today. One is a report by Westcoast Actuaries that shows some of these high-cost contracts. The last is a Momentum policy paper that sheds further light on the issue and what needs to change.
The Chair: Thank you very much, Ms. Mo.
Mr. Cooper, thank you very much. Welcome. I’m glad you’ve arrived safe and sound. Before calling upon you, I want to introduce to the panel two senators who have arrived subsequently to when we started the meeting: Senator Marwah from Toronto and Senator Day from New Brunswick.
With that, Mr. Cooper, please proceed.
Tom Cooper, Director, Hamilton Roundtable for Poverty Reduction: Thank you very much.
I am the director of the Hamilton Roundtable for Poverty Reduction, which has been working on the issue primarily around payday loans. We know in Ontario, as you’ve just heard around the experience in Alberta, the industry has really operated in a vacuum of lax government oversight for the last 20 years.
While I understand this bill does not specifically cover payday loans themselves, we know the industry is quite interested in moving into this area of instalment loans. You’ve heard Alberta’s experience, and the same can be pointed to here in Ontario, where we’ve seen, for example, primarily Money Mart, which is Canada’s largest payday lender, now actively pursuing customers for these large instalment loans of up to $15,000.
If the consumer were to go on to Money Mart’s website, they could put in an amount of loan requested in an online calculator. What they would get, for example, for a request of $5,000 in an instalment loan, for 36 months, while it is outlined that the APR for this loan is 59.90 per cent, just 0.1 per cent below the criminal interest rate, a person could receive a $5,000 loan, perhaps with a credit check, perhaps not, for $301.85 per month for a 36-month period. That would effectively mean the repayment on that $5,000 loan would end up being $10,866.60.
We consider this type of interest to be absolutely predatory. As in Alberta, in Ontario, in my community of Hamilton, we have seen the impact of aggressive lenders really preying on those who are most vulnerable.
You’ve heard payday loan outlets often set up shop on the fringes of low-income communities. Certainly we’ve seen that. In my community of Hamilton, there are 40 payday loans outlets; across Ontario, we have 800 of them.
While the provincial government recently brought in new legislation to curtail the high interest rates, which are now 391 per cent annually for payday loans, we’re also worried that it may encourage more people to seek out instalment loans of higher values and really place them deeper and deeper into debt.
We have heard from our community, from local non-profit credit counsellors, that this situation is getting worse and worse, and people are making impossible choices around not being able to pay off their loan, not being able to cover rent or food or other basic necessities. We are absolutely seeing as well the fact that people are using these loans to cover those basic necessities because they absolutely have nowhere else to turn.
I’m not sure I can add very much more to what you’ve already heard except to say that we’d certainly encourage the further momentum on this initiative to lower the criminal interest rate but also in the future look at the possible, I suppose, re-uploading responsibility for payday lenders as well. The fact that they are able to go far beyond the criminal interest rate of 60 per cent and in Ontario charged 391 per cent annually for their loans is absolutely beyond criminal. We consider this predatory economic violence, and we would certainly encourage the Senate to act quickly to curtail this industry and other lenders who are, quite frankly, making life impossible for low-income Canadians, particularly those who are working and those on fixed incomes.
Thank you very much.
The Chair: Thank you very much, Mr. Cooper, and thanks to all the panellists for your presentations today and also thank you for your commitment to this very important matter. Canada is always a better place when people roll up their sleeves and contribute. Obviously, the three of you are contributing.
We’re now going to open the floor to questions from senators. May we start, please, with the deputy chairman of the committee, Senator Stewart Olsen.
Senator Stewart Olsen: I have two questions, and one for all, and please give me something brief so I don’t take up a lot of time.
I note with interest that the 60 per cent level is very high. Do you think it was put in place to try, in a bit of a social engineering way, to discourage borrowing from those who couldn’t afford it? Perhaps there is not an understanding that some people simply have nowhere else to go and it’s a trap. Could I get a comment on that and then perhaps what each of you think about the 60 per cent and what would be an acceptable interest rate level? Is it what’s asked for in the bill, or would you have another thought on that? Thank you.
Ms. White: I’m not sure why the 60 per cent was put in place. I don’t know the history of that. My apologies. But I do know that it appears that the people who are looking at and seeking instalment loans have no other choices at this point in time. That’s what’s detrimental to people. I see that very clearly with the people we see who come to not-for-profit credit counselling.
I’m not certain that I have a really good answer for you in terms of things. I refer you to the Momentum policy paper where they looked at other locales and countries for interest rates. Certainly we’re looking at something probably in the 35 to 40 per cent range from the research they’ve done, but we want to see a reduction for sure.
Ms. Mo: I can’t speak to the reason 60 per cent was chosen, but we do know that our world of high-cost credit did not exist at that time, so it couldn’t have been considered as far as what would be appropriate to deal with the type of consumer lending products that we see on the market today.
We know that 60 per cent would not deter somebody from getting a high-cost loan. We’ve seen loans much higher than 60 per cent, and yet somebody in a state desperation will still take that loan.
It’s important that we’re able to connect people to borrowing alternatives, because for many, a loan is not a good idea. Communities services and programs, emergency financial supports — anything but a loan is much better for many people.
In terms of what a recommended rate would be, our recommendation is that lower is better, but we’ve been recommending a pan-Canadian consultation to determine what that new maximum rate should be. I can share that Alberta has recently defined “high-cost credit” at 32 per cent and above. Manitoba is the same. We know there’s precedent in Quebec for usury being considered for anything over 35 per cent. Ontario is considering 35 per cent. The U.S. federal maximum on high-cost lending for military families is 36 per cent. There seems to be precedent and a movement to around the 35 per cent mark.
I believe the approach of this bill of tying the rate to the Bank of Canada lending rate is a sustainable approach compared to a stagnant figure. Thank you.
Mr. Cooper: I would certainly concur. The societal challenge is around the inability of many low-income borrowers to get credit. Perhaps they have bad credit now, but they’re unable to access financial services at traditional banks, particularly, despite the fact that we are seeing higher profits than ever before at the major banks. I think the federal government has an instrumental role to play in encouraging our large financial institutions to open up their products to low-income people, particularly, to enable them to get emergency loans when they do fall into that emergency situation so that we’re not seeing a situation where people feel their only alternative is to go to predatory lenders.
Another challenge is around the lack of income for many people. If we’re talking on a larger scale, we’re talking about the need for living wages, adequate social assistance rates and affordable housing. These also all play into the incredible financial pressures Canadians are feeling today. We know more and more Canadians are falling deeper and deeper into debt because many other aspects of life are unaffordable.
We have to look to our financial institutions, big banks as well as credit unions. Credit unions have opened up their space a little more than the big banks, but we have a long way to go so we can ensure that people have access to financial services when they are in need.
Senator Wallin: Again, it’s a question for all of you, but I think, Ms. White, you said that this is a strategy for reducing poverty. I’ve noted it here anyway that we have to deal with this issue. I’m wondering if we’re not confusing two things. Dealing with appropriate income, access to housing, financial literacy or poverty in general is quite a separate question from usury rates, misleading rates and complicated rates. I’m wondering how we can separate this in the conversation, because I think it clouds the issue.
Again, I’m interested in your number, because in the legislation, I think we’re dealing with a lower number — 20 per cent. I’m not that good with math, but you borrow $100 and if there’s a $2 fee on that, that actually is 24 per cent a year. That’s just a regular kind of bank fee. I’m worried about going too far low that we’re going to punish people who need short-term help, which is a separate issue from instalment loans, et cetera. So please comment on that first question of fighting two very different issues.
Ms. White: I understand the issue. I agree with you that there are many issues at play, and it makes this whole discussion very complex. But there are people who are forced to consider predatory lending because they have no other choice. Perhaps they’ve had poor credit. They might have had a bankruptcy. They have difficult circumstances. They have no collateral. No one will co-sign for them. They just have no access to traditional kinds of banking, so they are forced to it.
We see people from many different walks of life, and many of them, as I say, are vulnerable. The question is: What comes first? Do you address the poverty issue, do you address the lending rate, do you address homelessness or whatever? So I understand and agree with you entirely.
Senator Wallin: I’m just asking if we can target the needy — not that I think 60 per cent rates are good, because I don’t think so. We need new rules around that, but I’m wondering if we’re using the wrong tool to try and solve that problem.
Ms. White: In using the interest rate to solve?
Senator Wallin: Yes.
Ms. White: I think the interest rate is the result. That’s the fee people have to pay. That’s the issue for me.
Ms. Mo: Poverty is not only about money, but it’s always about money. We regularly see people living in poverty with multiple high-cost credit loans, attempting to meet their basic needs and bridge to the next paycheque at sky-high rates of interest. I believe this bill, if nothing else, will save people considerable amounts of money, money that will go a long way in lower-income families and communities.
Mr. Cooper: I would concur. Putting more money back into the pockets of low-income families is vitally important.
As I mentioned, and to Senator Wallin’s point, I believe the challenge facing low-income community members right across the country are those to do with unaffordable housing, rising food prices and lack of income supports, whether they’re working or on government assistance programs. Often those are the individuals targeted by these predatory lenders. They use aggressive, misleading advertising campaigns to really draw people in to use their products.
I strongly believe that if we lower the interest rate, it will be far easier for low-income consumers. At the same time, we also have to continue as a society to ensure that people can access affordable housing and adequate income supports. Both issues have to go together.
Senator Ringuette: Thank you for being here and providing us with your expertise.
Mr. Cooper, earlier in your testimony you said that the Province of Ontario curtails to 381 per cent per payday loan. Could you expand on that for the benefit of our members?
Mr. Cooper: This is a recent lowering of the payday loan interest rate. Two years ago, it sat at $21 on $100, and it was lowered to $18 on $100. Last year and just a month ago, on January 1, it was lowered again to $15 on $100, which equates to a 391 per cent annual interest rate. The province heard from communities and advocates who are working on behalf of people borrowing these loans that the rates are simply too high and they remain too high.
In Hamilton, we became the first community in the province, the first municipality in the province, to create a payday loan licensing bylaw. What that effectively meant was that payday lenders in Hamilton were required to pay a licensing fee. They were required to post on large posters in their outlets the actual cost of interest of taking out a payday loan compared to a charter bank loan. We also required payday lenders to provide credit counselling information to anybody coming in the door because we definitely want to break this cycle of payday lending.
This month, the City of Hamilton’s licensing department is going to be bringing in the first zoning requirements for payday lenders, and it will require a pass that only 15 payday lenders be allowed to be established in Hamilton. We’re hoping this will, over time, be able to lower certainly the number of payday loan outlets but also the need in the community.
Senator Ringuette: As a follow up to your statement, a physical outlet is certainly one presence in the community, but yesterday, as I Googled loans online for Canada, there were over 10 pages online, names galore that were offering services online, and I’m sure none of them are registered provincially. Therefore, none of them have a provincial licence.
The phenomenon is that because there’s no real oversight, the industry is just growing because nobody is paying attention to what is becoming a disaster for our low-income families. Do you see the online phenomena in your community also?
Mr. Cooper: Certainly it is becoming, I think, an online crisis. We don’t have an adequate community response to it or a national response as of yet.
Again, I think the need for these loans speaks to the fact that many low-income people throughout Canada are challenged because they don’t have alternatives, and as we’ve seen in Quebec where it’s not profitable for payday loan outlets to operate because the government lowered the interest rate on payday loans so dramatically.
I think what we need to do is create an environment where people have alternatives to traditional financial products. Unless the big banks and credit unions across the country — and there are some great examples already in Calgary and in Vancouver and a few places in Ontario, but so far they are few and far between. I think that’s where we really need to start addressing the overall crisis because it does become extremely challenging to monitor the Internet and the growth of these online predatory lenders.
Senator Tannas: Thank you all for being here. I’ll direct this question to Ms. White because you’re a national organization. If any of the other witnesses have information, maybe they can chip in.
I’m interested in Quebec, where there is a 35 per cent usury. My question is: Do your Quebec counterparts recognize that there is a shortage or a problem with the market in terms of access at 35 per cent in Quebec? For us, we’re sympathetic to this. The number of 60 seems high, the number of 20 seems low, so here we have something in the middle in Quebec. Is there a dearth of payday lenders and instalment-loan people and emergency-credit types operating in that marketplace that would signify that 35 is too low?
Ms. White: I appreciate your question. I don’t have a lot of data on Quebec. My apologies. We do know that in Newfoundland, they had a restriction on payday loans, and yet there were still people looking for it, and they’ve just recently brought up that issue in Newfoundland again to revisit that.
Senator Tannas: They are short of payday lenders? There is no access?
Ms. White: My understanding is that they’re going to look at legislation around payday lending.
What I want to bring to your attention is that people who are in crisis, as lots of these people are, are looking for solutions. Further to Senator Ringuette’s question, people will find a solution. They’re desperate. They got into debt over time, usually, and then they want a quick fix. The rubber has hit the road for them and they need to find an answer, which may mean for some people going to online lending and that’s why the predominance of that.
I’m sorry that I can’t address the issue in Quebec for you sufficiently, but I suspect what’s happening is lots of people are accessing online.
Senator Tannas: That’s how they get around the jurisdiction?
Ms. White: There’s always a way. That would be my thought on that.
Senator Tannas: For all of you, would it be your preference that this segment be wiped out? Would that be helpful to all of the people that you serve? Or do they need to be here and it is a question of providing a commercial balance here between the need and the returns?
Ms. White: I think there needs to be a balance. Certainly there seems to be a need for some access to small loans at a reasonable rate, for sure. I think that if we were to wipe it out, there would be something to take its place. I’ve been in this long enough over the years that when something gets restricted, something else takes its place. So there will be constant evolution.
If I can go back to the time of debt settlement, which was predatory in itself, we saw that legislation did away with a lot of that, but something else has taken its place. The same as we see with payday loans and more instalment debt, then even if you restrict this, there will be something else, I’m sure, come along. Unfortunately, we can’t act sufficiently quickly enough to prevent everything that’s going to happen because there will be something new.
Senator Unger: You commented, Ms. White, that people in crisis will look for solutions. Are you saying that it doesn’t really matter where you set the rate, that desperate people will always find a solution regardless of what we’re doing?
Ms. White: I think it’s important for us to look at a rate that’s reasonable for these people. You’re right that they will always find a solution, for sure, but in terms of these very vulnerable consumers, I think it behooves us to be responsible in terms of that rate.
Senator Dagenais: My question is for you, Ms. White.
To your knowledge, how much of a front for organized crime are high-interest lenders? We know that organized crime can launder money by lending it. However, perhaps those lenders exist because banks refuse those clients, in a discriminatory way.
If I come back to the proposed rate of 20 per cent, unless I am mistaken, department store credit cards have a rate of over 20 per cent. If 60 per cent is too high today, as it can be declared criminal, is a rate of 20 per cent not too low?
As Senator Tannas was saying, there are some who lend at 35 per cent in Quebec. We must not forget that, if rates are very low, it can help people, but it can also encourage them to borrow more. We have to be careful.
Today’s businesses can offer you to buy a pool, swim in it this year and pay for it next year. The same goes for furniture, as businesses give you a chance to get furniture immediately and pay for it next year. Some businesses also lease cars for $50 a week. It is tempting, so we can’t blame people for taking advantage of the opportunity, and lenders benefit from that. So I think we need to strike a balance between the 20-per-cent rate and the 60-per-cent rate. I would like to hear your thoughts on that.
Ms. White: You have two questions. The first one is about whether they are a front for organized crime. It certainly may be, but I don’t know the answer to that question. My apologies. I sat on a panel that reviewed the Payday Loans Act in Ontario about three or four years ago, and there was no discussion about that at the time, but certainly I understand where your question comes from, and there may be a reality with that, for sure.
To your second question, I think that we hopefully will end up with a rate that’s lower. Where will it end up? I appreciate the fact that you’re all consulting about it and there are minds that are much better than mine who will say there are various economic factors that come into play. We do recommend that it be lower, for sure, because we see the price that people pay.
To your point about whether they could borrow more, we see that with many Canadians we’ve gotten over $1.70 per dollar of disposal disposable income; that rate is going up and up. Certainly, from not-for-profit credit counselling, we have a concern about that.
As I mentioned in my piece, there’s a cycle, and we’ve all been impacted in Canada by the whole consumerism piece. My concern is looking at the education of people to encourage saving, and saving to borrow and having a down payment for things that they need to purchase. From an education perspective, that’s where I stand. But yes, there are concerns, for sure.
Senator Dagenais: Thank you very much, Ms. White.
The Chair: Thanks very much, Mr. Cooper and Ms. Mo, for being available this morning. This has been a very helpful panel that I know will assist us in our deliberations. Thank you very much for being available.
I’d like to introduce the witnesses for our second panel. We have with us Chris Robinson, Professor, Finance, School of Administrative Studies, at York University, and we have Professor Jerry Buckland, Professor, International Development Studies, Menno Simons College, Canadian Mennonite University, the University of Winnipeg.
Gentlemen, thank you very much for being with us. We look forward to your five-minute opening statements, after which senators will then move to questions. I understand there’s an agreement that Mr. Buckland will proceed.
Jerry Buckland, Professor, International Development Studies, Menno Simons College, Canadian Mennonite University, The University of Winnipeg, as an individual: Thank you very much for the opportunity to come and speak with you. I think this issue that you’re looking at is very important. It’s a real passion of mine.
There was talk of consumerism in the last panel, and I think the related concept in terms of credit is financialization. I think financialization is this growth in the credit market, and it’s really tightly connected with consumerism. It’s a really important issue and what you’re doing is very important. You’re really looking at what is an iceberg; it is a very big problem and you’re looking at the very tip. This tip is incredibly important.
What I want to do is talk a little bit about financial inclusion, explain what I mean by that and connect that with the issue that you’re looking at, which is the usury cap, and then mention some ways in which I think you might consider addressing financial inclusion.
Financial inclusion is an important policy goal, and usury caps are one component of financial inclusion, but perhaps not the most important component.
Financial inclusion is about bringing into the mainstream banking system, including banks and credit unions, people who are outside of it. The purpose of financial inclusion is to improve the quality and safety of financial services that excluded people use in order to advance their financial and overall well-being. Financially excluded people include those who are either completely excluded and have no services through mainstream banking and those who are partly excluded and get some of their services from mainstream banking.
The data on financial exclusion in Canada is somewhat mixed, but between 1 and 5 per cent of Canadian adults, or 306,000 to 1.5 million Canadians, do not have a bank account. A much larger number of them do not have sufficient financial services to meet their financial needs from mainstream banks. I think that’s partly what you’re looking at here: the underbanked people rather than the un-banked. Instead, people go to fringe banks, payday lenders, instalment lenders and pawnshops, et cetera, in order to get their financial services met.
The evidence finds that people who are most affected by financial exclusion include low-income, indigenous peoples and single-parent families. With reference to the committee’s request to make reference to indigenous and gender issues, I think that financial exclusion is a phenomenon that affects indigenous people and single parents, some of whom are female, among other groups.
With respect to causes of financial exclusion, the research finds that mainstream financial institutions do not do enough in three areas, and in my report I talk about this in more detail. I’ll just skim through it right now.
The first area is physical access. Research has found that in many inner-city neighbourhoods, mainstream banks have been shutting down branches.
A second factor is that mainstream banks do not necessarily provide sufficient safe and appropriate services for low-income people, and they don’t address issues like personal identification and cheque hold periods, and they often don’t advertise their products among these communities.
Finally, low-income people, in research that I’ve seen, sometimes find that mainstream banks and credit unions do not necessarily treat low-income people with respect, and therefore trust is not built.
These are some of the factors that sometimes push people towards using the kinds of instalment lenders, payday lenders, that you’re speaking about.
A previous panellist talked about financial literacy. I think that’s a really important factor. In Canada, the Canadian Financial Literacy Leader is working hard on that. I would want to add that it’s important to balance financial literacy education and regulation that makes the credit sector simple and understandable for all people.
Specifically on the issue of usury caps, there’s quite a bit of debate in the literature about their effectiveness. Structural theorists tend to argue that usury caps will restrict interest rates that are oppressive or exploitative. Neoclassical economic theories, on the other hand, argue that markets are competitive, so if you put a usury cap on that market, it will push lenders out of the industry.
The evidence on which theory is correct varies in place and in time. For instance, in a suburban neighbourhood where there are many retail lenders, there may be sufficient competition. In an indigenous, remote community, there may be no competition. So I think it varies from place to place.
Another important issue in terms of usury caps has to do with how we understand those usury caps. Even if usury caps are intended for financial retailers, they must be enforced. There has been little evidence of government enforcement of the criminal rate of interest in Canada.
For instance, before the criminal rate of interest exemption was created for payday lending, payday loan companies across the country, except for Quebec, charged interest rates in excess of the criminal rate of interest. Some of these companies were subject to class-action lawsuits, but I am not aware of any completed government action using the criminal rate of interest against payday loan companies during the pre-exemption period. Also, payday lenders continue to operate in provinces without the criminal rate of interest exemption, for instance, Newfoundland and Labrador.
Finally, other fringe banks, such as pawnshops, not operating within the payday loan exemption, charge rates in excess of the criminal rate of interest. I’m not aware of government action in either of these cases.
I wanted to wrap up by sharing some thoughts about reforms that you might consider in addition to the work you’re doing on the usury cap.
First of all, to deepen and enforce the current Canadian access to basic banking regulations, we currently have regulations that require mainstream banks to provide financial services for low-income Canadians. However, these regulations are limited and they’re not, in my view, properly enforced, so these could be strengthened and enforced.
Second, financial consumer protection regulations, I believe, need to be strengthened. This is because of this phenomenon of financialization, that there are more and more credit products, and a comment from a previous panellist about how new products will arise when regulation comes in to reduce a previous product. We need consumer protection to protect consumers against all of these different types of products.
A third problem that we face in this market is an absence of good data. Last session, there was a question about payday lenders in Quebec. Unfortunately, we have very little data across Canada to make these kinds of decisions, so we need to collect more data about this industry.
The fourth point I want to make is that we need to develop a unified plan to address financial exclusion in certain areas that I would call financial service deserts. Those deserts are particularly in inner-city and low-income communities. Credit unions have really stepped up —Assiniboine, Vancity, Alterna — to address these financial service deserts in certain cities, but we need the banks to come on board because they are much larger, they are universal, and they need to take their share of the responsibility.
Another area that needs to be addressed is remote, rural and indigenous communities. There is tremendous limitation in terms of financial services in these communities, and these need to be addressed. There are interesting experiments elsewhere in the world, including the Commonwealth Bank in Australia. They’ve done interesting work with indigenous communities in Australia. I want to point to that as an opportunity.
Once again, thank you very much for letting me share these thoughts with you.
The Chair: Thank you very much, Dr. Buckland.
Dr. Robinson, please.
Chris Robinson, Professor, Finance, School of Administrative Studies, York University, as an individual: Thank you for the opportunity to present my opinion to you on Bill S-237. I know that Senator Ringuette is a francophone, but I will have to address you in English.
I’m sorry. I’m losing my French too much. Maybe it’s because I’m separated from my French-speaking wife.
The Chair: Too much information, Dr. Robinson.
Mr. Robinson: I agree completely with Professor Buckland’s concerns about financial exclusion. He and I have been working together for many years.
I applaud your intention with Bill S-237, but I don’t agree with you. I think you will have unintended bad consequences from this bill, and some of you have raised issues related to that.
Let’s cut to the chase here. The reason you’re seeing these very, very high charges, fees, et cetera — especially in payday lending, which is a much more serious problem — is because this is an incredibly inefficient industry.
I speak as an expert here. Why should you believe me? I’m a CPA. I am a certified financial planner. I’ve been doing this my entire life. My books and my research are used around the world. The $15 per 100 rules that have come in in Ontario are based entirely on my research, which was done originally in Manitoba.
These guys are not predators, in the usual sense, for the most part. There was one that was, but they’re gone. They are simply incredibly inefficient businesses. Average from a payday lender: 11 loans per day of $460. Try paying the bills, unless you’re charging very high fees.
I want to challenge you to take a different approach here. I’m almost alone among finance professors in Canada in being extreme left-wing. I want you to force the banks to take over this business. Ban it, and have the banks do it. They can do it vastly cheaper.
Furthermore, in my professional opinion — and I stress the word “professional” — the banks will not suffer from doing this. Bringing everybody into the mainstream will make them more money.
The reason they haven’t addressed it is twofold. And I’m really concerned about payday lending. The instalment lenders you may knock out of business by doing this. That will mean that their borrowers will go back to the payday lenders at rates that are vastly higher. Colorado, for example, ended payday lending a number of years ago and went to instalments. Business was cut by a third, and the rates are much higher than 60 per cent, but at least it’s better than payday lending.
What I want is the banks to do this. The banks can run it through their tellers. They don’t even need executives to look at anything. They can run it through their computer systems. They can do it.
The only reason they haven’t done it is, (a), it sounds bad; they don’t want to be called payday lenders; and (b), it’s so small. My estimate is that the total payday loan book outstanding at any given point in time is about the size of one bank branch’s mortgage portfolio. I could own a significant part of the payday lending industry personally. It’s that small. So the banks could swallow it whole. They just haven’t bothered because it’s such a peanuts project to them.
You in the Senate would have the opportunity through the Bank Act to, shall we say, bully them — persuade them — to do this, and it would not hurt them. They could do it.
And they could teach their staff, who are my former students, to treat everybody with respect. Tell the banks, “Take off your suits, give up your credit cards, dress yourselves as indigenous people” — and I know something about this given that my adopted son is part indigenous — “walk into a bank without all the identification, not as a rich white guy like me, and try to get an account. Try to get respect.” I get lots of respect. I don’t see any problems in the banks, but we know from the interviews we’ve done and that I’m doing now that lots of people — not fortunate people like any of us in this room — have a hard time. Yet, I know the banks are perfectly capable, because those are my students, and they can treat anybody with respect. They just have to be told to do this.
What I’m challenging you to do is to change that climate, to push the banks and not worry about this bill. I know you’ll feel a lot of pride in the bill you’re bringing forward to help people, but I don’t think it’s going to help. I think what I’m saying is what you need to do. It clearly agrees with what Professor Buckland says and what many other people we work with, including the people you’ve seen here already. Thank you.
The Chair: Thank you very much, Dr. Robinson.
We’ll now move to questions.
Senator Tannas: Let’s pretend we’re not going to talk the banks into taking over this industry, and let’s say that we’re going to try and do the best we can to provide a sensible balance between a price that will help consumers of these products and enough return that we don’t lose the industry and therefore people’s access to it.
You talked about inefficiencies, Mr. Robinson, and I think that’s great, but we’re seeing more and more Internet-based lenders. If they can do it over the Internet, why is it that the industry remains so inefficient?
Mr. Robinson: I’m going to answer that question and also one you asked in the last session — or rather, I’m going to tell you why I can’t.
The Internet industry, as far as I can tell — and it is very difficult to get any reliable information. I suspect the payday lenders will appear in front of you. You should be very cautious trusting anything they tell you.
Internet lenders come and go very fast. The evidence I’ve been able to see is that their loan losses are tremendous, such that I do not believe this is a sustainable business. Money Mart is very good at doing its business. The loan losses range from 1.3 to 5 per cent in the store fronts. They’re ranging at 10 per cent or more — and that’s 10 per cent more of the principal.
The simple thing is, I could make some free money. I just go and borrow from an Internet lender and then laugh at him, because they can’t do anything. They can’t affect my credit rating, they can’t chase me, they have no standing in the courts and it’s not worth their while to chase me. So I could go through every Internet lender, borrow whatever I can get from them and laugh at them. I don’t do that because I’m an ethical person, but I don’t believe the Internet is the threat. The storefront payday lenders will tell you that it is a huge bogeyman. They’re lying. It’s not. I don’t see that issue.
They are more efficient in terms of needing an office, but those loan losses are killers. I was able to extract Money Mart’s loan losses on the Internet side of the business. I have to go to the U.S. to get data on Money Mart. The last data available is 2014 before their parent went private. They were showing 11.7 per cent loss for the Internet side, and they are the best of the business. So imagine what these fly-by-night operations are doing. They come up and think it’s an easy way to make money, and they’re gone.
There are two or three Internet operations in Canada that are good, but they also follow all the rules. They’re regulated. Progressive, Mogo and 310-LOAN, for example.
The other question you asked, however, which I think is very important, was “what about 35 per cent in Quebec?” We don’t have any data on the instalment lenders. The only data I’ve been able to get anywhere on any of this was through U.S. 10-Ks and 10-Qs, disclosing Canadian data from Money Mart. If I had that data, I could tell you whether 35 per cent was fair. That was how I determined that $15 per hundred is the fair rate for payday lenders. But I don’t have that data, so I would be guessing. My guess is that 40 to 60 is what they need because that’s what I see being charged.
Senator Mockler: Thank you very much, doctors. This was very informative.
You’ve said, Dr. Robinson, if I look at Bill S-237 and I look at your proposal with banks, you said that we would have unintended, bad consequences. Can you expand on that?
Mr. Robinson: Yes. If I’m right that this rate is too low — and I believe it is. As I said, I don’t have any data, but when I see credit card companies in competition with each other, charging 2 per cent per month, I think that anything at that level is going to be unsustainable.
It’s no accident that Money Mart is offering these loans — because of the limitations. They’ve been fighting against me since 2004.
Senator Mockler: They haven’t succeeded.
Mr. Robinson: They have not succeeded. They did for a while everywhere but Manitoba. At one point, I think they took something offline because they realized I was using it. But Money Mart, I have to tell you, is the most honest and best one of the bunch by far. However, my gut feeling is that it will require 40 to 60 per cent for these loans to be offered.
Therefore, what will happen is that people who are going to go that route — there’s another problem with a payday loan compared to an instalment loan. Picture this: You have no emergency fund, and you have no credit card. We are defining the client here. You can’t make ends meet, and you borrow $500 this month. Two weeks from now, payday comes up, and you have to pay back $500. It doesn’t even matter what the fee is. How many people do you think could do that if they couldn’t make ends meet last month? Then they’re caught in a cycle.
The idea of the instalment loan in some states in the U.S., B.C. and now Ontario is to try to relieve that by forcing it into instalment loans so that you have a longer period over which to pay it back. How many of us could pay back our mortgage in one shot? That’s as big a job for them to pay back $500.
So I think that they will be cutting off access to that intermediate — 40 to 60 per cent. By the way, they’ve been quoting 391, and that’s because these people don’t understand finance. The effective annual rate is thousands to ten thousands to a million per cent, because you are borrowing for such a short time. Keep borrowing like that and you will be ruined. That’s the problem of driving us out of the instalment loans and back into payday loans. That’s what I’m afraid will happen.
Senator Mockler: I have a supplementary. Give us a dry run of why the banks are not moving on it, and what would you do with the banks?
Mr. Robinson: Hold their feet to the flame. I’m a professional in this field. I wrote the first personal finance text for the Institute of Canadian Bankers in 1985 in English and French. They are capable of doing this. Talk to the local branch manager, and they’ll tell you that the head office just doesn’t allow it.
My experience with retail bankers is that they care about the people, not just about the money, but the system — these are very big organizations. The amount of money at stake in payday lending is nothing. The banks, for example, especially CIBC, all have this illusion that they can go to New York and trade in a zero-sum game in derivatives and make billions of dollars. Of course, the next year, they lose billions. I know how derivatives trading works. This is part of my expertise. So they don’t pay attention to a little business like that.
In fact they make all their money out of the branches. If you just expand the branch — you’ve got the same branch, the same staff. You’re running more loans through them. Overdraft protection is what you actually do; give everybody overdraft protection. The fees are quite high in overdraft protection. In fact, they are higher than 20 per cent if you work it out. But boy, is it a lot cheaper than what they’re paying now. Then they’re in the mainstream. They can improve their credit rating. They can do all the things that Jerry and I want them to do.
That doesn’t solve, for example, the indigenous reserves in northern Ontario and Manitoba. I think we need something else for that, such as postal banking, but at least it solves the problems for the inner city where most of our population, including a large part of our indigenous population, lives.
We interviewed people in 2016 coming out of payday lending stores. We persuaded people to talk to us. It was not me, but it was somebody I’m working with. Did you interview, Jerry?
Mr. Buckland: A team of us.
Mr. Robinson: A team interviewed. Forty-eight per cent of the subjects were indigenous. Ten per cent of the population in Manitoba is indigenous. That is where your problem is. And they will go back to the payday lenders if they don’t have the instalment loans, and the payday lenders are worse, not because they’re nasty but because they’re too inefficient.
Senator Ringuette: My imagination is in overdrive right now in regard to the Canadian banks, although I must say, and to their credit, that the Desjardins Group is financing local communities and volunteer groups that want to provide emergency loans. They are doing a fantastic job, and I want to congratulate them. I want to say that the six big ones, chartered ones that are well guarded by the Department of Finance, should follow the example that they’re setting. I understand and I agree, although you’re kind of asking for mission impossible for the time being, but we’re here for a while, so there might be hope.
Constitutionally, you understand that the federal government is responsible for setting the rate of interest. In 2006, we gave the provinces that wanted to regulate the payday loan only financial product, which was a loan of $1,500 up to 62 days. That was the limit, and that is the only product that the provinces can regulate. If we fast forward to 12 years later, we’re faced with all these new retail outlets and no oversight.
Question number one is, should the federal government give more power to regulate more financial products to the provinces, or should we backtrack from what we did in 2006 and say that this is a federal issue and we will regulate and provide oversight to all Canadians from coast to coast to coast?
Mr. Buckland: I think that either federal regulation or harmonized jurisdiction, provincial-territorial regulation, both of those could work. My preference would be federal. It seems to me it’s more efficient. I’m an economist by training. But I think harmonized territorial provincial could also work.
A key issue here is how do people understand the law. I failed to emphasize this in my presentation, but my understanding is that there’s some deep misunderstanding about the criminal rate of interest. My colleague Dr. Gail Henderson has done some research into this, and it seems like many policymakers understand that law to apply just to criminal credit offerings, not to financial retailers. So it seems like there’s an important misunderstanding that this bill needs to address. Is that right, that 60 per cent is only applying to criminal offerings? I would say, whether it’s federal or harmonized, we need to be clear on what it is and what it means.
Senator Ringuette: Our research indicates that in the last 10 years, the three cases that went to the Supreme Court of Canada in regard to the criminal interest rate had to do with contract law.
Mr. Robinson: That’s true about the contract law. I was involved in a case earlier than that, the Dunphy case, which was an interesting case in its own right.
I would prefer to see federal regulation. My stated preference and my submission was repeal section 347(1) and give two years and kill payday lending, but you have to do that while also pushing the banks. I would see it better done federally.
What you could do is take a shot at this. We don’t have data and we can’t get it, so bring in the Bank of Canada overnight rate plus 36 per cent and see what happens. That’s not an unreasonable approach to take. I think that the rate you have set is almost certainly going to be too low. If you bring it in at what I just suggested, you will not catch the standard department store credit cards, et cetera, and you will hit the instalment lenders, or you may not. It may be that they actually can be sufficiently efficient, but I don’t know. But that would be an alternative. I would like to see it done, regulated federally.
Senator Marwah: Professor Robinson, I am glad I have retired from banking. I’d hate to debate with you on whether the bank should or shouldn’t do this.
Both of you, as well as some prior witnesses, have said that the issue is also one of enforcement, and to me no law has any value at all if it cannot be enforced, so it is not enforced.
I’d like your views on why that is the case. I can hazard a guess. Because it’s not important enough, so that’s why we don’t do it. If we can’t enforce 60 per cent, I’d hate to think how you could enforce 20 per cent where the numbers would rise exponentially. I’d like to have your views on why that is the case. What are the factors behind it?
Mr. Buckland: I think that’s a very good question. Part of the ambiguity on the part of policymakers reflects maybe a lack of political motivation to address financial exclusion. I think many people who are going to high-interest lenders, payday lenders, pawnshops, rent-to-own operators, instalment lenders, are low income. They have few alternatives and many of these people are powerless. They have very limited voice politically. So when they’re unhappy with their financial services, they don’t really have the outlets to complain and make a fuss, whereas a middle-income consumer maybe is more aware of the different channels that he or she can take to complain and make a fuss.
The Financial Consumer Agency of Canada, for instance, has access to basic banking regulations and they’re enforced on the basis of complaints. Consumers phone in and complain. But do low-income people know that they can complain? Do they know about the existence of the regulations? Probably not. Whereas middle-income people probably are more aware of their rights and more articulate about those rights. I think that’s a part of the problem.
Senator Marwah: Why are consumer advocates, including yourself, not mounting a campaign to get people to complain? Why has this not come up as an issue of enforcement? As long as I’ve been here, I’ve never heard anybody mounting a complaint. We all know virtually hundreds of lenders, and if we include the fees and the insurance, which are basically hidden interest rates, we’ve been above 60 per cent for decades, and not one boo has come from anybody, no consumer advocate agency, no credit counselling firm, and I find that impossible. There are voices. Why aren’t they doing something?
Mr. Buckland: I think there are voices, and low-income consumers do have voices. There are organizations that represent them. ACORN Canada is one. We heard from Courtney Mo who represents an organization in Calgary. I live in Winnipeg. SEED Winnipeg is an organization that does similar work. There are definitely voices out there.
Again, I’m really glad that you’re listening because there hasn’t been a listening ear for those voices. It’s awesome that you’re listening. Please talk to these people more and hear their views. This is great because this is a major social problem. Low-income people are financially excluded. They face barriers to access mainstream banking that middle income people complain about. I totally agree with your point.
Mr. Robinson: That was a great answer.
Senator Unger: I’m sitting here listening and trying to remember who it was, Stephen Leacock perhaps, who said, “I hate banks.” That’s kind of my feeling and lifelong attitude toward banks.
Dr. Buckland, would you comment on what your colleague is saying and what his views are? Would you both agree that financial literacy is really scarce in Canada at this point? It should be mandatory in all high schools across the country, but I don’t think it is. I’m wondering if you would agree that further recommendations need to be looked into, for example, more education, and that should all come before a bill like this would pass?
Mr. Buckland: I’ve been working with Dr. Robinson for many years. In fact we’re co-editing a book on payday lending in Canada. We disagree from time to time, but we also agree on many points. Certainly, in terms of his financial analysis of the payday loan industry, I totally respect his understanding and what payday lenders need to charge in order to operate their firms. I completely support his views.
In terms of the role of financial literacy, I agree, because I think this financialization phenomenon tied in with consumerism really is pushing us to learn more, and buyer beware. That’s so critical.
My caveat would be that sometimes there’s an assumption that if you’re low income, you’re more financially illiterate. For my research, I go into neighbourhoods and talk to low-income people. I’ve been blown away by the ability of low-income people to manage meagre finances. I agree that everyone needs to become better equipped in terms of financial literacy because of this complicating marketplace. Low income, middle income, upper income we all need to learn more, but I would never want to say that low-income people find themselves in that space because they are financially illiterate. In fact, middle-income people could learn a lot from low-income people about managing their finances.
Mr. Robinson: I agree and disagree. I don’t think the issue is financial literacy. I’m in the middle of this debate with people writing to me all the time about it. The issue is deeper than that. It is behavioural. Some of you may have noticed that the Nobel Prize in economics went to Richard Thaler this year, behavioural economist. I do research in behavioural economics related to consumer finance. We’re developing a course on this at York.
The innate behaviours of people wired into our brains, the neuroscience, overrides completely the prefrontal cortex that does the rational stuff that we all think we’re doing. You may have heard of the marshmallow experiment, but there is just huge amounts of evidence. I’ve published work on behaviour and the way we are wired.
I’ve been exhaustively trained for my whole life in finance and economics, but it may be that the only reason that I have terrific self-discipline is because my parents gave it to me when I was two years old or something. So it isn’t the financial literacy.
Besides which, you should not trust any of the financial literacy measures you see. I look at the questions they ask and it’s nonsense. They don’t ask the kind of questions that Mr. Buckland and I would ask somebody about their finances. They are asking middle class people if they know how to manage their trust funds. They’re not asking them: Do you understand what it means if you spend this today and don’t have it tomorrow? Really.
So in regard to financial literacy measures, I don’t think Canadians are any worse than anybody else, but I don’t think it will help. I don’t want to say no, but I don’t think it will help.
Senator Unger: Your comment about more education, more research, more of the recommendations that Mr. Buckland talked about, should that be done before this bill or a bill like this should be passed?
Mr. Buckland: That is a good question. What’s needed is a federal government plan to address financial exclusion, and as a part of that package of policy reform, there needs to be research.
Should more research be done before passing this particular bill? Yes, I think so. There’s been some questions about the consequences of the action. I still feel very strongly that there needs to be clarity about the purpose of criminal rate of interest. Is it just for criminal organizations, or is it for all credit providers? First and foremost, in my mind that needs to be clarified.
Senator Dagenais: Before I ask my question, I would like to digress for a moment. We were talking about literature that could help people save money. There is a very popular Quebecer accountant who recently published a book titled En as-tu vraiment besoin? People could read that very affordable book on the topic.
You talked about major Canadian banks. We know that the Canadian banking system is recognized for its quality, as well as for its regulations. Major banks are very profitable, perhaps because they have decided to stop taking risks. I may be a bit biased, as my spouse worked for a major bank for 30 years.
I would like to come back to a potential solution that could be considered, with a national framework. Beyond the criminal interest rate, could lenders not be forced to use some sort of standard contracts or record those contracts? That may be a solution. I would like to hear your thoughts on that.
Mr. Robinson: I think you’re referring to the contracts. They do have formal contracts, although you have to be cautious about them. They are required by law to do this in each of the provinces, but what they don’t do is report to credit agencies, so they never get to improve their credit rating. There’s been proposals to do that. It’s such a small industry that it’s expensive for them to collect the data. They don’t do that now. They don’t report. Big banks report to credit agencies, stores, et cetera, but not payday lenders. That would help repair credit, but I don’t think it would address the principal issues. I think that we still need the people to be working in the banking system for all of their needs rather than through the payday lenders and these other lenders. They claim, sometimes falsely, that they will help you improve your credit score. That is generally a lie. There may be some places that are doing that, some instalment lenders, but for the most part they’re not reporting.
As for registering the contracts, some of this work is done in one or two U.S. states, and they have to add additional fees for it, but there are some differences in the U.S. that don’t apply here.
Mr. Buckland: In Canada, we know payday lending is regulated provincially. The Financial Consumer Agency of Canada, which is a federal agency, is responsible for regulating the access to basic banking regulations. They also do general financial consumer education, and they’ve done, for instance, surveys on payday lending. In some ways, I think the FCAC would be an ideal federal organization to take on more of that payday loan regulation, but it’s not in their mandate right now.
In Australia and the United States, there are federal regulations. Chris has mentioned that in the United States usury caps are regulated at the state level. However, the new Consumer Financial Protection Bureau, which was a product of President Obama, now has just introduced regulations requiring payday lenders in the U.S. to underwrite their loans. I think this is a really good move.
One of the things that we’ve seen in terms of the harmful consequences of payday lending is that people get into a repeat borrowing cycle. They’re trying to meet a long-term financial need with a two-week loan, and there’s a misalignment. The lender is earning a profit from these repeat loans, but the borrower is not addressing their financial needs, so the Consumer Financial Protection Bureau in the U.S. is requiring underwriting. I think FCAC would be an institution that could take on something like that.
In Australia, they have federal regulation called “responsible credit,” and ASIC, the Australian Securities and Investments Commission, is responsible for overseeing that responsible credit regulation.
So again it’s a federal regulation that is doing some of the work that I think you might be referring to.
Senator Dagenais: My question is for both of our witnesses. We are talking about borrowing at a 40-per-cent interest rate. If someone is forced to borrow at a 40-per-cent interest rate, the likelihood of them being able to repay the money is minimal. The person could deal with another lender to repay their first loan. Finally, if they don’t win the lottery, they will be in debt for a long time. What do you think about a 40-per-cent interest rate?
Mr. Buckland: I think it’s a high rate, and it would be a risk for some borrowers. It could draw some borrowers into a credit cycle that they eventually would not be able to pay off. For other borrowers, it could be fine.
That’s one of the things we’ve seen in our research on payday lending. Some people are very strategic and they use payday loans very strategically. We saw this in a focus group recently in Winnipeg where we talked with a group of a dozen people, and two of these people were very strategic. They only took out payday loans once or twice a year and they took them out even though they had savings. Why? Because they knew that they would pay off the payday loan. So they were very strategic.
But there were others in this group who got trapped into a payday loan cycle. They couldn’t pay it off, and they had to get another one to pay off the first and so on and so on, and they got into this repeat loan cycle. So the payday loan regulations are insufficient to protect people currently. I’m sorry if I haven’t answered your question directly.
Mr. Robinson: There is something that happens quite commonly, and we’ve heard testimony to this effect. We know it’s happening, as do both the payday lenders and their clients. They’ll go across the street to another one if they can’t get enough from the first one. Everybody knows this is happening. If there was a province-wide or country-wide registry, you could possibly stop people from doing this, but this becomes very intrusive and very expensive to operate. The same happens in the States, so that as you get this multiplicity of lenders, then people just simply borrow again and again. Because they’re not putting up any security and there’s no registration, one lender doesn’t know that another one is on the hook. We had one fellow who came in and testified that he used three lenders in sequence. Then he would pay off one and borrow from the next, something like kiting cheques.
Senator Wallin: A quick summary of your point, Mr. Robinson, is that the issue is not financial literacy, that somehow people are hard-wired to either manage their finances or not, and then the other issue, of course, of discrimination. Essentially, what you’re saying is: Force the banks to do this; they can use their overdraft system or their lines of credit; they’re going to lose money because the clientele is not going to change their behaviour and they should just write it off because it’s a relatively small amount of money in the scheme of things.
Mr. Robinson: That’s a very good question. That’s not quite what I’m thinking of. I’ll quote my son as one of my co-authors.
What I’m proposing we’ll do and what the banks create is what we call “scaffolding,” that is, either personally or socially, you create mechanisms that impose some self-discipline. We all do this. We do this whether it’s with respect to chocolate, impulse spending or cutting up credit cards. You create mechanisms for yourself.
This would transfer to the banks the ability to do what the payday lenders are sometimes doing, which is creating this mechanism: You have to pay it back. But the bank gets the money first. Almost all deposits now go electronically. So the bank gets the money, covers the overdraft, and you have an enforced “pay yourself first,” the mantra of financial planners you may have heard, or set up a separate account or something like that.
Similarly, the credit unions have tried to set up such schemes, but the credit unions are sufficiently small that they don’t have enough reach to get to enough people. They’ve tried very hard, but it’s difficult. The banks can do that relatively easily. They could set up with clients an account they put some money into and then they pay the payday loan or overdraft out of that, but they keep their savings over here. That would be the way I would hope it would work.
The Chair: On behalf of the committee, I want to thank both of you for taking the time to prepare and to appear with us today. I think that your points of view have been very helpful to us as we wrestle with this problem, which, like so many problems, seems relatively simple until you come to understand it. Thank you much very much. We’re very appreciative of your time.
With that, I’m going to suspend the meeting, and then we’re going to convene very quickly for an in camera session.
(The committee continued in camera.)