Payday Lending in Canada in a Global Context (eBook)

Jerry Buckland is Professor of International Development Studies, Menno Simons College, Canadian Mennonite University, Canada. Chris Robinson is Professor of Finance, School of Administrative Studies, York University, Canada.Brenda Spotton Visano is Professor of Economics and Public Policy, Department of Economics, The School of Public Policy & Administration, York University, Canada. 

Foreword 6
Acknowledgments 9
Contents 11
Notes on Editors and Contributors 14
List of Figures 16
List of Tables 17
Chapter 1: Introduction 18
Overview of the Book 18
The Payday Loan Industry in Canada 20
The Payday Loan Product and Its Usage 22
Privacy Issues 24
Regulation of Payday Lending 25
A Roadmap to the Book 26
Survey of the Literature 30
Recent Studies and Their Sources 30
Industry Dynamics 32
Corporatization 34
Online Payday Lending 34
Unique Issues of Online Loans 36
Asymmetric Information 36
Costs Differ for Online Versus Storefront Loans 36
Online Lenders Less Likely to Follow Regulations 37
Troublesome Consumer Practices 37
Repeating Online Loans 38
Do Payday Loans Benefit Consumers? 38
What Do Customers Think About Payday Loans? 40
Repeat Borrowing 40
The Situation in the United States 41
Why So Many Payday Loans? 42
Consumer Behavior and Literacy 43
Tunneling 44
Payday Loan Marketing 45
Financial Literacy 45
The Impact of Regulation on Payday Lending 46
Some New US Payday Loan Regulations 47
Payday Lender Costs 48
The Impact of Price Caps 49
Limiting the Amount of Borrowing 50
The Impact of General Payday Loan Restrictions 50
Where We Are Now 53
References 54
Chapter 2: A Statistical Profile of Payday Loan Clients from National Surveys 58
Introduction 58
The Economic Factors 61
The Demographic Factors 65
Frequency of Borrowing and Repeat Borrowing 67
Regression Results 68
Conclusions 78
References 80
Chapter 3: A Socio-economic Examination of Payday Loan Clients: Why and How People Use Payday Loans 82
Introduction 82
Mixed Methods Analysis 83
Why and How Do People Use Payday Loans: Results from the Survey 83
Participant Characteristics and Use of Payday Lender Services 83
Why Use Payday Loans as Opposed to Another Type of Loan? 84
Payday Loan Fees 87
Repeat Borrowing 88
Online Borrowing 90
What Do People Think About Alternatives to Payday Loans: Results from the Focus Group Meeting 91
Frequency and Period of Use 91
Purpose for the Payday Loan 92
Why Payday Loans? 92
Participant Assessment of Payday and Other Loans 93
Interest Rates 95
Repayment Structure and Duration 95
Loan Size 95
Credit Reporting 96
Discussion 96
References 98
Chapter 4: A Business Analysis of the Payday Loan Industry 99
The Business of Payday Lending 99
The Players in Canada 100
Follow the Money: Where Does It Come From  and Where Does It Go? 104
Loan Volume, Average Size of Loan, and Loan Losses 108
The Internet Lending Business 114
Other Borrowing Options in the Alternative Financial Services Sector 116
Check Cashing 116
Pawnbroking 117
Installment Loans 118
Rent to Own 121
What Rate Cap Should Canadian Regulators Set? 121
A Brief Look at the USA and UK Rate Caps 121
Analyzing Rate Caps for Canada 123
The Financial Effect of Loan Size Limits and Other Regulations 133
The Installment Option 136
Conclusion 138
Appendix 1: Segment Results of DFC Global Corp 139
Appendix 2: DFC Global Corp 140
Appendix 3: BC Aggregate Payday Loan Data 141
Appendix 4: US Payday Loan Data by State 141
References 142
Chapter 5: Ethical Issues Related to Payday Lending 144
Introduction 144
The Industry Argument Against Regulation 146
Exploitation, Fraud, and Coercion in Payday Lending 147
Cross-Subsidization and Repeat Borrowing 150
Payday Lending and Market Failures 151
Payday Lending and Self-Control 152
A Corporate Social Responsibility Analysis 153
Returning to the Industry’s Justification 157
Should the Government Do Something About It? 158
References 159
Chapter 6: Mainstream Financial Institution Alternatives to the Payday Loans 161
Introduction 161
Barriers to Banking in the Mainstream 163
Financial Literacy 163
Attitudinal Barriers 164
Difficulty Opening a Bank Account 165
High Cost of Using a Bank Account 168
Distance to Banking Services 170
Lack of Trust 171
Alternatives: Expanding Choices and Overcoming Barriers 172
Federal Regulatory Initiatives 173
Public Accountability Statements 173
Access to Basic Banking Services Regulations 175
January 2015 Extension of No-Cost Accounts for Targeted Populations 175
Today’s Regulated Low-Cost Banking Opportunity 176
Product Initiatives 177
Credit Union Convenient Small-Loan Products 177
General Emergency Funding Assistance 178
Dedicated Emergency Funding Assistance: Rent Banks 179
Prepaid Benefits Cards: Toronto City Services Benefits Card 179
Credit Union Community Banking Models 180
Government Postal Savings Bank 182
Remaining Barriers 185
Conclusion 185
References 186
Chapter 7: Payday Lending Regulations 190
Overview 190
Introduction: The Rationale for Government Intervention 191
Usury Laws 192
Legislative History of Usury Laws in Canada 193
The Regulation of Payday Loans in Canada 196
Criminal Code Exemption 196
Achieving the Balance 199
The Objective of Regulating Payday Loans 199
A Patchwork of Regulation 201
Payday Lending Regulation Across Canada 201
Price Caps 203
Borrowing Limit 205
Multiple Loans/Repeat Loans 206
Data Requirements 207
Installment Loans 208
Disclosure to Borrowers 209
Enforcement 210
Education and Financial Literacy 211
Regulation of Payday Loans in Other Jurisdictions 212
Regulation of Payday Lending in the United Kingdom and Australia 212
Regulation of Payday Lending in the United States 214
Permissive, Hybrid, and Restrictive 215
Colorado 216
Washington 217
Consumer Financial Protection Bureau Proposed Rule 218
Regulating for Effectiveness in a Dynamic Marketplace 219
Dynamic Marketplace 219
Monitoring and Accountability 221
Public Participation 222
Decision-Making 223
Conclusion 225
Works Cited 226
Chapter 8: Conclusion 232
Introduction 232
By Chapter 233
Insights from the Econometric Analysis 234
Insights from the Socio-economic Analysis 234
Payday Lender Finances and Economics 236
Ethical Issues and Payday Lending 236
Mainstream FI Alternatives 237
Payday Lending Regulations 238
By Theme 239
Do Payday Loans Help the Clients? 240
Are Payday Loan Characteristics Well-Aligned with Its Clients’ Interests? 241
Are There Mainstream FI Alternatives to Payday Loans? 242
Do Regulations Help Payday Loan Consumers? 243
Recommendations for Action 244
Preferred Policy Recommendations 245
Enhance Access to Mainstream Banking 245
Expand Appropriate Financial Products at Banks and Credit Unions 246
Ban Payday Loans 246
Secondary Policy Recommendations 246
Design Loans from Fringe Financial Service Providers, Based on Solid Research, That Are More Appropriate for the Financial Needs of the Customer 247
Rate Caps but No Size Caps 248
Enhance Data Collection 248
Reference 248
Sample of Websites of Organizations Offering, Regulating, or Concerned About Payday Lending 249
Government Regulators 249
Canada 249
Provincial and Territorial Consumer Affairs Offices 249
United States 250
United Kingdom 250
Australia 250
Payday Lending Associations 250
Canada 250
United States 250
Payday Lending Companies 251
Canada 251
United States 251
United Kingdom 251
Australia 251
Civil Society Organizations Engaged with Payday Loan Regulations and Issues 251
Canada 251
United States 252
United Kingdom 252
Australia 252
Index 253