In its recent throne speech, Premier Rachel Notley’s government said it intended to “protect Albertans who are experiencing economic distress from being preyed upon by unscrupulous lenders.”
The idea, to create “an Act to End Predatory Lending,” is sound but how it is implemented will require great care.
As noted in a recent report by Cardus, Banking on the Margins, payday lenders and their loans are structured to encourage customers to become dependent. The loans, while quick and easy, do not build credit. As well, they require customers to pay back the original amount borrowed plus substantial interest in one lump. Too often, this further handicaps people who already struggle to maintain responsible cash-flow.
An unemployed construction worker from Fort McMurray who has trouble making ends meet one week can be crippled by the automatic withdrawal of his previous week’s shortage plus interest rates. And in Alberta, at an annual rate of 839 per cent on a 10-day term, those rates are the second highest in the country.
Further, our research suggests the lack of funds and the increase in debt take their toll on families. There are clear examples of significant physical and mental health problems, increased criminal activity, and a host of other problems that ultimately strain society – and often the government.
So three cheers for trying to find a better way forward for people in need of short-term loans
But it gets tricky when we ask how this will happen, and which New Democratic Party will come to the fore when this bill is introduced?
Will it be the social gospel movement of Chester Ronning, the first leader of what is now Alberta’s NDP? If so, we are likely to see a pragmatic government response that emphasizes co-operation between citizens who unite to address a social ill – a throwback to the old Co-operative Commonwealth Federation.
Or will it be the NDP that springs from the academic and activist realms that want to make a political point via direct government intervention, regardless of the outcome?
Notley would do best to follow the footsteps of the CCF and create an environment that leads to a better, and more just, small-dollar credit market, rather than shutting down payday lenders and leaving no alternative.
Why? Because payday loans do provide a lifeline to many people. They are often the best of the worst for people facing eviction because they can’t pay rent or who need cash to buy groceries. There are times when bounced cheques or the penalties for arrears exceed the cost of a payday loan. To end payday lending – even if it is predatory – might leave people worse off.
What is needed is a better loan and to get that, we need a better market, one that rebalances the interests of the lenders. We need the concerted joint effort of three groups: community associations and charities, financial institutions and government.
The government should remain focused on how to improve, not kill, the small-dollar loan market. To do this, it should concern itself less with a hard interest rate cap and more with the repayment terms. The real challenge for people who need emergency cash is the onerous repayment terms that drop like an anvil on paydays. If Alberta were to follow Colorado’s example and create a regulatory environment that mandated loan terms and required lenders to accept instalments rather than lump sums, it would go a long way to alleviating the cash flow pressure that leads to dependency.
But more importantly, the government should focus on enabling innovation in co-operative institutions like credit unions, and paving the way for charitable organizations to partner with financial institutions to offer better loans. Our paper recommends exploring options such as providing loan-loss reserves to credit unions or banks looking to innovate in this sector. Or, better yet, to provide social-impact bonds that extend a return to those who provide innovative services aligned with the government’s objectives. The fact that groups like First Calgary Credit Union and Momentum are already making moves in this area suggests there is an appetite for it.
The Notley government has a choice in its efforts to end predatory lending: it can make an ideological point, or it can make a principled move that leverages the power of Albertans to build a better and fairer small-dollar loan market.
Let’s hope the old CCF shows up when the bill is introduced.
Brian Dijkema is Program Director, Work and Economics at Cardus.