BANKRUPTCY LESSONS FOR PAYDAY LENDING REGULATION.

• Author: Ben-Ishai, Stephanie
• Position: Canada

1. INTRODUCTION

   More than half of Canadians were already living paycheck to paycheck before the COVID-19 pandemic, experiencing increasing amounts of financial stress and debt. (1) The federal government has offered cash transfers to those whose incomes were reduced due to the pandemic, and as that relief ends, the potential for financial distress is even greater. This vulnerability presents an opportunity that the payday loan industry is particularly primed for and has responded to, considering it has been held out to be an "essential service" with continued operation since the onset of COVID-19. (2)

   A payday loan is an unsecured, and usually small, loan from anon-traditional lender. These loans are short-term in nature, hence the name--a borrower usually pays the loan back by their next payday. (3) Payday loans can last as long as 62 days and be for up to $1,500. (4) Most, however, span just two weeks, and the average amount of a loan is between $300 to $460. (5)

   Payday loans are an important source of credit--borrowers who turn to payday loans often do so because they are quick, and also because these borrowers do not otherwise have access to traditional financial institutions due to their credit history and scores. (6) Payday lenders are also less discerning, willing to lend to borrowers without a credit check as long as there is proof of identity, proof of future income, and ownership of a chequing account. (7) However, repayment also includes paying the lender their fees and interest, which borrowers might not always be fully aware of or capable of paying. This means that payday loans end up being a very high-cost form of credit. In fact, in 2016 a national federal survey of Canadians found that fewer than half "understood that a payday loan is more expensive than available alternatives." (8)

   Until 2007, payday loans fell within the bounds of section 347(1) of the Criminal Code of Canada (CCC), which set the criminal interest rate constituting usury at 60 percent per annum. (9) In 2007, however, a carveout was introduced to allow payday lenders to charge a higher rate of interest, subject to regulation as imposed by each province. (10) Regulation of payday lending now consists of province-specific statutes and regulations, each trying to find an approach that will allow for a payday loan market while also protecting consumers from the potentially harmful nature of these products. (11)

   Recognizing that "financial insecurity is the common feature of all payday loan users," in the midst of a pandemic economy, it is important to consider how consumers can avoid "debt traps." (12) Yet many debt relief experts anticipate that exactly this will happen, and that the number of people filing for insolvency will go up. (13) After all, there is considerable overlap between the people who have at least one payday loan and those who file for insolvency. (14) While there is mixed evidence about whether borrowing from a payday lender causes insolvency, Skiba and Tobacman present a strong case for a causal link between the two. (15)

   In this article we summarize the existing provincial regulation of payday lending and present an original description of the prevalence of payday loans among the liabilities in Canadian insolvency filings. Our data in Part II shows that while the overall number of filings increased by 15 percent from 2011 to 2019, the proportion of those filing for insolvency who had at least one payday loan among their liabilities more than doubled during the same time period. The COVID-19 pandemic may encourage people to further turn to payday loans and then insolvency as ways to handle their debts and financial obligations. (16)

   This article proposes to reflect on the current state of payday loan regulation in the context of those who have filed for insolvency as a means to consider how one might inform the nature of the other. The data used in this paper is drawn from an analysis of the prevalence of payday loans among those who filed for insolvency in 2011 and 2019. Data on insolvency filings for each of the years of 2011 and 2019 were obtained from the Office of the Superintendent of Bankruptcy (OSB).

   In the OSB data about the liabilities of debtors, there is no category for payday loans. The identification of payday lenders was made possible by linking the names of creditors appearing on the documents filed with the OSB either to provincial lists of licensed payday lenders or to a list of firms with websites offering payday loans. Licensing lists for 2011 and 2019 were obtained, where available, from provincial consumer protection agencies either upon inquiry or through publicly available databases. Those lists do not contain unlicensed payday lenders, and the data had to be supplemented with other publicly available data.

   We begin by looking at the composition of the payday loan market in terms of borrowers and lenders. As will be seen, there has been an increase in the presence of payday loans among those who filed for insolvency in almost every province, though there has also been a decrease in licensed payday lenders. The expansion of the online payday lending market may play a part in this, though its contours are difficult to ascertain. Next, we will review the current methods of regulation in place across Canada, and analyze regional similarities and differences. Though the structure of each province's regulatory framework is generally the same, containing caps on rates, terms of repayment, disclosure obligations, and prohibitions on lender conduct, the specific requirements can vary widely, especially with regards to online payday lending. There are some notable gaps in disclosure requirements and prohibitions that will be explored further. We conclude by offering recommendations for more effective regulation, as well as proposing ways to reconceptualize the place of payday loans and insolvency in Canadian consumers' lives.

2. EMPIRICAL VIEW OF THE PAYDAY LOAN MARKET

   The Canadian payday loan industry can be said to have begun in 1996 with the emergence of Money Mart. (17) After that, the industry grew "rapidly in the early and mid-2000s, though growth slowed by the early 2010s." (18) The number of stores hit its peak around 2011, and has been declining since then. (19) Yet the market is still sizable, with over 1,400 stores across the country. (20) The Canadian payday loan market is estimated to account for a sizable "$2.3 to $2.7 billion face value of loans per year." (21)

   We set out to compare the frequency with which payday loans appear among the debts owed by those filing for insolvency in 2011 and 2019 and to look at the characteristics of the filers who had a payday loan among their liabilities. The OSB provided us with information about all insolvencies filed in each of those years. The primary document from which the information was recorded was Form 79, the Statement of Affairs (SOA). The SOA is filled out by a licensed insolvency trustee (LIT) in an interview with a debtor conducted early in the insolvency process. (22) The SOA contains a limited range of demographic information about each debtor as well as information about each debt, including the name of the creditor. (23) The LIT categorizes each debt into one of nine categories, (24) records the amount of the debt, and whether the debt is secured or unsecured. Importantly, the information on the SOA is not the official record of the debt. Later in the insolvency process, the LIT will contact all of the creditors identified by the debtor and seek a proof of claim, the documentary evidence of the debt. (25) Differences between the information reported by the debtors and that reported by the creditor may then emerge.

   There is no distinct category for payday loans on the SOA. We were therefore forced to define a payday loan as any debt for which the LIT listed a name that we could link to a payday lender. For example, if "Money Mart" was listed as the creditor, we would categorize that debt as a payday loan. To accomplish this task, we created a list of the names of all of the payday lenders in Canada. The list grew to about 300 lenders active in 2019 and about the same number in 2011, including firms that were either licensed by the provinces or that appeared during an internet search for "payday loans in Canada." (26) We then searched through the approximately three million liabilities listed on the SOAs of the 2011 and 2019 insolvency filers; based on the name of the lender, we categorized each liability as either a payday loan or not. (27)

   There are clearly a number of errors that could arise from this procedure. Some errors will be the result of some small short-term loans made by lenders that do not appear on our lists. In addition, some lenders issue both payday loans and other longer-term, lower-interest loans.

   This latter problem is more likely because there has been a trend in recent years for traditional payday lenders like Money Mart and Cash Money to move toward offering larger longer-term instalment loans in addition to smaller short-term payday loans. (28) For example, Money Mart advertises instalment loans of up to $15,000 with loan terms from 12 to 60 months at interest rates ranging from 29.9 percent per annum to 46.9 percent per annum. (29) Cash Money offers "line of credit" loans, at a 46.93 percent interest rate, of up to $10,000. (30) Such loans are still high cost and relatively small. We have no way of distinguishing between short-term Money Mart and Cash Money payday loans from their longer-term cousins; we therefore count all debts named as being owed to Money Mart or Cash Money as payday loans.

   After identifying the liabilities that could be payday loans, we were then able to ascertain demographics of payday loan borrowers among those filing for insolvency and identify the most frequent lenders.

   1. LENDERS

      The payday lending industry began with physical storefronts, whose success depended on...