COVID-19 and the Regulation of Alternative Financial Services.

• Author: Akrong, Kevin
• Position: Canada - Special Issue: COVID-19 and the Law

Introduction I. Regulation of Cheque-Cashing and Payday Loans A. Cheque-Cashing B. Payday (and Installment) Loans II. Voluntary Credit Relief Programs and Impact on Credit Scores A. Voluntary Credit Relief: Banks and AFS Providers B. Credit Scores and Deferred Payments III. Credit Repair Loans Conclusion Introduction

In March 2020, emergency orders enacted in response to the COVID-19 pandemic started shutting down businesses and other workplaces, negatively affecting the incomes of millions of Canadians. (1) Given that even before the COVID-19 pandemic we owed an average of $1.76 for every dollar of income, (2) this immediately raised concerns about how those affected would meet their debt obligations. Media attention focused on actions by the chartered banks to relieve borrowers from mortgage and credit card payments. These were important measures to alleviate the financial stress placed mostly on middle-and upper-middle-class Canadians. (3) Less attention was paid to actions by the types of financial services providers relied on by Canadians living on low incomes, such as provincially regulated cheque cashers and payday lenders. These service providers are often collectively referred to as "alternative financial services" (AFS) providers. Before the pandemic, several types of AFS were not subject to any meaningful regulation, raising the question whether, as a potential result of the pandemic, increased use and reliance on AFS would prompt government action.

The implementation of debt relief programs by both banks and AFS providers raised another question: how did deferring debt payments affect Canadians' credit scores? And what other types of products were individuals, especially those with "bad credit" pre-pandemic, turning to for emergency credit in the wake of COVID-19 economic shutdowns?

This essay proceeds in three parts. In Part I, we discuss the regulation of cheque-cashing and payday loans, and changes to these regulations in response to COVID-19. In Part II, we review voluntary credit relief programs offered by both banks and AFS providers, and examine how taking advantage of these programs may affect a borrower's credit score. This issue likely has broader relevance to Canadians of all income levels, but poor credit history can force consumers to turn to high cost AFS providers. In Part III, we briefly discuss an AFS which preys on Canadians with poor credit history who need access to credit, misleadingly titled "credit repair loans". Our review of the response from government and private actors to the regulation of financial products in the wake of the COVID-19 pandemic aims to help expose the need to ensure that the regulation of financial products protects the ability of Canadians at all income levels to meet their needs and financial obligations.

1. Regulation of Cheque-Cashing and Payday Loans

   1. Cheque-Cashing

      To help counter the negative effects of COVID-19 on incomes, in March and April 2020 the federal government introduced the Canada Emergency Response Benefit (CERB) and the Canada Emergency Student Benefit (CESB). (4) These benefits were in place until September 2020. The CERB provided up to $2,000 per four-week period for Canadians facing financial challenges. Similarly, the CESB provided up to $2,000 per four-week period to certain graduating secondary students, post-secondary students and recent post-secondary graduates. (5)

      In recent years, federal and provincial governments have been encouraging benefits recipients to register for direct deposit, efforts which have increased in response to COVID-19. (6) But some recipients continue to receive benefits by cheque. Banks, which are federally regulated, are required to cash government cheques up to a prescribed maximum amount at no charge for any person, including non-customers, provided they meet certain identification guidelines. (7)

      Prior to the introduction of CERB, the prescribed maximum amount was $1,500. This was raised to $2,000 to match the CERB and CESB payments. (8) Although this increase to the federal government cheque cashing limits is a temporary measure, the federal government has not indicated an end date.

      This relief measure applies only to cheques cashed in-person. Canadians with a bank account (9) may choose to deposit their cheque through a mobile app or automated teller machine (ATM), but then the cheque may be subject to a "hold period" to ensure that the cheque clears before funds are paid out. Banks often advance funds in the full amount of the cheque immediately, but this will depend on the relationship between the bank and the customer, since the bank is effectively loaning the money on the presumption that the cheque will clear. Customers with a limited relationship with the bank, a previous history of returned cheques, or with few assets available to cover a returned cheque may be subject to a hold period. Hold periods have been identified as a major issue for financial consumers living on low incomes. (10)

      Federal regulations set the maximum hold period banks may apply to cheques deposited through a mobile app or ATM: up to five business days if the cheque is $1,500 or less, or up to eight business days if the cheque exceeds $l,500. (11) Generally, the "big five" banks--Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Scotiabank, and Toronto-Dominion--apply a hold period of four days to cheques less than $1,500 and five days to cheques greater than $1,500. There are exceptions, for example, for bank accounts open for less than ninety days, which allow banks to apply a longer hold period. (12) These rules were not amended in response to the introduction of the CERB and CESB.

      While the relief measure ensures that federal government cheques could be cashed for free in-person at a bank, it does not account for the realities of the pandemic. Even prior to the pandemic, concerns had been raised about the lack of bank branches in low-income neighbourhoods. (13) In the pandemic, accessing a bank branch in person became potentially more difficult and dangerous. Banks closed some branches completely and reduced the hours of others. (14) Concerns about COVID-19 have reduced ridership on public transit, (15) leaving residents to rely on financial services within walking distance from work or from home. For many Canadians living in low-income neighbourhoods, these will be AFS providers which offer cheque-cashing services, such as Cash4You, Cash Money, and Money Mart. (16) Although ATM and mobile app cheque deposits may eliminate the need to cash a government cheque in-person, these are discretionary account features which banks may remove or suspend. Customers with a history of returned cheques, outstanding service charges, or other negative banking history may have such a limited account or no bank account at all, leaving them with no option other than to cash government cheques in-person.

      Cheque cashers advertise their services as quick and convenient, only requiring personal identification to cash a cheque, making them a logical choice for the unbanked to cash any cheque. The other primary benefit to consumers is that cheques cashed at these AFS providers are not subject to a hold period. Instead, customers endorse or "sign over" their cheques, and then the AFS provider deals with their own financial institution to clear the cheques. But customers pay a high price for quick and convenient access to their money: cheque cashers charge either a flat fee or a fee based on a percentage of the amount of the cheque, or both. (17) These fees apply to all cheques, including cheques for Government of Canada benefits, although fees may vary depending on the type of cheque. According to the Financial Consumer Agency of Canada, it could cost $63 to cash a $2,000 Government of Canada cheque at an AFS provider. (18)...