In Ontario, the payday-loan industry offers sums of cash of less than $1,500 for short terms — less than 62 days — at very high interest rates: there are currently 657% on an annualized basis on the average 10-day term, down from 766% before the regulations took effect.
These lenders fill a unique niche in Ontario’s lending market for customers known as ALICE — an acronym for Asset-Limited, Income-Constrained, and Employed. More than two-thirds of ALICEs earn less than $50,000 per year. And while payday lenders’ reputation for being the somewhat shifty cousins of banks is not entirely undeserved, they nonetheless provide a real and needed service to people who, for a variety of reasons, can’t or don’t have the cash to meet their needs. The majority of people who take out a payday loan are doing so to avoid late charges, NSF fees, or maintain power in their digs.
Financial institutions like credit unions have long indicated a desire to provide alternatives to payday lenders, but the existing regulations hamper their ability to try new products. The Ontario government’s recent proposal to exempt these community banks from all payday loan regulations allows credit unions to experiment with cost structures, interest rates, loan terms and other factors that the rules otherwise prevented. For instance, a credit union might make space for a borrower to take more than 62 days to repay a loan.
While technically, this opens up the possibility for higher rates, the province correctly notes that it doesn’t make sense for credit unions to take advantage of their own members. As the government itself puts it, "consumer protection would be unaffected by this exemption as credit unions are required by law to operate on a co-operative basis for the primary purpose of benefiting the credit union’s members."
Deregulation for credit unions could exemplify history repeating itself. Alphonse Desjardins founded Canada’s first credit union in 1900 to offer a lending alternative for white-collar workers who were forced to borrow at high rates to buy their weekly groceries. Over time, credit unions developed and, in many cases, acted as leading innovators in Canada’s heavily regulated, moribund banking industry.
Ontario’s moves to exempt these institutions from regulations might not just be clearing a path to address a lack of payday-loan alternatives; they may also open a road to alternate solutions for other, bigger social problems.
