The poverty machine

Nova Scotia’s working poor need protection from the payday loan industry.

Fathom Billard, a single mother of two in her 30s, may be poor, but she's also a fighter. "I just got tired of being pushed around," she says, explaining her decision to defend herself in court against a high-interest loan company that claimed she owed it more than $2,000. "You can't get blood from a rock,'" Billard told the company's credit manager. "'I'm not not paying you because I don't want to. I'm not paying you because I can't.'" She warned him that if he took her to small claims court, she would be there to fight back. "I just thought, I've been kicked around enough," Billard says. "I was showing up come hell or high water. I was going to be there."

Billard has short red hair and comes across as a frank, no-nonsense, but patient person. She says her financial problems started after she took out a high-cost payday loan that would have to be repaid when she got her next paycheque. Her job as a personal care worker in a nursing home paid $16 to $17 an hour, but she was behind on her bills. Billard, who lives in an apartment in Spryfield, was supporting her two young children and her mother, who looked after the kids while she was at work. Although payday loans are easy to get, they can be extremely difficult for working poor people like Billard to repay. In Nova Scotia, for example, it's perfectly legal for payday lenders to charge up to $31 in interest and fees for every $100 they lend. That means that people who borrow $300 at the maximum rate have to repay $393 out of their next paycheque.

No wonder Fathom Billard, like so many others in her position, ended up taking out a second payday loan. At the same time though, she realized she had to get off the payday treadmill. The annual borrowing rates on such loans typically range from 400 to 1,200 percent---astronomical compared to an annual rate of around 36 percent on credit card advances, 21 percent for bank account overdraft protection or 10 percent on a bank line of credit. The problem is, people on low incomes often can't qualify for cheaper credit. And they get caught on a high-interest loan treadmill as they try to keep mounting bills at bay.

Billard applied for a $2,000 "consolidation" loan at a company called easyfinancial services. The annual interest rate was a hefty 59.9 percent, and Billard says the company required her to sign up for loan-protection insurance that cost $23.33 every two weeks. The insurance was supposed to pay off all or part of the loan in the event of death, disability or job loss.

"When you're caught between a rock and a hard place, you pretty much go for whatever options you have and at that point, that was the only option that was available," says Billard. "I thought it was the lesser of two evils."

In November 2008 Billard lost her child care, when her mother had to return to New Brunswick for about three months. "I couldn't leave my two-year-old and six-year-old home alone, so I was basically forced to quit," says Billard, who worked the overnight shift at the nursing home. She picked up part-time shifts when child care was available, but her income was so low she had to cash in her pension. She couldn't get employment insurance benefits because she wasn't available for full-time work, and when she inquired about easyfinancial's job-loss insurance, she was told she didn't qualify. "Basically they looked at it that I quit work," Billard says. "So, the loan protection plan and the premiums that I had paid for a year, or a little over a year, were absolutely no good to me whatsoever."

In October 2009, Billard stopped making her biweekly loan payments, and when easyfinancial took her to small claims court, she told her story to Gus Richardson, the small claims adjudicator. Richardson ruled that the terms of the loan were invalid under Nova Scotia's Consumer Protection Act, partly because easyfinancial was charging more than the legal rate of interest for such loans and partly because a borrower is not required to pay more in costs than the loan agreement states. The adjudicator found that the loan agreement gave the total cost of borrowing as $811.31, but the actual cost of interest and insurance totalled $1,722.16. He dismissed easyfinancial's claim that Billard still owed more than $2,000, adding that the company had not produced evidence showing what part of the loan remained to be paid.

"The working poor are poor in part because their income cannot keep ahead of their expenses---and in part because the fragility of their finances shackles them to debt," Richardson wrote in his ruling. "Their lives are full of stories of cases where debt has become a form of indentured servitude from which they cannot escape."

"Well, that basically sums it up," Billard says. "I just feel like the poor keep getting poorer."

Nova Scotia "suits" discuss payday loans
"I haven't seen so many suits since my wedding," says Garry Smith eyeing the well-dressed crowd in a big, oblong, windowless room at the Nova Scotia Utility and Review Board. The "suits" had gathered to participate in two days of formal hearings on whether to change regulations that govern Nova Scotia's payday loan industry. Smith, a stocky man with closely cropped greyish hair, works as a prison guard in Cape Breton, but was attending the hearings as chair of the political action committee at the NSGEU, the big public service union.

"The people that are representing the payday loan association are lawyers. They're calling on expert witnesses from market research and things like that," Smith says. "I never saw any witnesses that were in fact payday loan users or poor people or people that are struggling out there," he adds. "As a matter of fact, the thought came to me when the market researcher for the payday loan association was giving his analysis, according to his data everybody is very happy with payday loans. If everybody's happy with payday loans then how come he's not going and getting a payday loan himself?"

Although Smith is right that no poor people appeared in person at last week's hearings, there was one big difference from the last round in January 2008. This time, payday loan borrowers were represented by a consumer advocate with full standing to introduce evidence. In 2008, the consumer advocate was appointed at the very last minute after the deadline for formal submissions had passed. As a result, testimony from the payday loan industry dominated the hearings and the Board ended up giving the industry everything it wanted, including a maximum payday loan rate of $31 for every $100 borrowed, a rate that works out to more than 800 percent in yearly interest and fees. It's also the highest in the country. Manitoba's maximum is $17 per $100, Ontario's is $21 while in BC, Alberta and Saskatchewan, the maximum rate is $23 per $100.

Legalized payday loan sharks?
Nova Scotia was the first province to regulate the payday loan industry after the federal government amended the criminal code in 2007 to allow payday lenders to set their borrowing rates higher than 60 percent per year. The 60 percent maximum was intended to outlaw organized crime's practice of loan sharking---preying on people in desperate financial straits by lending them money at excessively high rates of interest. The change to the criminal code gives payday lenders an exemption from the 60 percent limit if they're licensed to conduct business in a province that regulates the industry. Nova Scotia's regulations require payday lenders to post signs warning their loans are high-cost, specifying the total cost of borrowing $300 for 14 days and giving the annual percentage rate for the loan.

Although borrowers may not know it, payday loan costs vary widely. In Nova Scotia, two companies, Money Mart and The Cash Store, operate three-quarters of all outlets. Money Mart charges $58.50 to borrow $300 for 14 days at an annual rate of 508 percent, while the same loan from The Cash Store costs $93 at an annual rate of 808 percent.

Quebec is the only province that does not have a payday loan industry because it will not allow lenders to charge more than 35 percent in yearly interest. Last June, the Newfoundland government announced it would not regulate the industry and would uphold the criminal code's maximum annual interest rate of 60 percent. "This government has made significant strides over the last several years to reduce poverty,"  a government news release quotes Kevin O'Brien, minister of government services, as saying. "We do not want individuals being gouged or putting themselves more in debt and having a hard time catching up because of high interest rates for these types of short-term loans."

Jeff's payday loan hole
During last week's Utility and Review Board hearings, experts spent hours debating the fine points of regulating the payday industry, but the devastating personal impact of expensive payday loans only became evident during an evening session, when members of the public were allowed to speak. The session, which lasted 38 minutes, heard from Linda Wilke, a certified financial advisor in Dartmouth. Wilke has worked for over seven years at Credit Counselling Services of Atlantic Canada, a non-profit, charitable agency with nine offices in the region. It helps people manage their debts to avoid bankruptcy. She reminded the board of surveys showing that nearly 60 percent of Canadians live paycheque to paycheque while carrying record levels of household debt.

"It is easy to realize that we are currently sitting in a precarious debt situation," Wilke told the board, adding that payday lenders can get away with charging high rates because people who need loans are often desperate. She said she frequently sees clients who are juggling three or four payday loans of more than $800 each. They're caught in the cycle of repaying the loan, then immediately re-borrowing the money. Regulations should require a cooling off period of at least one day before people can re-borrow, she said, and the payday loan companies should be required to set up a shared database so they can check to see if borrowers are already juggling other loans.

Wilkie read an email from one of her clients, a 39-year-old, well-educated professional who earns upwards of $60,000 a year. Jeff, who wishes to remain anonymous while he works his way out of debt, is married with two young children. He lives on Nova Scotia's south shore, but commutes to his job in Dartmouth. His email urges people to avoid payday loans at all costs and to seek credit counselling instead.

He says his own "payday loan problem" started after he was discharged from bankruptcy. All of his debts were cleared and his credit history wiped clean but his lack of a credit rating made it impossible to buy a car for commuting without resorting to high-interest financing. "Try to feed a family of four on a single income and see how you do," he says in a phone interview, adding that, as his bills piled up, he took out his first payday loan to cover the rent.

"Borrowing the money was absurdly easy," his email says. "It wasn't until later that I realized how they make their money ---by taking mine. The repayment fees were exorbitant, but since I could re-borrow from them at the same time, the situation became workable. For a time." Under Nova Scotia's regulations, a payday loan can be issued for up to half of a person's paycheque. But repaying it with interest takes an even-bigger chunk of the next one.

"It wasn't long before I was maxing out what I could borrow from one payday lender and repaying most of my paycheque in order to do it," Jeff's email says. "How could I get myself out of this mess? The answer that occurred to me at the time was: go to a second payday lender. And so it began, the widening of the hole I was in." Soon, Jeff found himself juggling eight payday loans, including ones he took out from unregulated online lenders.

"I was spending most of my paydays repaying and re-borrowing in a carefully choreographed sequence so that, at the end of it all, I could still provide for my family." He finally managed to take out a high-interest, longer-term consolidation loan that barely covered what he owed, but he soon found himself returning to payday lenders to cover other debts. In the meantime, life at home was tense. "My family had given up doing family things: shopping, eating out, going out to movies, driving anywhere, doing anything fun. Utilities went unpaid. Grocery budgets shrank, until every expenditure became a battle zone. Feelings of worthlessness, helplessness."

When Jeff approached his employer and bank manager for help, they referred him to Credit Counselling Services. "Now instead of a second bankruptcy and even bleaker future, I am looking at a debt management program that will allow me to honestly repay my debts and still have a life," he says, adding he's hoping his story will stop other people from taking out payday loans.

Payday lenders preach personal responsibility
Stan Keyes, president of the Canadian Payday Loan Association, listened as Linda Wilke read Jeff's email. But the former federal Liberal cabinet minister seemed unsympathetic when asked about it later.

"There are always going to be extreme examples," Keyes replies. "Alright, maybe this gentleman had an issue with borrowing money. Someone else has a problem with drinking too much. Another person has a problem with not exercising enough," he adds. "At what point does an individual have to be responsible for what they do?"

Keyes, who is urging the Utility and Review Board not to change the regulations governing payday lending, insists it would be impossible to guard against extreme abuse of payday loans. "You'd be regulated to death," he says adding that most payday borrowers have the means to repay their loans and most don't borrow beyond their financial means.

Economists Mike Bradfield and James Sawler disagree. They were commissioned by consumer advocate David Roberts to compile an overview of the Nova Scotia payday loan industry and to recommend changes in regulations. Their report points to the dominance of Money Mart and The Cash Store, which operate 31 of Nova Scotia's 43 payday outlets. "They hold a very large market share and in economics, we would assess that there isn't really effective competition in the industry to keep prices down," Bradfield says. He and Sawler are urging the Board to reduce maximum lending rates to $21 per $100 borrowed, the same rate as Ontario.

"We have to consider the interests of the particular consumers," Sawler says. "The research that we did shows that payday users have lower incomes, a large proportion of them have lower levels of wealth and, as a result, they're vulnerable."

Bradfield and Sawler also recommend a ban on payday loan insurance fees as well as a limit on the amount of each loan to just 10 percent of a borrower's paycheque.

When asked why Nova Scotia needs a payday loan industry, Bradfield shakes his head. "Because the mainline financial institutions aren't doing their job properly," he says. "I've been a member of a credit union for 42 years and I am embarrassed that the credit unions in Nova Scotia are not offering a service." He points out that before it merged with other credit unions in the region, the Metro Credit Union had a fund that was available for small, low-interest loans.

Halifax lawyer David Cameron agrees that the working poor should have access to cheaper credit. Cameron acted as the consumer advocate at the last round of Utility and Review Board hearings in 2008. He says politicians should figure out how to give people access to loans from Canada's highly profitable banks, trust companies and credit unions instead of leaving them vulnerable to the payday loan industry. But he notes that politicians seem indifferent because the very people who use payday loans "aren't the type of people who necessarily make a loud noise." Choosing his words carefully, Cameron adds: "There may be a lot of people who still would question whether the payday loan industry should exist in Nova Scotia."

Garry Smith, political activist with the NSGEU, is more direct. "I don't think governments should be legalizing loan sharks," he says. Smith advocates a government poverty reduction program. "Payday loans are a symptom for poor people. They are not a solution, they are a symptom and they should be treated as symptoms and what should happen is the disease that is causing people to have these symptoms should be cured."

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