Lee Friday – March 25, 2017
It sounds like London Councillor Mo Salih wants to put payday loan shops out of business. Why? Does he intend to set up his own shop after he uses the government to sweep away the competition?
As per a London Free Press article: “Payday loans are nothing more than loan sharks masquerading in cute costumes, dancing to jingles,” Coun. Mo Salih said in apparent reference to their TV commercials.
On January 24, 2017, Salih and his cohorts on the Community and Protective Services Committee voted in favour of forcing payday loan businesses to (a) post interest rate and fee information, and (b) make information available to customers regarding money management and debt counselling.
This follows close on the heels of new Ontario legislation forcing payday lenders to reduce “the maximum total cost of borrowing for a payday loan from $21 to $18 per $100 borrowed as of January 1, 2017.” According to the provincial government, this is to “ensure consumers are better protected and able to benefit from lower costs for each loan.”
A basic principle of economics to which politicians seem completely oblivious (or they simply don’t care), is that you cannot initiate a particular action in isolation. In other words, every action produces one or more reactions. These consequences can be good or bad, though the latter usually describes the consequences of political actions.
HOW WILL THE NEW LAWS AFFECT THE PAYDAY LOAN MARKET ?
I suggest that Mo Salih and the other councillors, as well as provincial legislators, read The Conference Board of Canada report titled Filling the Gap – Canada’s Payday Lenders (Report).
The Report notes the state of Oregon implemented a payday loan cap ($10 per $100 borrowed) in 2007. The result – “access to short-term credit fell precipitously among recent payday loan users in Oregon relative to Washington [the “control” population], with borrowers diverted into “incomplete and plausibly inferior” substitutes for payday loans (such as bank overdrafts and late bill payments).” Six months prior to the cap, there were 346 licensed payday outlets in Oregon. This figure dropped to 105 by February 2008, then to 82 by September 2008.
The Report also notes the province of Manitoba implemented a much higher cap ($17 per $100 borrowed) in October 2010. The result – “Between 2011 and 2012, the number of licensed payday loan outlets in Manitoba fell 48 per cent.”
The Report correctly points out that “inappropriate restrictions in the attributes of payday loans—or the conditions permitted in providing them—can create a regulatory environment in which it becomes uneconomic for payday lenders to operate.”
The Report also provides evidence of “a significant risk that the cost of alternate sources of credit [including bounced checks and various forms of overdraft protection] could exceed the cost of accessing payday loans.”
In the Report’s conclusion, we read, in part: “Careful analysis of the cost structure of licensed payday lending in Canada reveals that current legislated maximum fees in some provinces with low interest ceilings may not adequately cover the cost of providing payday loans. Imposing inappropriate regulatory requirements on an industry that is already significantly regulated might only serve to reduce access to credit for a financially vulnerable segment of the population.”
DO POLITICIANS THINK ABOUT THE CONSEQUENCES OF THEIR ACTIONS ?
When it comes to predicting the actual consequences of their actions, the brains of politicians are essentially dormant. However, they devote considerable thought to the manner in which they might convince the public of their magical ability to predict and deliver a specific consequence. In our case, the Ontario and London governments tell us their benevolent actions will result in lower costs and more information for payday loan borrowers. Yet these governments remain silent about some of the potential, and likely, consequences as described in the Report.
Default rates for payday loans are considerably higher compared to conventional consumer loans. This is a notable cost for payday loan shops, which do not earn exorbitant profits, though conventional banks surely do. In fact, many major corporations have profit margins far exceeding those of payday loan businesses. Politicians criticize payday loan shops for their high fees, while giving a free pass to banks which often charge higher fees for similar services (overdraft etc.).
Each individual knows their own personal circumstances better than anyone else, including government busybodies. Customers borrow from payday loan shops because they decide this is the best solution to their short-term financial difficulty. This is a decision which rightly belongs in the hands of the two parties to the transaction, neither of which forces the other to engage in the transaction. When a third party – government – enters the picture, and claims the moral right to forcefully dictate the terms of the transaction, this reduces the options available to the first two parties. As economist Thomas Sowell wrote, “taking decisions out of the hands of those most directly affected is one of the central patterns of the political left that make them dangerous to the very people they think they are helping.”
A reduction of options stemming from new provincial and municipal laws is likely to result in falling revenues and rising costs for payday loan businesses in London – simple economics. Quite possibly, many of these businesses will cease to operate (government imposed job losses), which may please Mo Salih, but what about the ‘payday borrowers’ who would be forced into more expensive credit facilities? In this event, will politicians see the error of their ways, and repeal the laws which caused the damage? Not likely. They are incapable of connecting the dots. They cannot identify cause and effect.
As they create new laws, politicians constantly assure us they are motivated only by a burning desire for higher levels of ‘consumer safety’ and ‘citizen protection.’ They are always eager to improve various aspects of our lives, as long as they can use taxpayers’ money to finance their favourite schemes.
But what happens when we suggest to them the idea that they should invest their own money to open a private business as a means of offering a product or service which would improve a particular aspect of our lives? Well, because their schemes are incapable of achieving their desired ends, they respond by pontificating about the immorality of depending on profit driven enterprises to deliver essential services to citizens. They do not understand that profits are the only way of determining whether the provision of a particular product or service is economically beneficial. Simple economics.
We do not need the government to regulate the payday loan industry. Free market competition is a natural regulator, which always delivers the best results for consumers. Are you listening Mo? If you think consumers are getting a raw deal, you should view this as an opportunity. Jump into the market, open a payday loan shop and offer your service at below-market rates. If you do this successfully, you will drive those other loan shops who you speak about so contemptuously, out of business. You have my support Mo. Contact me when you are ready to start the business. I would like to be your first customer.